INTRODUCTION

Whether you are a proprietary trader or work in an investment house all traders and companies have objectives in how they utilise their money to make profit or to hedge (minimise risk) on existing positions.

Everyone will have what is commonly known as a trading strategy and its common that everyone will have different strategy depending on what it is they are trying to achieve. For example, a proprietary trader is not likely to hold positions for long periods of time nor do they generally have the ability to absorb large losses due to the amount of money that they have at their disposal whereas institutions will generally have a larger pool of money in which to trade with and whilst they don’t like to lose either in most cases they have enough resources to absorb losses easier and mitigate risk by way of hedging positions accordingly.

So how do traders make decisions when to trade and what changes the consensus of the market to move in the first place?

In trading there are two commonly used tools which will affect traders and their positions in the market. One we explained in Unit 1 of this course and that is fundamental analysis which is concerned with the economic data which affects market prices. Most proprietary traders will have a keen eye on the fundamentals and economic data releases although generally they will use them to make quick profits during economic figure releases which we will explain later in the section. Institutions of course are also affected by fundamentals in the market but they rarely use them to make quick bucks! Most institutions will already be in positions during economic data and will have already accounted for any changes in the market before they happen, its only when economic data or news changes or is not expected when things start to get really hectic in the market.

Central Banks, companies and policy makers will often say in publications and in the press that they don’t like market volatility as it destabilises markets and therefore investors, countries and companies. They will often communicate to the market place in a manner to avoid such uncertainty and therefore market volatility.

The most common everyday tool for traders is technical analysis because it is visual in nature and it gives the most up to date representation of price which gives the trader the ability to analyse current data versus data of the past. Put simply Technical analysis is a graphical representation in the form of a chart.

Charts help traders identify patterns in the market, they can also help traders identify areas of interest or where price spends the most time. Charts can also help traders analyse where prices or market sentiment might change, it also helps traders identify who is in control of a market i.e. bulls or bears.

In this section we are going to learn about the different charts traders use and the basics of technical analysis which can be used to build traders strategies.