Foundations of Trading: A Trader’s Journey [Part 1]

Every journey begins with that very first step out your door that puts you on the path to your destination. Even though learning to trade the stock market doesn't require you to travel hundreds or thousands of miles, it still takes those first steps to get you moving forward to your end goal of consistently making money trading stocks. Our fledgling class, The Foundations of Trading, is designed to do just that, get you trading.

However, with any journey, you need to know where you are going before you can get there, and when it comes to the stock market, you need to decide if you want to be a trader, an investor, or both. The difference is simple: a traditional investor will buy and hold various company shares or stocks in the market for extended periods, such as a year or more. They need the market to go up so the stocks they hold increase in value. Investors typically trust others to manage their portfolios' money and stocks positions. And finally, they are focused on saving money for the long term and tend to target 15% to 20% annual profits.

On the flip side of the stock market coin are traders. Traders are constantly buying and selling stocks from various sectors of the market. They are looking for profits and want the market to move in any direction to create those profits. They tend to manage their own trades and portfolios, and their positions on a trade can last from a few hours to a few months. Unlike investors, which are focused on the long-term increase, traders are focused on generating capital in the short term. Finally, traders tend to measure their returns monthly instead of yearly.

Now that we have decided how we want to approach our trading and the stock market. We need to focus on three core areas as our journey begins through the Foundations of Trading class.

We need to learn how to consistently predict the direction a stock will move. This is called forecasting and is a combination of methodical analysis, chart pattern interpretation, and experience. It is a combination of skills and creativity.

We need to learn to apply the right strategy at the right time. A winning strategy includes three parts: identifying an opportunity in the market, a cohesive set of specific and coordinated actions, and protection against failed outcomes.

We need to learn relentless risk management. It's tempting to focus on the opportunity; however, if you manage the risk, the profit tends to take care of itself.

Now, let's take a deeper look at learning to predict the direction a stock will move by introducing candles and candlestick charts.

What Is a Candlestick Chart?

The origins of a candlestick chart date back to a Japanese rice trader in the 18th century known as Munehisa Homma. He is widely considered to be the architect of the candlestick chart system, which was developed to track the price of rice contracts. Today’s candlestick chart, which is very similar in form and function to the original Japanese charts which were developed, is a graphical representation of the open price, the close price, the high price, and the low price of a stock for a defined set of time.

How Do You Read a Candlestick Chart?

Let’s take a look at a chart example and see how the open, close, high, and low-price points are displayed on a candlestick.

For discussion purposes, the candlestick image above represents the time frame of one day of trading. The first arrow at the very top of the candle’s upper wick or shadow as it is called is the highest point the price went during the day. The next arrow down shows the price at which the stock in question open at the start of the day. While the third arrow down shows the price, the stock closed out at the end of the day. Finally, the very bottom of the lower wick or shadow represents the lowest price the stock traded at during the day. This candle is red in color because, during the course of the day’s trading, the price ended up closing lower than it originally opened, reflecting a drop in the price of the stock. Sometime, the color black will be used instead of red but they both represent a drop in the day’s price.

Let’s take a look at the same candlestick, but the opening and closing prices are switched. As with the red candlestick image, the first arrow at the very top of the candle’s upper wick is the highest price the stock traded during the day. The next arrow down shows the price at which the stock in question closed at the end of the day. While the third arrow down shows the price, the stock opened at the start of the day. Finally, the lower wick shows the lowest price the stock traded at during the day. This candle is green in color because, during the course of the day’s trading, the price ended up closing higher than it originally opened, reflecting an increase in the price of the stock. Sometime, the color white will be used instead of green but they both represent a positive gain in the day’s price.

​In Closing

Building a strong foundation is important to trading and understanding candlestick charts is essential to reading the sentiments of the stock market. Having a conversation with everyone to find out their opinions in the market is impossible; however, once you start using candlestick charts, you will have a graphical representation of how most everyone in the world is reacting to the fluctuations of a stock in the marketplace at your fingertips. Thank you for being a part of our new Foundations of Trading series and join us in our next blog where we take a deeper look at the directions the market can move and how to read those movements.

Finally, if you are looking to start your stock trading journey, then follow this link to purchase the recordings of the live Foundations of Trading classes which you can review as many times ​as you would like. Plus, after you purchase, join us on our discord server to answer any questions you may have. Thank you!