With the economy now in a recession, government bailouts everywhere, consumer prices rising, and unemployment increasing, there isn’t a better time to learn how to trade the stock market! Really? Can people still make money in the stock market even when it’s as volatile as it’s ever been? The answer is a resounding yes! In fact, there isn’t a better time to learn how to trade.

Why do I say that? With the uncertainty our economy presents all of us, wouldn’t it be nice to bring in a little extra money on the side to help add some financial security? Better yet, what about the possibility of eventually replacing your 9 to 5 job working for yourself? If you are able to make consistent money in the markets, you could trade from home with no employees, no overhead, no inventory, and no commuting. Trading can become the ultimate business; but is that really possible for the average Joe? Absolutely, let me explain.

What used to be the common practice of merely picking a stock you like and holding onto it long enough to make money is changing, especially when you see the DOW losing 778 points in one day as it did last September. Now, I’m not discrediting the long-term investment strategy, but it just isn’t as easy as it used to be. It is clear that the market is constantly changing, and it is different today than it was thirty years ago. People need to view trading differently too. Take day-trading for example.

Volatility is a day-trader’s friend; and the past year has been just that. Why is volatility good for the day-trader? Well, for one, you can make money when the market goes up and down. Yes, it is true; you can also make money when the market goes down. Not everyone knows or understands this. It is called "shorting". Shorting is when the trader sells a financial instrument, such as a futures contract, that he borrows with the agreement that he will purchase it back later to return to the lender. If the price of the contract drops, the trader profits from having sold the borrowed contract for more than he buys it back for later. In a volatile market, it is nice to know the market doesn’t have to just move up for you to make money; it just has to move. That is why today’s economy is still be good for a trader who knows what he is doing.

Traders also commonly buy and sell futures contracts on margin, meaning they only put up a fraction of the face value of the contract in order to trade it. Trading on margin magnifies the traders’ profits and losses. For example, $500 is required to trade one contract on the Emini S&P 500. A one point gain equals a profit of $50, or 10% on the money. Obviously this can work for you or against you because a trader’s losses are also magnified; however, the trader can make margin work for himself best if he understands this next concept: the concept of probabilities.

The key to understanding probabilities in the market is to realize that every single trade has a completely random outcome, however, with the rules of a strong trading strategy, over a large enough sample size, you will win more than you lose, if you can be consistent with your strategy. When a trader understands these probabilities, he can manage his risk the same way casinos manage their risk in gambling. Have you ever wondered how casinos are so successful in a business based on a game of chance? Let’s take blackjack for example. Most people agree that the outcome of each hand is completely random, but what people don’t understand is that the rules of the game give the casino a built-in edge. The casino has a 4.5 cent edge on every dollar that crosses the table, so the casino really doesn’t care whether they win or lose the next hand because over a large enough sample size it always comes out on top. If $100 million dollars were wagered on all the casino’s blackjack tables in one year, the casino would make $4.5 million. They will always make money because the rules of the game give them the edge (Douglas, 2001).

A trader can do the same by understanding there are so many different variables playing an effect on the market’s price at any given time that it is literally impossible to predict the outcome 100% of the time. However, market movement represents people’s reactions to greed and fear, the two driving forces of the stock market. Technical analysis identifies patterns in the market movement that can be used to determine buy and sell signals. While no strategy wins 100% of the time, thorough practice and careful observation will give the trader an edge in the market, and over a large enough sample size, he too will come out on top just like the casinos.

There are hundreds of market strategies to trade, but each trader needs to choose one that feels comfortable to them and fits their personality, then stick with it until they master it. If you need help choosing a strategy, KISSystem has developed a simple approach to teach beginners how to successfully trade futures. Although trading futures may not be for everyone, you can learn more about KISSystem by visiting my webstie.

Don’t let today’s news of the markets scare you from learning how to make money trading. Even in an unsettling economy, the markets can be profitable. Trading can be taught. It doesn’t take becoming a professional broker to learn how to make money for yourself. It just takes the desire, practice, and discipline to learn and master one strategy that fits your personality and goals. May you have all the success with your trading future.

Reference:

Douglas, Mark. (2001). Trading in the zone: Master the market with confidence, discipline and a winning attitude. Prentice Hall Press.