Personal views and opinions as to possible rises and falls in the financial markets might be described as ‘gut reaction analysis’. You may have a feeling that the market is going to rise or fall – but you don’t know why. In any case, personal views and opinions should not be ignored in financial trading because, very often, they turn out to be right!
No matter how ridiculous this may seem it has a logical explanation. Today’s financial markets serve more small, private investors than ever before. Many of these people use ‘gut reaction’ to buy and sell, and read the same financial publications that you use to make decisions. At expert level, expert analysts will be using the same methods of fundamental, technical and quantitative analysis that you may be using. Therefore, in many ways, rises and falls predicted by all these methods can turn out to be self-fulfilling.
To support your personal views and opinions keep an eye on economic indicators. Paying attention to certain economic ‘barometers’ provides a good early signal as to how markets may react in the future. For example, it is becoming popular to pay close attention to certain companies that are usually the first to be affected if there is to be a change in the economy. Companies involved in the transportation and distribution of goods are ones to watch. If there is a change in the amount of goods being transported around the country whether it be an increase or decrease then these companies will be affected and it’s a sign that many other companies will feel the same effect further down the line.
Consumer confidence can also play a major part in providing early economic signs.
Take the housing market : An upsurge in the housing market eventually affects a whole host of other industries. From estate agents, removal firms, consumer durables and mortgages, they will all be affected somewhere down the line. And each of these industries have many other industries that are connected, and will eventually be affected. A surge in the housing market for example will instantly affect removal firms. They will require more staff who in turn will be driving more vehicles that ultimately will be using more fuel, which adds to further road congestion etc. Estate agents will be turning over more business, DIY centres will see a rise in profits, and more consumer durables will be purchased as new owners look to furnish their new property. The list is endless.
Finally keep an eye on the volume of trade conducted through the stock, share and commodity markets. You’ll soon discover that if share prices went up but actual volume was fairly low then this upsurge will be short-lived. If shares went up on the back of good volume then this increase should continue for a number of days. It works in the same way for falling prices. Pay particular attention to the big companies, the FTSE 100 can rise on the back of just a handful of the big companies if their share price increased even if many of the other companies share price remained the same or even fell.
Special Strategy: ‘Profit Taking Friday’
Friday afternoons can be a very profitable day to trade, on the other hand, it can also be very expensive! The reason, like in a number of industries, traders need to meet certain weekly targets and Friday afternoons are a favourite time.
The FTSE could have traded profitably all week and there are no major world issues that will effect the price. Come close of business on Friday, the FTSE finished down 83 points – the reason, traders saw their clients’ shares were riding high and decided to sell a number at the premium price, thus forcing the FTSE to fall quite sharply.
Although this doesn’t occur every week, you need to be careful if you have a ‘up’ trade on Friday. My advice would be to trade very carefully on that particular day -ideally you want to have made a profit by Friday lunchtime enabling you to close your position before the profit-taking activity occurs. I’ve made a number of healthy gains by using this information and so can you.
The financial trader, following the weeks performance, quotes the FTSE to finish on a high by Friday evening – he doesn’t take into account profit-taking and so you take a ‘down’ position, by 2.00pm the FTSE is riding high up 67 points. The financial bookmaker increases their prices, but by 3.40pm it’s obvious that there is some selling occurring. On seeing this, the bookmaker sharply drops their price until close of business. The bookmaker finally settles on the FTSE falling over 92 points but because you had a very good price, your profits are high. This was all down to some last minute profit taking, so take advantage when you can!
Clever Strategy : When trying to make judgements on the prospects of a financial market never use just one method of analysis. Always use several. But, similarly, never try to use them all. Many of the methods are variations on a similar theme. This will produce a conflict of information and make it impossible to make a decision – what experts call ‘paralysis of analysis’!