In order to succeed as an investor / trader, you must hone your skills in three key areas:
Knowledge — Confidence — Discipline
Knowledge is your starting point! Without it you cannot hope to have confidence in the decisions you need to make and so you are probably better off leaving your money in the bank.
The importance of knowledge is stressed in an interesting study produced by the Johnson Graduate School of Management at Cornell University – a study which highlights the result of not being thorough in what you do.
Knowledge is a very broad area…
It’s much more than simply accumulating data. Anyone can accumulate the necessary data, but the key is your ability to analyze that data so that you can make informed decisions.
Here are the four steps to building your skills in this important area.
STEP #1: Discover Your “Current” Knowledge and Skills
Like in any area, you first need to understand where your knowledge / skills are today.
A great starting point for this is Mark Tiers Investment IQ Test.
This is a FREE questionnaire. It is quite lengthy, so you’ll need to be patient / persevere. At the end of the questionnaire, you’ll get a detailed 9 page summary. Save your Username and Password so you can come back to this at a ater date to determine whether you’ve made any progress.
STEP #2: Develop Your “Technical Analysis” Skills
All active investors have access to newsletters published by their Broker and / or subscribe to commercial newsletters which provide recommendations on stocks and market projections.
These services are terrific — in fact, smart investors take heed of what these newsletters have to say and often make their decisions based on this advice. That’s not a bad move – after all, these “information providers” have done a lot of the analysis on your behalf and so can save you a lot of time.
However, smart operators do NOT rely on these sources alone.
They undertake their own analysis on every recommendation which appeals – most often using Technical Analysis.
Technical Analysis involves the use of computer systems to analyse raw data. The data can be presented in chart format so you can gain a visual feel of trends.
Many of the systems available today also give you a diverse range of sophisticated options for presenting and analyzing data, including Gann analysis and back testing.
STEP #3: Develop Your “Fundamental Analysis” Skills
This involves looking at global issues such as economic trends, industry trends, company financials, and newspaper reports amongst a variety of sources.
There are also many specialist newsletters in this area – e.g. services which highlight moves in stock holdings held by major shareholders, industry specific newsletters, services which report and analyze company financial reports on your behalf, etc.
The financial media also publish a plethora of information which can be useful. Although it is often “old” news, it’s still something you should be aware of because it can impact the markets or a particular stock.
If you’re going to rely on Fundamental Analysis, then it’s very important that you gather ALL the relevant sources together and evaluate each of them for what they provide.
Whatever you do, you should NOT follow the example of those who got involved (for the first time ever) in the markets during the Dotcom craze of the late 90’s – people who listened solely to a recommendation from a broker and / or media hype without doing any form of analysis. There were many very big losers from all that!
Because of the diversity of available Fundamental information, you can get information overload and so it’s best to identify the specific areas you are interested in and seek out those services which specialize / are relevant in those areas.
For example, if you are interested in energy stocks, you may like to consider Oil and Energy Investment Report.
This popular investment newsletters gives you two model portfolios: one for income, another for growth. You also get timing guides, reports on dividends and earnings, and “sell” as well as “buy” signals. If something important happens between issues, as was the case with the capture of Saddam Hussein, the death of Al-Zarqawi, and many other turning points in the oil market, you get Flash Alerts and e-Updates.
One of the benefits of newsletters like this is that they keep you aware of opportunities on a global basis
— the best opportunities don’t always happen in your domestic market.
Another example is Natural Resource Hunter(from the same publisher) which focuses on resource companies, a sector which has literally boomed in the past few years fueled by the never ending appetite for resources by the Asian tiger economies.
This service not only looks at the resource companies, but also those which are providing them with infrastructure.
STEP #4: Develop an Appreciation of the Asset Classes and Trading Instruments available so you can become an All Seasons Trader
No matter which industry you’re in, there are most likely multiple ways in which you can achieve the outcome you seek.
Each option probably has it’s own level of complexity, risk, and opportunity … and each is probably suitable for a specific set of circumstances.
The investment sector is no different.
It gives you the opportunity to deal in multiple Asset Classes – Stocks, Futures and Foreign Exchange (Forex).
Each Asset Class has it’s own set of working parameters. Many professional traders move between all three – following opportunities as they arise.
There are also a range of trading instruments for you to consider. Most people are aware of equities (stocks/shares) in a general sense, but what they don’t realize is that you can trade these through various instruments … including warrants, options,and puts.
Again, each is suitable for a specific purpose and for a particular set of circumstances.
Once you understand the various options available to you, you are in a position to take advantage of opportunities irrespective of whether the market is moving up, sideways or downwards.
In effect, you become an “All Seasons Investor“, able to make money no matter which way the markets move.
Once you understand Technical and Fundamental Analysis and the trading instruments available to you, you’ll have a sound base for going forwards.
Together, they form the base of the KNOWLEDGE you’re going to need.
A word of caution:
Like in any industry, you should learn the basics first — so if you’re new to this arena, start by paper trading (i.e. no money on the table) and when you’ve developed the confidence in your abilities, then start with some small trades. Progress from there to larger trades and then move onto the more sophisticated trading options available to you.
In effect, approach everything in a series of baby steps. Those who jump in at the deep end (e.g. trading options) from Day 1 because a friend said it was easy invariably get caught out.
If you want to move into the more sophisticated instruments immediately rather than progressively build your knowledge and skills to the level required, then consider having that function managed on your behalf by a Licensed Securities Broker.
To your trading success!