Advanced Trading Concepts Explained - The Definitive New Zealand Guide
Our comprehensive guide explains the process and risks of moving from basic to advanced trading concepts, position trading vs swing trading vs day trading vs algorithmic trading, common trading mistakes (and how to avoid them), trusted resources for further learning and frequently asked questions.
Updated 24 April 2024
Summary:
To help explain everything you need to know, our guide covers:
Know This First: The market is ever-changing, and so should your trading strategies. This part emphasises the need for ongoing education and adaptation:
- Transitioning to advanced trading involves more than just learning new strategies, and there is a lot of risk that needs to be managed. Overall, advanced trading requires a deeper understanding of the markets and how various factors affect them.
- Despite an unprecented amount of resources available, many New Zealanders struggle to move beyond basic chart reading and fail to understand complex indicators and analysis techniques, which then limits their potential returns.
- Using economic reports and news to predict market movements is essential given markets move based on information - this means advanced traders spend a lot of time reading and understanding market conditions.
- The biggest risk to trading profits is trader behaviour - too often the same mistakes are made when strategies get ignored and over-trading causes loss after loss.
To help explain everything you need to know, our guide covers:
- Moving from Basic to Advanced Trading Concepts
- Advanced Trading Strategies - Position Trading vs Swing Trading vs Day Trading vs Algorithmic Trading
- Risk Management in Advanced Trading
- Common Trading Mistakes and How to Avoid Them
- Resources for Further Learning
- Advanced Trading Frequently Asked Questions
Know This First: The market is ever-changing, and so should your trading strategies. This part emphasises the need for ongoing education and adaptation:
- Staying Informed: Keeping up with the latest financial news and market trends.
- Continuous Education: Attending seminars, webinars, and courses to stay updated with new trading strategies and techniques.
- Adapting Strategies: Being flexible and ready to adjust your strategies in response to market changes.
MoneyHub Founder Christopher Walsh explains why understanding the basics is essential for successfully implementing advanced trading strategies:
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"Too many traders don't understand the basics - they get emotional, sell too late, or jump on bandwagon investments without proper research. These mistakes often stem from a lack of foundational knowledge in trading and investing.
Competent and successful traders and investors work hard, follow markets, research resources deeply, and manage their risk. Investors who fall short usually lack consistency, discipline, and an understanding of the fundamental principles of the financial markets. Developing a solid foundation in basic trading concepts is critical before venturing into more complex strategies. This includes understanding the mechanics of different market orders, recognising the implications of market trends, and applying basic risk management techniques. With this foundation, investors and traders are better equipped to explore advanced strategies, such as using technical indicators for market analysis, implementing sophisticated trading algorithms, or engaging in short-term trading practices like swing or day trading. Successful trading isn't just about strategy; it's also about mindset. The best traders remain calm under pressure, adapt to changing market conditions, and approach trading decisions with a clear and disciplined thought process. They understand that trading is a long-term journey requiring continual learning, patience, and the ability to bounce back from setbacks. I believe the transition from basic to advanced trading isn't just a leap in complexity; it's a holistic shift in approach and mindset. We have published this guide to provide new and seasoned traders and investors with the resources and guidance needed to navigate this journey, empowering them to make informed decisions and achieve their investment goals". |
Christopher Walsh
MoneyHub Founder |
Your free guide to advanced trading concepts, thanks to BlackBull Markets
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Moving from Basic to Advanced Trading Concepts
MoneyHub focuses on explaining financial concepts and helping New Zealanders make informed decisions. While some of our information is aimed at inexperienced investors, many resources meet the needs of experienced investors.
Before delving into advanced trading concepts, it's essential to have a solid understanding of the basics and refamiliarise yourself with anything you don't understand:
Transition to Advanced Trading Strategies Has Risks - Here's What You Need to Know:
Before delving into advanced trading concepts, it's essential to have a solid understanding of the basics and refamiliarise yourself with anything you don't understand:
- Understand Financial Markets: Our how to invest in shares, bonds and commodities guides) explain how they're traded, as well as the risks and must-know facts.
- Market Orders and Limit Orders: These are the different types of orders used to buy and sell; Investopedia explains this best.
- Bull and Bear Markets: Understanding market trends and how they affect trading decisions, which is best explained by Investopedia.
- Risk Management: Understanding the basics of risk management, including diversifying portfolios and setting stop-loss orders, is essential for sustainable investing. Our investing guide explains more.
Transition to Advanced Trading Strategies Has Risks - Here's What You Need to Know:
- Delving into advanced trading means moving beyond the simple charts and basic indicators. Advanced traders use a range of sophisticated tools to decode market trends. This includes understanding complex chart patterns, trend lines, and technical indicators such as Fibonacci retracements, Bollinger Bands and Ichimoku Clouds.
- Advanced traders also interpret economic indicators like GDP, inflation rates, and unemployment figures to understand their impact on market dynamics and make investment decisions. Understanding how international events and economic policies can influence local markets and vice versa is crucial for a well-rounded trading approach.
- Beyond data, successful investors need to manage their emotions. Too many investors have lost money by putting emotion before rationality.
- Keeping abreast of the latest financial news, market trends, and economic shifts is essential. The need for continuous learning from trusted investing podcasts, reputable YouTube channel insights, webinars and courses cannot be understated.
Advanced Trading Strategies - Position Trading vs Swing Trading vs Day Trading vs Algorithmic Trading
Investors use a range of strategies - we explain each below to help you understand the opportunities and risks.
Important: Each strategy has its own set of risks and rewards; traders must choose the one that best aligns with their investment goals, time commitment, and risk tolerance.
Important: Each strategy has its own set of risks and rewards; traders must choose the one that best aligns with their investment goals, time commitment, and risk tolerance.
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Position Trading
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​Swing Trading
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Day Trading
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Algorithmic Trading
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Risk Management in Advanced Trading
Risk management is the cornerstone of successful trading, especially with more complex strategies. While diversification is widely known as a proven way to limit risk, stop-loss, take-profit, and risk-reward are less understood. We explore these in detail to help you make informed choices, minimise losses and maximise profits.
Understanding Diversification
Understanding Stop-Loss and Take-Profit
The Importance of a Risk-Reward Ratio
Understanding Diversification
- Diversification is about spreading investment across various assets to reduce risk. This isn't just limited to different shares; it also includes bonds, commodities, and even different markets or sectors.
- For example, investors might allocate their funds across industries like technology, healthcare, and energy, balancing the portfolio to mitigate sector-specific risks given how volatile markets can be.
Understanding Stop-Loss and Take-Profit
- These are predefined levels where a trader exits a position – a stop-loss to limit potential losses and a take-profit to secure gains.
- For example, if you buy a share at $100, you might set a stop-loss at $90 (limiting your loss to 10%) and a take-profit at $120 (securing a 20% gain). These thresholds are crucial in managing risk, particularly in volatile markets.
The Importance of a Risk-Reward Ratio
- This is a trader's tool to assess the potential reward of a trade relative to its risk. A common strategy is to seek trades with a risk-reward ratio of at least 1:2.
- For example, if a trader risks losing $1 on a trade, they should aim for a return of $2 or more. This principle ensures that even if not all trades are successful, the profitable ones offset the losses of the unsuccessful ones.
Understanding the psychological aspects of trading
Trading is not just a financial challenge but a psychological one. Many New Zealanders struggle to maintain mental discipline and get caught up in making bad decisions or even (unknowingly) self-sabotage when experiencing adverse market conditions. We outline three key must-know considerations:
1. Establishing Emotional Discipline in Trading is Critical
Emotional discipline involves controlling fear and greed. It is crucial to make decisions based on analysis and strategy, not emotional reactions to market fluctuations.Successful traders set predefined rules for entering and exiting trades, which can help. By adhering to these rules, traders avoid impulsive decisions driven by panic or excitement.
2. Avoiding Common Psychological Pitfalls is Essential
Common psychological pitfalls include overconfidence, underestimating risks, and the inability to accept losses. For example, a trader might feel invincible after a few successful trades and ignore risk management, leading to reckless decisions which compound and deliver loss after loss. This is why regular reality checks and adherence to risk management principles are essential.
3. The Importance of a Trading Plan Cannot Be Understated
A comprehensive trading plan outlines a trader's strategy, including the markets they will trade, the risk management rules they will follow, and their financial goals. The plan will act as a roadmap, helping traders to stay focused and disciplined. It should be regularly reviewed and adapted to reflect changing market conditions and the trader's experience level.
1. Establishing Emotional Discipline in Trading is Critical
Emotional discipline involves controlling fear and greed. It is crucial to make decisions based on analysis and strategy, not emotional reactions to market fluctuations.Successful traders set predefined rules for entering and exiting trades, which can help. By adhering to these rules, traders avoid impulsive decisions driven by panic or excitement.
2. Avoiding Common Psychological Pitfalls is Essential
Common psychological pitfalls include overconfidence, underestimating risks, and the inability to accept losses. For example, a trader might feel invincible after a few successful trades and ignore risk management, leading to reckless decisions which compound and deliver loss after loss. This is why regular reality checks and adherence to risk management principles are essential.
3. The Importance of a Trading Plan Cannot Be Understated
A comprehensive trading plan outlines a trader's strategy, including the markets they will trade, the risk management rules they will follow, and their financial goals. The plan will act as a roadmap, helping traders to stay focused and disciplined. It should be regularly reviewed and adapted to reflect changing market conditions and the trader's experience level.
Your free guide to advanced trading concepts, thanks to BlackBull Markets
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Common Trading Mistakes and How to Avoid Them
It's easy to make mistakes when trading, and bad decisions can be compounded; we outline common mistakes and the strategies to sidestep these pitfalls:
1. Overtrading
Excessive trading is often driven by the common urge to make quick profits or recover from losses. Successful traders set strict trading limits and only trade when their strategy signals it, not out of impulse or emotion.
2. Neglecting Risk Management
Ignoring the fundamentals of risk management, like not setting stop-losses or risking too much capital on a single trade, is a fast way to produce negative returns.
Successful traders always have a clear risk management strategy, use stop-loss orders, and never allocate more than a small percentage of their portfolio to a single trade.
3. Following the Crowd
Making trading decisions based on market hype or panic rather than individual analysis is all too common. This was an ongoing problem during COVID when various 'investor' Facebook groups encouraged people to buy shares in small-cap NZX-listed shares, often with poor returns when the 'crowd' stopped buying. To avoid these mistakes, doing your own research and analysis while staying informed but sceptical of market 'noise' and hype is essential.
4. Letting Emotions Drive Decisions
Allowing fear or greed to dictate trading decisions is difficult to control, and many traders can't control their behaviour. The best approach is to maintain emotional discipline and stick to your trading plan and strategies, irrespective of emotional responses to market movements. You risk sinking and throwing away the entire plan if you don't.
5. Failing to Adapt
Markets are always moving - sticking rigidly to a strategy even when market conditions change is essential. Traders who stay flexible regularly review and adapt their strategies in response to market changes and make timely decisions generally see the best returns.
1. Overtrading
Excessive trading is often driven by the common urge to make quick profits or recover from losses. Successful traders set strict trading limits and only trade when their strategy signals it, not out of impulse or emotion.
2. Neglecting Risk Management
Ignoring the fundamentals of risk management, like not setting stop-losses or risking too much capital on a single trade, is a fast way to produce negative returns.
Successful traders always have a clear risk management strategy, use stop-loss orders, and never allocate more than a small percentage of their portfolio to a single trade.
3. Following the Crowd
Making trading decisions based on market hype or panic rather than individual analysis is all too common. This was an ongoing problem during COVID when various 'investor' Facebook groups encouraged people to buy shares in small-cap NZX-listed shares, often with poor returns when the 'crowd' stopped buying. To avoid these mistakes, doing your own research and analysis while staying informed but sceptical of market 'noise' and hype is essential.
4. Letting Emotions Drive Decisions
Allowing fear or greed to dictate trading decisions is difficult to control, and many traders can't control their behaviour. The best approach is to maintain emotional discipline and stick to your trading plan and strategies, irrespective of emotional responses to market movements. You risk sinking and throwing away the entire plan if you don't.
5. Failing to Adapt
Markets are always moving - sticking rigidly to a strategy even when market conditions change is essential. Traders who stay flexible regularly review and adapt their strategies in response to market changes and make timely decisions generally see the best returns.
Resources for Further Learning
We have carefully compiled a list of reputable resources designed to assist in understanding advanced trading strategies. It's important to proceed with caution, as many 'finfluencers' may lack genuine experience and could be offering 'coaching' services rather than true expertise. Additionally, please be wary of numerous deceptive resources that are best avoided - New Zealanders are scammed daily when it comes to investing decisions and you can avoid falling for traps by sticking to trusted resources.
Books
Websites
Courses
Podcasts and YouTube Channels
Books
- The Intelligent Investor by Benjamin Graham – A must-read for understanding value investing.
- Market Wizards series by Jack D. Schwager – Interviews with some of the most successful traders.
Websites
- Investopedia – Comprehensive resource for financial information and education.
- Bloomberg – For up-to-date financial news and market analysis.
Courses
Podcasts and YouTube Channels
- Chat With Traders – Podcast featuring successful traders.
Advanced Trading - Frequently Asked Questions
Our list below is limited and should not be considered as financial advice. Please exercise caution when proceeding with any trading activity, whether basic, intermediate, or advanced, as the risks of losing money are significant.
How much capital is needed to start advanced trading?
The required capital for advanced trading varies depending on the trading strategy and market. For example, day trading in the US sharemarket typically requires a minimum of $25,000 due to the Pattern Day Trader rule. However, less capital is required for swing or position trading. It's essential to have enough capital to diversify and withstand potential losses.
What are the best times to trade in major international markets?
The best times for trading depend on the specific market. For instance, the US markets (NYSE and NASDAQ) are most active during their opening hours, especially the first and last hour of the trading day, which will be around 1am and 10am New Zealand time. Forex markets operate 24 hours, but the highest volatility is often when major market sessions overlap, like London and New York.
How do economic reports affect market movements?
Economic reports can have a significant impact on markets. Reports such as GDP, employment data, and interest rate decisions can cause volatility as traders and investors reevaluate asset values based on new information. Advanced traders use these reports to predict market trends and make informed trading decisions.
What are some common technical indicators used in advanced trading?
Advanced traders frequently use indicators like Moving Averages, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands. These tools help identify trends, momentum, and potential reversal points in market prices.
How do I manage risk in volatile markets?
Risk management in volatile markets involves setting tighter stop-loss orders, reducing position sizes, diversifying across different asset classes, and avoiding over-leveraging. It’s also important to stay informed about global events that could impact market volatility.
What assets do advanced traders typically focus on?
Advanced traders often focus on assets with higher liquidity and volatility as these provide more opportunities for profit. This includes major shares, forex pairs (especially majors like EUR/USD), commodities like gold and oil, and increasingly, cryptocurrencies.
Is algorithmic trading suitable for all advanced traders?
Algorithmic trading requires a strong understanding of both financial markets and programming. While it offers the advantage of speed and can remove emotional decision-making, it's not suitable for everyone. It requires a significant investment in technology and a thorough understanding of algorithmic models.
How important is market psychology in advanced trading?
Market psychology is crucial in understanding how other traders and investors might react to news, economic events, and price movements. Understanding market sentiment can be as important as technical analysis, especially for short-term trading strategies like day trading or swing trading.
What role do emerging technologies like AI and blockchain play in trading?
AI is increasingly used for market analysis, predictive analytics, and automated trading systems. Blockchain is revolutionizing aspects of trading infrastructure, offering enhanced security and transparency, especially in areas like settlement and custody of assets.
Your free guide to advanced trading concepts, thanks to BlackBull Markets
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