The Basics

Before we jump straight into trading strategies, let's begin by developing a conceptual framework for how price should behave and how it should trend.

Below is a picture of the "ideal market". The ideal market is one which has perfect trends and conforms exactly to our expectations of how it should behave. Unfortunately, this type of market does not frequently exist. Trading, for the most part consists of forming a theory about how the market should behave and buying or selling with the hopes of profit. By understanding the basics and how the ideal market trends, traders will be better armed for acting on opportunities when they arise.

Overview of the Market

In the above picture, it can be seen that the movement of price can be divided into three groups: up trend, down trend, or consolidation. Generally speaking, when price is trending upwards, it is making "higher highs and higher lows". Also, when price is trending downwards, it is making "lower highs and lower lows". When price is neither trending upwards or downwards, it is consolidating, or moving sideways. If the reader has not already reached a conceptual grasp of how price moves, now would be an excellent time to re-read this paragraph and examine a few charts of their favorite financial instrument. Price can only go three directions - up, down, or sideways.

Retracements

When a stock is in a clearly defined trend, there are brief periods of time where price move the opposite direction of the trend. These are called retracements. A retracement can be thought of as a period of time in which market participants are taking profit, causing price to move in the opposite direction of the trend.

Trading Success

In theory, trading is very simple. In order to successfully trade, all an individual must do is purchase a security when it is rising in price, sell it when it is falling in price, and avoid it when price is not moving. In practice, however, trading can be remarkably difficult. The psychological impact of seeing hard-earned money grow and decline with the flow of the market can be too much for many individuals. Additionally, with thousands of views and opinions about the market at any given time, a trader can easily be overwhelmed trying to find "the Holy Grail", or the answer to the market. Unfortunately, the answer to the market is an answer which many traders do not wish to hear: success in the markets comes through a trader finding his or her "edge" and practicing on perfecting it.