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The NebraskanGooner Comprehensive Guide to Trading Fundamentals
Nebraskan Gooner (an STP Episode 2 guest) has put together a comprehensive tutorial on the basic fundamentals of trading for beginners interested in entering the markets. Before anyone can become a proficient trader, quite a few core principles need to be understood and this guide has covered many of those points to help you get you off to a good start. Have a look at the guide below:
Commonly used abbreviations/definitions:
- HTF – High time frame – A bit subjective and will vary slightly from person to person. I consider 6 hour time frame charts and higher as “high time frame.”
- LTF – Low time frame – A bit subjective and will vary slightly from person to person. I consider 1 hour time frame and lower as “low time frame.” (I refer to 2 hour and 4 hour charts as midterm time frames)
- S/R – Support/resistance. Typically referring to a resistance flipping into a support and vice versa.
- R:R – Risk to reward. This refers to the implied risk while entering a trade and the potential reward if it reaches its intended target.
- Bullish – Referring to the price of an asset going upwards. Bullish markets go up.
- Bearish – Referring to the price of an asset going downwards. Bearish markets go down.
- Long position – A position with the intention of an asset going upwards. Basically, it means the buying of an asset.
- Short position – A position that speculates on the decline of an asset. Short selling is when a trader/investor borrows a security with intention to sell it on the open market at a lower price. Short selling is of higher risk than traditional investing.
- S/L – Stop loss. Stop losses are used to manage risk by automatically closing a position for you if price goes against your position.
Understanding candlesticks (Those red and green boxes on charts are called candles):
Candlesticks are the most basic part of trading. Each candle is associated with a different timeframe. There is a new daily candle every 24 hours. A new weekly candle started every 7 days and other candles for basically any duration of time you are interested in. Everyone knows that a green candle means price is going up and a red candle means price is going down but each candle tells a more in-depth story. To understand what each candle means, we need to know the different parts of a candle. Each candle has an “open”, a “close”, a “body”, and may have an upper or lower wick. As seen in the picture below.
In this next section, Nebraskan Gooner breaks down each part individually:
Candle open: The open is decided by what the exact price of an asset is when a new candle is printed on any given time frame. Right now, a new daily candle opens at 1800 CST. A new candle will open every day at this time and the candle will start at wherever the current price of that asset is. The candle open will always be at the BOTTOM of a green candle and at the TOP of a red candle. If price starts the day at $10, the candle open will show up at $10 on the chart. If price goes up to $11, the candle open is still at $10 and will be at the bottom of the candle since price went up. If price drops down to $9 the candle open is still at $10, but is now at the top of the candle since price went down.
Candle close: When a candle closes a new candle opens. The candle close is marked at the exact price of an asset when the time limit on that candle expires. If you’re looking at a daily candle, the candle close price will occur 24 hours after the candle opens. The candle close will be at the TOP of a green candle and at the BOTTOM of a red candle. If the price opens at $10 and closes at $11, the candle close will be at the top of the candle, because price went up. If the price opens at $10 and closes at $9, the candle close will be at the bottom of the candle, because price went down.
Candle body: The green or red (usually rectangle) area of the candle is known as the body. The longer the candle body, the more disparity in price from the candle open to the candle close. If price opens at $10 and closes at $12, the candle body will be green, because price at the close of the candle was higher than the price at the open of the candle. If the candle would have closed at $16 then the candle body would be much bigger that day.
Candle wick: Any candle may have a thin line on the top or bottom. This is called a wick. Candle wicks are created by price action that occurs above or below the candle close during the time the candle is open. Many new traders put too much focus on the wicks of a candle. Wicks can be used to your advantage but you should more focus on the levels where a candle opens and closes.
Volume:
Volume is an indicator often forgotten in the basics of trading. It can be a powerful tool for confirmation. Volume should be viewed like gas for a car. The more buyer volume coming through, the higher a move is likely to push. If a move keeps pushing higher and higher but there’s less and less buyer volume, the move is likely running out of steam (or momentum).
*Volume is also useful for confirmation of a pattern or trendline breakout. A high volume breakout shows strong market intent and the move is likely to continue. A low volume breakout shows low market intent and the breakout is more likely to fail.
Horizontal supports and resistances:
Price history and psychological numbers are what create supports/resistances. A support is a price value where you expect buyers to be interested in an asset. Resistance will be found while an asset is going up and support would be found on the way down.
A key level where there are lots of people waiting to sell would create a resistance and a key level where there are lots of people waiting to buy would create a support. If an asset reaches $10, that is a round, whole number and would potentially be a psychological support or resistance. The basic logic of trading is “Buy at support and sell at resistance.” As a beginning trader, one of the simplest mistakes we can make is buying an asset at a resistance, or panic selling an asset at support.
*In the image above, you can see price established a horizontal support. Buyers were quick to buy this asset at that price the first 4 times it dropped to the support. As you can see, the 5th time, support was unable to hold. That support level will now become a resistance with price beneath it.
*(Above) The same way a price can bounce up at support, it can reject at resistance. If we fast forward on this same image, you can see price rejected at this resistance (which was previously support) and continued to go lower.
Using different time frames on charts:
This is a really important section that I think a lot of newer traders and investors misunderstand. If you are looking at a 1 day chart or a 1 week chart, you will expect any trades or any price action to take a much longer time to execute than if you were looking at a 1 hour chart. So if you’re entering a trade based on a 1 day chart, expect that trade to take much longer to play out than a trade entered on a 1 hour chart.
You must also understand that what happens during a 4 hour chart can effect how the 1 day chart looks. It’s important to understand how each time frame works to put together a full picture. If the 1 day chart is looking very bullish, but the 4 hour chart is looking very bearish. You can use that 4 hour information to help make a decision on the daily chart and potentially sell your position based on this information.
Useful Indicators:
On balance volume (OBV) – This indicator can give you a clearer picture of the strength/weakness of a move. It measures the buying and selling pressure to tell you which side may be showing more force. If buyer volume exceeds seller volume the indicator will point upwards. If selling volume exceeds buyer volume the indicator will point downwards.
This can be really useful for when price is moving mostly sideways. Price tends to precede volume, so if OBV is showing an uptick in strength, while price is relatively stable, that may give you an early indication that price will move up (and vice versa for downwards).
In this example below, notice how the OBV line below the chart is moving upwards while price is moving mostly sideways. Buyer strength was more powerful than seller strength during this sideways movement and price expansion in the direction of the pressure occurred shortly after.
The difference between trading USD trading pairs and BTC trading pairs:
USD trading pairs: This is a trading pair that is valued against the U.S. Dollar. Examples include ETH/USD, LTC/USD, XRP/USD, etc. You will buy these with USD and sell them back into USD (Or a stable coin like USDC or USDT in which case the pairing would be ETH/USDT). This will have no correlation to the price of Bitcoin. Occasionally if Bitcoin goes up in US value, altcoin USD value will also rise. To understand an asset’s value in correlation with Bitcoin you will need to look at its Bitcoin trading pair.
Bitcoin (BTC) trading pairs: This is a trading pair that is valued against Bitcoin. Examples include ETH/BTC, LTC/BTC, XRP/BTC, etc. You will buy these trading pairs with Bitcoin and sell them back into Bitcoin. If this trading pair is going up in value then that means it is gaining more value in the US dollar than Bitcoin is. If this trading pair is going down it means its value against the US dollar is depreciating or that it is appreciating slower than BTC.
Special thanks to Nebraskan Gooner! Everyone at TrendSpider hopes you enjoy this useful guide.
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