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Some important questions & answers (for beginner investors) for SP:SPX by Tradersweekly

Today we prepared for you several questions and answers that might be helpful to new investors. Please feel free to post your own questions and answers in the comment section.

What is technical analysis and why does it work?
Technical analysis is a scientific discipline that analyzes investments by evaluating statistical data (usually price and volume ). This method works because of fractal nature which represents the ability of same price patterns to appear across multiple different time frames independently. This applies also to patterns observable in oscillators, indexes and other technical tools.

What trading systems are the best performing ones?

Best performing trading systems are trend based. Purpose of such trading systems is to identify the trend and then „ride it“ – which means investing in its early stage and taking profits in its latter stage.

Which time frame is the most reliable?

Generally, bigger time frames are more reliable as opposed to smaller time frames. Though, patterns and trading signals usually take longer to develop when using a bigger time frame. Most common time frames are: 1-hour, 4-hours, daily and weekly.

What is leverage? Is it a really fast way to make money?

Leverage simply represents borrowing money in order to fund an investment. For example, when a trader uses leverage with ratio 1:10 and underlying asset moves by 1% then leveraged asset moves by 10% in the same direction. Leverage is definitely one of the possible ways to generate money fast. However, it is also a quick way to lose money.

Should I use a leverage when I am new (unexperienced) investor?

Use of leverage by new investors is pretty common as it represents an enticing opportunity to make money fast. However, in our opinion, an unexperienced investor should not use leverage at all. That is because leverage is very difficult to manage and its use by an unexperienced trader usually results in loss of capital.

Is it possible to time exact market tops and bottoms?

Timing exact market tops and bottoms is incredibly difficult even for an experienced trader. There are several technical tools at disposal of a technical analyst which he or she can use to indicate market reversal points. However, picking these exact spots is not necessary in order to turn profitable in trading. As mentioned previously, best performing trading systems are trend based. Such trading systems work by identifying trends and by exploiting them (without requirement to identify exact market top or bottom).

What is diversification? Why should I implement it?

Diversification is one of the possible ways to manage risk in the portfolio. It simply stands for diversifying capital into multiple different investments rather than focusing capital in a single investment. Proper diversification protects investor’s capital from price fluctuations within particular market sectors. Additionally, it is crucial in order to build a long-term lasting portfolio.

Should I invest in the stock market when it just reached all time high?

Probably not. Usually, the market tends to pull back when it reaches a new all time high. Therefore, in our opinion it is not best to add to the long position just when a new all time high was reached by an asset. One of the best strategies in a strong bull market is to add to the long position when price drops and then sell the position once an asset reaches new all time high.

Should I invest in an asset just because it fell 90% in value recently?

Not necessarily. Fall of such high magnitude does not necessarily mean that the price trend will reverse. There may be various reasons why an asset fell by so much; and therefore, doing your own due diligence is highly advised before entering any trade.

Is past performance of an asset indicative of its future performance?

No. Past performance of an asset should not serve as a basis for predicting future performance of that same asset.

Should I use options/other derivatives as a new trader?

There is no restriction to use options as a new trader but derivatives in general are more complex instruments than stocks or bonds; additionally, their price is determined by numerous factors that an investor should be aware of. If a trader does not fully understand how some asset class behaves, then he or she should avoid such a particular asset class.

Should I keep holding a losing position?

It depends on the investor’s own assumption but in general it is better to close positions that keep losing to prevent further losses and to be able to use capital somewhere else.

I feel I haven’t made many trades in the recent past. What should I do?

Trading is not about making enough trades but about generating profit. Sometimes there are not enough opportunities in the market; making too many trades could lead to entering positions that a trader is not fully comfortable with. Also too many trades reduce profit due to trading fees being stacked up. So if a trader can not find another opportunity to make a trade, the best solution is to take a “break” and to keep looking for the next opportunity rather than force himself or herself into trading.

DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not serve as basis for taking any trade action by individual investor. Your own due dilligence is highly advised before entering trade. This content serves solely educational purposes.

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