Warning: reading this post may change your mindset on trading in a way that makes it tough for you to ever become profitable. It's a logic dump from me, and, in years of studying the market, I am yet to find a consistently profitable system. That being said, I want to elaborate on some of the common styles of trading and why they may or may not work. If you have a profitable system, you probably don't want to read this thread. If you are one of those people who naturally understands trading, don't read this thread as it might cause you to overthink. For the rest of us, and especially noobs, this will get you far past the norm.
The main thing you have to understand is that all trading is predicting. People get mad when you say this because they don't like to accept that belief. But, to simplify, if you believe price will go up, you take a long position. You are predicting that as a result of some activity, price is going to go up in the next couple seconds/minutes/whatever. Traders will try to tell themselves that they are not predicting, that they are playing based on statistical odds or whatever, it's still predicting. Look, if you roll a pair of dice 6 times, I predict you will get at least 2 twos at some point (not necessarily on an individual roll). Statistical forecasting is the same as predicting.
With this understood, there are exactly 3 types of prediction in trading. Price movement, volatility, and ratios. There is a 4th, arbitrage, but that is still price prediction. Next these will be explained in detail:
Price movement. In this type of trading you are predicting that price is going to move. If you think it's going to larger, you take a long position. If you think it's going to go lower, you take a short position.
Volatility. In this type of trading you are predicting that price will or won't change. At the most elementary form this is option straddles. If you think price is going to move a lot, you might do a long straddle. If you think price is not going to move a lot, you might do a short straddle.
Ratios, pair trading. With this type of trading you are figuring that price of one stock is going to change in a certain direction relative to another stock. It's still price movement, although it's a bit different. You don't care if it goes up or down, just that it changes to be greater or smaller relative to something else.
Price movement is the most frequent style of trading so lets focus on that. There are a few ways to do this, most often, trend following and counter trend. Trend following is a mess to even talk about because no one can agree on the definition of a trend. There are many ways to define a trend, including:
A series of higher highs and higher lows. How many? Everyone disagrees.
A moving average starting to increase. Which moving average? Everyone disagrees.
An upward trendline. How do you draw a trendline? Everyone disagrees.
Support becoming resistance. Which support? Everyone disagrees.
For this reason you are unlikely to ever get a satisfying definition of what a trend is.
Of course, there are people who say you can tell a trend just from looking at a chart.
So trend trading means you want to buy in the direction of the trend because price has a better chance of continuing in that direction (prediction) than going in the other direction.
It makes sense in theory, but what you will realize is that most trend traders seem to buy a lot and get stopped out for small losses a lot. Infrequently, they have big winners that go in their direction. This carries many implications, such as you need to take every single trade because you have to get those massive successes.
Counter trend is practically the opposite of trend following. Counter trend is when price is going up and you short. Why would you do that? At first, it might not make sense. But when you start trading, and you try trend following, and you are not profitable, you might realize that every time you enter price goes against you. Maybe you might want to try it the other way. There is a separate version of counter trend trading which is identifying tops and bottoms. This is a very difficult and only a few people can do it consistently.
All price based indicators are useless and the reason is this: just because when price goes one way for a long time an indicator gives a specific output, does not mean that when the indicator gives that specific output that price is going to go one way for a long time. You will not understand this until you using indicators for approximately 3 years. Note I did not say all indicators are useless, I said price based indicators are useless.
There are a few that might not be useless:
Volume
VWAP (ok this is based on price and volume), but I haven't figured out what to do with it yet.
Depth of market historical graph
Trade pace
Resting limit orders
The most helpful thing you can think of is that most people lose money, and the way you are imaging things is probably wrong, and what you've read in this post is probably wrong.
The main thing you have to understand is that all trading is predicting. People get mad when you say this because they don't like to accept that belief. But, to simplify, if you believe price will go up, you take a long position. You are predicting that as a result of some activity, price is going to go up in the next couple seconds/minutes/whatever. Traders will try to tell themselves that they are not predicting, that they are playing based on statistical odds or whatever, it's still predicting. Look, if you roll a pair of dice 6 times, I predict you will get at least 2 twos at some point (not necessarily on an individual roll). Statistical forecasting is the same as predicting.
With this understood, there are exactly 3 types of prediction in trading. Price movement, volatility, and ratios. There is a 4th, arbitrage, but that is still price prediction. Next these will be explained in detail:
Price movement. In this type of trading you are predicting that price is going to move. If you think it's going to larger, you take a long position. If you think it's going to go lower, you take a short position.
Volatility. In this type of trading you are predicting that price will or won't change. At the most elementary form this is option straddles. If you think price is going to move a lot, you might do a long straddle. If you think price is not going to move a lot, you might do a short straddle.
Ratios, pair trading. With this type of trading you are figuring that price of one stock is going to change in a certain direction relative to another stock. It's still price movement, although it's a bit different. You don't care if it goes up or down, just that it changes to be greater or smaller relative to something else.
Price movement is the most frequent style of trading so lets focus on that. There are a few ways to do this, most often, trend following and counter trend. Trend following is a mess to even talk about because no one can agree on the definition of a trend. There are many ways to define a trend, including:
A series of higher highs and higher lows. How many? Everyone disagrees.
A moving average starting to increase. Which moving average? Everyone disagrees.
An upward trendline. How do you draw a trendline? Everyone disagrees.
Support becoming resistance. Which support? Everyone disagrees.
For this reason you are unlikely to ever get a satisfying definition of what a trend is.
Of course, there are people who say you can tell a trend just from looking at a chart.
So trend trading means you want to buy in the direction of the trend because price has a better chance of continuing in that direction (prediction) than going in the other direction.
It makes sense in theory, but what you will realize is that most trend traders seem to buy a lot and get stopped out for small losses a lot. Infrequently, they have big winners that go in their direction. This carries many implications, such as you need to take every single trade because you have to get those massive successes.
Counter trend is practically the opposite of trend following. Counter trend is when price is going up and you short. Why would you do that? At first, it might not make sense. But when you start trading, and you try trend following, and you are not profitable, you might realize that every time you enter price goes against you. Maybe you might want to try it the other way. There is a separate version of counter trend trading which is identifying tops and bottoms. This is a very difficult and only a few people can do it consistently.
All price based indicators are useless and the reason is this: just because when price goes one way for a long time an indicator gives a specific output, does not mean that when the indicator gives that specific output that price is going to go one way for a long time. You will not understand this until you using indicators for approximately 3 years. Note I did not say all indicators are useless, I said price based indicators are useless.
There are a few that might not be useless:
Volume
VWAP (ok this is based on price and volume), but I haven't figured out what to do with it yet.
Depth of market historical graph
Trade pace
Resting limit orders
The most helpful thing you can think of is that most people lose money, and the way you are imaging things is probably wrong, and what you've read in this post is probably wrong.
