This question is asked by many, but answered by none. There are a lot of factors which affect the way how the stock market works and it is nearly impossible to point out one of those factors as to the reason behind the movement of the market as it moves.
One of the most prominent reasons behind the movements of the stock market is the trader’s psyche. Think of it this way, When musk said that he is no longer interested in bitcoin, the whole market took the money out of the crypto coin.
When India said that it will increase its methanol production to meet the rising fuel demands, the sugar stocks of the country went skyrocketing. The shares of AStra Zeneca went up as they declared about the vaccine breakthrough.
All of these things contribute to the movements of the market. The game is to understand why the market moves rather than how it does that.
What are you more interested in, your car works or the way it does?
Let us look at some facts as to why the stock market moves the way it does and why something like that happens.
We have already discussed the psyche part, now let us talk about the news part.
The market psyche and the economic news are both correlated to some extent. The way the market behaves is all because what news is fed to it and what time. If the major banks of a country suddenly decide to increase the interest rates, the forex market would see an instant reaction. What most of the people do, is what the stock market does.
If there is a big bull and a whole bull-team in the market, then the bull trend appears and if there is a bear and a team with that bear who are all focusing on taking their money out and putting the pieces back to what they were, there is a bear trend. The market wold the way it does because of the bears and bulls, dominantly.
Now let us come to the bigger picture. How can you profit from anything like that when it happens? It is very simple and I think trading can be summed up in one statement. Buy low and sell high.
Also, it sounds easier than doing it. Wherever you buy, you think that is the lowest. When you sell, you think that is the highest. But that is not what the truth is.
Where you sell can be just another level and the prices can go up. It can also be just safe to sell there because the prices can shoot down as well.
The best thing to do here is to get comfortable with selling and buying first. Now how would you do that? Where to invest? The answer depends on the trader and the capital they are ready to put in. If the traders are backed up with a good capital, they can opt for trading in the currency markets. However, that is not the safest option because it is the big money game.
Then comes the derivatives part. You can of course go for the big things like future’s contracts, or contract for differences or even something else. These things are something that won’t guarantee overnight success. Also, they don’t guarantee a for sure loss as well.
If you are new to the market, be active in equities investments and get comfortable with the ways at which the stock market works. The idea is to be present in the market and before entering the position, you should have a concrete reason to exit it.
Such things cannot be done with the pressure of losing a lot of money in mind.
Getting used to the nature of the market is more important than making money here.
Money is something that will devour you more and more into the loopholes of making more profits but the end results will be nothing but loss. To look for money in the market is not the right approach to enter it.
Now let us look at the ways with which you can mitigate risks while you trade.
Mitigating risks is easier when you know what you are doing. Some people say that an effective stop loss can mitigate all the risks which is true as well but, rather than using the stop loss as something that would save you from a loss, better positioning is a better option.
Apart from an effective stop loss and a better positioning idea, investment in stocks that can diversify your portfolio is also a good option to save money. Understand the business models of some firms and make sure your money is at the correct place. The correct ways of investing are before you invest, learn what the company is doing and never put all eggs in one basket.
If your decision of investing in a good firm becomes fruitful, then you will be open to the dividend payment schemes that a lot of companies have. This way, you will earn money while you are not even investing.
After all is done, or if i may, before everything is done, it is important that you understand how your broker is charging you for your trades because that is how our profit share will bulk or shred, according to the set premise.
You should understand how the broker charges you for deposits and withdrawals and some other things wherever money is involved. This has to be done no matter what. So much stress is paid upon this fact because all these deductions end up to become a big decision when the trading day ends, or your own targets are reached.
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Bottom Line:
Rather than thinking on how the market works, focus on why it does that. Since you are new to trading, focus on getting comfortable with the environment first, the money will come. Never think of something too fancy that can happen overnight. That is never the case.
