Tuesday Trading Tutorial - January 6, 2009

When we last left off, we had discussed the intricate details pertaining to credit spreads. Today’s article will delve into a broader scope of trading, analyzing the markets as one entity.

One of the most challenging aspects of becoming a successful trader relies on the individual to be able to recognize and distinguish certain trends and signals within the markets.

With more than 10,000 publicly traded stocks, there are more than 2,300 stocks out there, which offer available options. It can be extremely daunting for an investor to take into account the overall extent of the markets as a whole.

One of the most important aspects a trader needs to take into account when analyzing the markets is that the sentiment of other investors is driven mainly on fear and greed. It becomes invaluable for you, as an investor, to take into consideration the psychology of other investors when coming up with your own trading strategy.

Another key ingredient to improving your skills and knowledge towards investing is that you need to know that you are competing against professional traders, and that it is paramount to hone your skills and choose the proper analytical tools to strengthen your strategies.

The most popular analytical tool that is free to everyone comes from the Internet. Both novice and advanced investors have free reign to research and access any information pertaining to a company’s financial statement, stock performance, charts and other analysts’ opinions on any company.

Some of the most popular sites to visit for the aforementioned information can be Yahoo! Finance, Google Finance and Reuters. Additional sites are also available that provide a more in-depth approach to market analysis, they include Bloomberg, Reuters and CNNMoney.

Once you have put into place the tools needed to improve your trading skills, it is now time to look at the markets to determine the general movement within the markets. On average, three out of every four stocks move in the same direction as does the overall market.

While analyzing the markets as one, there are many contributing factors to take into account when predicting the market’s next move. These factors would include monetary policies, interest rates, industry leaders and economic reports.

In the first part, monetary policies, it is vital for an investor to keep up with current happenings within the Federal Reserve. The Fed, among many other roles, is in charge of curtailing inflation, which in turn affects the overall direction of the markets. If the Fed was to slow down inflation, short-term interest rates would increase, and vice-versa. However, it usually takes the markets upwards of six months to react to the Fed’s moves, which leaves the markets to trade on their own accord.

As stated above, directly linked to the Fed are interest rates. The discount rate, the fees charged to banks for borrowing money, is extremely vital because it is directly linked to the cash flow and money supply of the country. Thus, there is an unique relationship between interest rates, bond prices and the stock market, and can be used to anticipate the markets direction.

Being able to follow industry leaders is also a good tool to use when analyzing the marketplace. With the help from the listed financial Internet sites above, investors can compare and contrast various groups and companies within a specific segment. With more than 200 industrial groups, many analysts believe that nearly half of a stock’s trading price is attributed to its specified group within that industry.

The final aspect surrounding the analysis of the broader markets comes from differentiating between the noise and the pertinent information inside the many economic reports released by the government, or related parties. Some of the most influential reports that may lead the markets in certain directions are the Unemployment Reports, Gross Domestic Product (GDP), Consumer Price Index (CPI), Producer Price Index (PPI) and Retail Sales.

Regardless of what path you take to learn and use the tools needed to become a successful trader, being knowledgeable and perceptive about the macro environment will help you succeed in the micro arena, when it comes to investing.

Check back soon as the next article will cover aspects of a basic approach to researching and analyzing the fundamentals of a stock and its encompassing attributes.

For more information on the stock and options markets check out the wealth of information at BetterTrades.