10 Trading

Introduction

The markets hate uncertainty – traders don’t.

Trading is a vast subject, and the purpose of this chapter is to provide an introduction that might be useful to the retail investor who is already trading or considering having a go at it.  Some trading will give you useful insights into how the stock market works, but many retail traders are likely to achieve better returns from a sound investment strategy.

In the context of the stock market, you can trade an individual share on the cash markets and an index futures price or single stock future (SSF) on the derivatives markets.  Exchange Traded Funds (ETFs) are increasingly used for index trading.  Index movements tend to be less volatile and more predictable than the share prices of the companies that comprise the indices.  On some significant news, trading the individual shares most affected is likely to be more rewarding than trading the index, but is more demanding.  You can also trade stock options.  Futures and options trading have been briefly described in the previous chapter.

In the UK, a great deal of trading in both individual shares and indices is carried out through Contracts for Difference (CFDs).  See Chapter 11.

This chapter addresses trading in individual shares, though some of the material here will be relevant to index trading.  Successful stock market trading requires experience, discipline, and both fundamental and technical knowledge. Many traders and trading gurus place too much emphasis on Technicals and not enough on Fundamentals.  Traders need to understand how share prices behave and how they are influenced by news flow and by key market participants.  For the possibly under-resourced retail trader, keeping up with news flow and rapidly moving Technicals is a real challenge.   See Chapter 5.

There is little doubt that profitable trading is a professional or semi-professional activity and the retail investor should enter this domain cautiously – if at all.  A serious issue for the retail trader is that he becomes so focused on rapid share price fluctuations in real time that he will fail to see the bigger picture around a share price movement, and miss out on substantial movements that often take place over […]