Getting From Analysis To Executing The Trade - Part One

Submitted by Marco on 16 May, 2006 - 18:55

Unless you’re gambling away your capital at the markets, I expect you as a share trader to be doing some due diligence before each trade - analysing the stock or currency pair before making your mind up whether to enter the trade at all then if the price is trading up, down or sideways. It's all the same deal, the same process whether you trade the US stockmarket, the Australian sharemarket or the forex markets.

Traders use both fundamental and technical analysis to make their decisions on their trades. Usually investors or traders with a longer time horizon use fundamental analysis and short term traders use technical analysis. Some forex traders may use fundamental analysis on a short term basis following the release of a piece of economic data.

First, you need to decide whether it is worth your while to enter in the trade or not. Remember, as a trader you are looking for the high probability trades. If your profit target is only a few cents or pips, then the prospective profit may not be enough to make your time spent tracking the trade worthwhile. Once you’ve decided to enter in the trade or not you move into the next phase…

Personally I look at the market momentum to decide whether or not to enter in a trade. Other people have other methods, but I like to keep it simple. If the momentum aka the gradient of the trend line is steep enough, then that’s a signal that it may be worthwhile to trade that stock. Next step is to try out a few different time scales. If the gradient is shallow on the year long view, but the gradient is steeply negative i.e. downwards in the 1 month view then it may be worth shorting the stock, commodity or currency with a time horizon shorter than a month.

Come back for the next installment... in part two of "Getting From Analysis To Executing The Trade".