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# Monthly Archives: August 2014

# Beginner Trading Questions

The first step is extremely important for your sanity as a trader. You have to set goals that are appropriate to your financial position and your makeup as a person. You need to answer some basic questions such as:

**How much money am I investing?**

The total amount you are investing determines how many shares you will buy of each company and how much loss you will be willing take on each trade so it is important to determine the amount. It will vary as you trade so you will need to reassess regularly.

**How much time will I invest?**

How often do you want to watch the market activity? The Redline System assumes you will watch every day after the trade closes as a minimum.

**What level of return will I aim for?**

This will change depending on the overall market cycles and your own personal appetite for risk. If you are happy to aim for 10% per year to out grow your mortgage, then you can choose some very solid slow growing companies that are unlikely to catch you out with a sudden drop in share price and your safety level will be high. If you aim for 200% per year, you will have fewer companies to choose from and could easily lose thousands in sudden moves. Then again you may achieve your goal in which case you will do very well. Your goal return will determine which companies you choose to trade and therefore the risk and return levels expected.

We recommend starting with a goal of 20% if you are beginning to trade and then as you succeed, you may reassess. It is always tempting to aim higher but until you can practise managing your trades, it can be dangerous.

# Tools & Definitions

A computer is essential to analyse the information required for this trading system. We aim to use free software where possible however some traders will prefer to use some additional resources.

The system uses the interaction of the share price itself and a series of moving averages to define when we buy or sell a share. Here are some basic definitions that we will use later.

**Closing Price:** This is the price that a share is last traded at on any particular day. Conventional wisdom considers the last price of the day to be the consensus of the professional traders dealing in million of dollars rather than thousands.

**Volume: **The number of shares traded on an average day. The volume and price combine to help us establish the share’s liquidity which is how much money turns over trading that share each day. This in turn determines how easy it is for us to buy and sell the share when we want to.

**Moving Average:** A moving average is simply the average of the share price of the last number of days or weeks. So a 3 week moving average would be the average share price of the last 3 weeks. It generally is based on whatever price the share closed at on each day in the last 3 weeks. There are several variations of the moving average (simple, weighted and exponential) and for the rest of this article, we will refer to the exponential moving average which is a way of calculating the average giving higher weighting to the more recent days.

**Multiple Moving Averages (MMA):** We plot several moving averages of varying lengths to give us a very visual idea of what the trend is for a share.

**Rate of Change:** The rate of change is the rate at which the closing price is growing over a certain time. For example a share that was $1 six months ago and that is now $1.50 would have a rate of change of 50% for that six months. It is common to refer to an annual rate so you could say the share has an annual rate of 100%. Rate of change does not predict the future but tells you what the share has been doing in the recent past.

We recommend Incredible Charts which is available freely online from www.incrediblecharts.com but requires a monthly fee if you want to receive hourly updates. The free version uses 18 hour delayed data.

# Live Trading Blog

Well once again I am going to try to to be disciplined enough to write a regular trading blog where I will record my live trades and reasons for them.

I’ll start in a day or two and I will use the Redline Trading System that I have for free download here.