How to choose the right market to trade

Many people don’t give much thought to life’s major decisions. They come across them via chance, whether it’s due to geography, time, or chance. Many of us make decisions on a whim, without much consideration, about where to live, work, and which markets to trade-in. It’s no surprise that so many people are unhappy with their life. You can trade stocks, futures, or options on the spur of the moment or think about it. Each of these has advantages and disadvantages.

Successful traders are logical individuals. Winners are just interested in the money, whereas losers enjoy the thrill of the game. It’s unclear where the kicks will land.

Keep in mind that every trading vehicle, whether it’s a stock, a future, or an option, must meet two criteria: liquidity and volatility when choosing a market to trade. Liquidity refers to a vehicle’s average daily volume in comparison to other vehicles in its category. The easier it is to get in and out, the larger the volume. You can construct a successful position in a thin stock only to be caught in the exit door and suffer slippage when attempting to collect profits. The amount of movement in your car is known as volatility.

The more it moves, the more trading opportunities there are. Many utility stocks, for example, are relatively liquid but difficult to trade due to low volatility—they tend to stay in limited price ranges. Some low-volume, low-volatility equities may be terrific long-term investments, but they aren’t suitable for trading. Remember that just because you have a strong view on a market’s future path doesn’t mean it’s excellent for trading. They must also have a lot of volumes and be able to move well.

Stock

A stock is a certificate of ownership in a firm. You own one-millionth of a company if you buy 100 shares of a company that issued 100 million shares. You become a part owner of that company, and if others want to buy it, they’ll have to compete for your shares, increasing their value.

People bid for a company’s stock when they like its prospects, driving up prices. They sell their stock if they don’t like the forecast, lowering prices. Companies attempt to raise share prices because it makes it easier for them to sell debt or float more shares. Top executives’ compensation are frequently linked to stock values.

A stock is a certificate of ownership in a firm. You own one-millionth of a company if you buy 100 shares of a company that issued 100 million shares. You become a part owner of that company, and if others want to buy it, they’ll have to compete for your shares, increasing their value.

People bid for a company’s stock when they like its prospects, driving up prices. They sell their stock if they don’t like the forecast, lowering prices. Companies attempt to raise share prices because it makes it easier for them to sell debt or float more shares. Top executives’ compensation are frequently linked to stock values.

Fundamental values, particularly earnings, drive prices in the long term, but legendary economist and stock picker John Maynard Keynes remarked, “In the long run, we’re all dead.” Markets are full of cats and dogs, stocks of unsuccessful businesses that, at some time, defy gravity and soar through the roof. Stocks in hot new industries, such as biotechnology or the Internet, might soar based on future profitability forecasts rather than actual operating results. Before reality settles in, each dog has its day in the sun.

Stocks of profitable, well-run businesses may trade in a range of directions, from sideways to down. A dropping price indicates that significant holders are selling. The market reflects the whole amount of what every participant knows, believes, or feels about a stock. “It’s OK to purchase low, but not OK to buy down,” is the golden rule in any market. Even if it appears to be a good deal, don’t buy a stock that is moving lower. If the fundamentals appeal to you, employ technical analysis to determine that the trend is upward.

When you buy a stock, you become a partner of a manic-depressive person he called Mr. Market, according to Warren Buffett, one of America’s most successful investors. Mr. Market appears every day and offers to buy you out of business or sell you his stake. Mr. Market is schizophrenic, so you should ignore him most of the time, but every now and then he becomes so miserable that he offers you his share for a song—and that’s when you should buy. Other times, he becomes so crazed that he offers an absurd price for your stock—and that’s the time to sell.

This concept is amazing in its simplicity, yet it is difficult to put into practice. Mr. Market’s mood is so contagious that it sweeps most of us off our feet. When Mr. Market is down, most people want to sell, and when he is up, they want to buy. We must maintain our sanity. To determine how high is too high and how low is too low, objective criteria are required. Buffett bases his judgments on fundamental analysis as well as a fantastic gut feeling. Technical analysis is a tool that traders can employ.

Future

Futures appear to be risky at first glance—nine out of 10 traders fail in their first year. When you look closely, you’ll notice that the danger isn’t in the futures themselves, but in the people who trade them. Futures trading provides traders with some of the highest profit prospects, but the risks are equal to the profits. Futures make it simple for gamblers to shoot themselves in the foot, or even in the head. Futures do not need to be feared by a trader with solid money management skills.

Commodities, the basic building elements of the economy, were once referred to as futures. A commodity, according to old-timers, is something that hurts your foot when you drop it on it—gold, sugar, wheat, crude oil. Many financial products, such as currencies, bonds, and stock indexes, have begun to trade like commodities in recent decades. Futures refers to both traditional commodities and innovative financial instruments.

A futures contract is an agreement to provide or accept delivery of a certain quantity of a commodity by a specific date. Both the buyer and the seller are bound by a futures contract. The buyer has the choice, but not the duty, to accept delivery in options. If you buy a call or a put, you have the option to walk away. You don’t have that luxury in the future. If the market moves against you, you must either increase your margin or exit the trade at a loss. Futures are more regulated than options, yet they are more competitively priced for traders.

When you buy a stock, you become a part-owner of the company. You don’t own anything when you buy a futures contract; instead, you enter into a legally binding contract for the future purchase of merchandise, whether it’s a carload of wheat or a sheaf of Treasury bonds. The person that sold you the contract takes on the responsibility of fulfilling it. When you buy a stock, the money you pay goes to the seller, but when you buy a futures contract, your margin money stays with the broker as security, ensuring that you’ll take delivery when the contract expires. Margin money was once referred to as “honest money.” While you must pay interest on margin borrowing in stocks, you can earn interest on your margin in futures.

The settlement date is assigned to each futures contract, with different dates selling at different prices. Some experts examine these disparities in order to forecast reversals. The majority of futures traders do not wait and cancel their contracts early, settling their earnings and losses in cash. Nonetheless, having a delivery date encourages individuals to act, which serves as a valuable reality check. For 10 years, a person may sit on a losing stock, convinced that it is merely a paper loss. The reality, in the form of the settlement date, intrudes on a daydreamer in the future.

Options

An option is a wager that a specific stock, index, or future will reach or exceed a certain price in a certain amount of time. Please take a moment to read that sentence again. It’s worth noting that the term “particular” appears three times. You must select the appropriate stock, forecast the magnitude of its move, and estimate how quickly it will arrive. You must make three decisions, and if you do even one of them incorrectly, you will lose money.

You must jump through three hoops in one leap when purchasing an option. You must be correct about the stock or the future, its movement, and its timing. At an amusement park, have you ever attempted tossing a ball through three rings? Buying options is a dangerous game because of the triple complexity.

Options provide leverage, or the capacity to control huge holdings with a modest investment. An option’s whole risk is limited to the amount you pay for it. When the market goes up, traders can make a lot of money quickly, but if the market goes down, they can walk away with no debt! The normal flow of brokerage house propaganda is as follows. It draws a large number of tiny traders who can’t afford to buy stocks but wants to get more bang for their dollars. The option buyer’s head is usually the one that gets smashed.

For years, my company, Financial Trading, Inc., has sold books to traders. When a customer returns to purchase another book, it indicates that he is engaged in the market. Every several months or years, many clients purchase stock or future books. A first-time buyer, on the other hand, who orders a book on options never returns. Why? Is he making so much money so quickly that he doesn’t require a second book? Is he going to wash out?

Because they can’t afford stocks, many novices buy calls. Options on futures are sometimes used by futures traders who have been beaten up. Instead of dealing with their inability to trade, losers turn to options. Taking a shortcut to get out of difficulty rather than dealing with the situation never works.