Some key considerations for short-term trading
Everybody wants to earn money in the stock market, but most of the people lose money.
Because most of the people don't have the knowledge and experiences to earn money in the stock market.
Stock market is an aggregation of all market participants. All smart people are in the market, including hedge funds, institutions, whales, dark pools. So it’s very easy for entry, but difficult to consistently make money.
We highly recommend that most of your money should be invested in a S&P 500 index ETF over at least 30 years with dividend reinvested. That's the only way to make solid money for the people without professional knowledge and experiences. And, the returns can be significant because of the compound of interest.
Why S&P 500 index ETF is a compound machine?
First, S&P 500 index is created and maintained by professionals, including Standard and Poor's economists and index analysts. The index includes the top 500 companies in leading industries of the U.S. economy. Incompetent companies will be expelled from the index and replaced with better companies. It's also well balanced and diversified between different industries. Warren Buffett ever says, "Never bet against America".
Second, the mechanism of how we run society and economy determines the S&P 500 index can only go up in the long run. Inflation is unavoidable, and those big companies have advantages to raise their price keeping up with inflation, and they have many choices to reduce the costs. Pension is the basic function of a country and significant portion of the pension fund is invested in the S&P 500 index. The government can't let pension fund go bankrupt. On the other hand, the pension fund has to go up in order to maintain the system.
Third, the advancement of technologies is one of the driving forces. Whenever there is an industry revolution, the stock market will go up exponentially. Just think about it. The invention of the car created Ford Motor empire; the invention of the search engine created Google empire; the invention of the iPhone created Apple empire; the invention of the social media created Facebook empire, etc. There will be lots of new technologies and inventions in the future in the areas like AI, IOT, biotech, etc.
However, most people want to earn some quick and big money, which is called short-term trading, or speculations. It is not impossible, but you need to spend lots of time and efforts to understand how stock market works, and develop a solid trading system. Otherwise, you could "win big money purely by luck but lose those money by so-called techniques and experiences".
Let's see what a successful trader does in a trading day:
Review macro economic data and news, such as inflation, interest rate, fed policy, CPI, employment, etc. The logic is that the macro environment will have some impacts on the stock market.
Use a solid proprietary trading system to find trading opportunities by considering both industry, fundamental and technical factors. For example, you need to find the leading company with good fundamentals in the hot industry and with a technical breakout with big volume; you also need to look at the monthly, weekly, daily, hourly and minute charts to initiate the trade; you need to setup stop loss and stop wins; there are some other things to do as well.
After market closes, review all the related trades, make a summary, understand what needs to be improved and think about next day's trading.
It's basically a full-time job, which is very difficult to copy by a normal investor.
In case you really want to make some short-term trading, here are some recommendations:
Don't trust anybody or company who wants to charge you a fee for a trading system and claim there is a high return. If there is a high return, why don't they trade by themselves? It's very easy to make money by selling a trading system or books or tutorials, but very difficult to make money by the real trading. Most Youtube investing gurus make the most money from Youtube, not the stock market.
Use at most 10% of your total available fund to trade, and prepare to lose all your invested money.
Use options instead of futures, always trade longs instead of trade shorts, and never use margins. If you use futures, short sells and margins, you could lose more than you can afford.
Learn some macro analysis, fundamental analysis, technical analysis and cycle analysis. If the macro environment is not looking good, you need to be careful. If you understand the company you are trading, you have a better edge to win. Technical analysis is very useful to understand the trend and predict the future of price movement, but sudden fundamental changes and big money can change the trend. Cycle analysis helps you understand the long-term patterns and trends. During a lifetime, you could face 3 big economic and stock market cycles where you have a chance to change your life.
Develop your own trading system: pick the right stock, read stock charts and technical indicators, timing for the entry and exit, stop-loss and stop-wins, and with good money management. Have good discipline to execute your trading system. Please note, that all well-known trading systems will not be effective, because there are too many people using the systems, which will certainly offset the effectiveness.
Understand some key concepts: for macro analysis, high inflation, high interest rate and tight Fed policy are not favorable for investing; for fundamental analysis, at least you should know about company valuation and value investing; for technical analysis, at least you should know about Dow theory, W D Gann, and Wychoff method, as well as some understanding about common technical indicators and overlays.
In summary, we recommend to invest most of the money in a S&P 500 index ETF over at least 30 years with dividend reinvested, while only trading at most 10% of the available fund for speculation based on your own trading system.