Best way to trade; How trading works
Trading can be defined as the buying and selling of an asset of your choice be it indices, shares, forex or commodities without owning the underlying instrument. With us, you’d trade using contracts for difference (CFDs), a derivative that enables you to speculate on the price movements of an underlying without owning it.
You can either go long (buy) or short (sell):
- You’d go long if you think that the underlying’s price will rise
- You’d go short if you think that the underlying’s price will drop
If your prediction is correct, you’d make a profit; contrarily, if it’s incorrect, you’d incur a loss.
Trading stocks can be a fascinating and lucrative way for an individual to grow their wealth but the stock market can be daunting for beginners. It involves complex strategies and platforms and many tools are available. New traders enter the market daily but many fail to achieve their full potential because of a lack of knowledge, preparation, and proper risk management.
The good news is that anyone can become a successful trader with the right knowledge, mindset, and approach.
10 steps to start trading
1: Always Use a Trading Plan
A trading plan is a set of rules that specifies a trader's entry, exit, and money management criteria for every purchase. Use technology to test a trading idea before risking real money. This process is known as backtesting. It allows you to apply your trading idea using historical data and determine if it's viable. The plan can be used in real trading after it's been developed and backtesting has shown good results.
The key here is to stick to the plan. Taking trades outside the trading plan deviates from your predicted performance and nullifies the value of your plan even if they turn out to be winners.
2: Treat Trading Like a Business
You must approach trading as a full or part-time business, not as a hobby or a job, if you're going to be successful. There's no real commitment to learning if it's approached as a hobby. It can be frustrating because there's no regular paycheck if it's a job.
Trading as a business allows you to clearly identify all your expenses and losses. This helps you reduce uncertainty, risk, stress, and even taxes. Too often traders imagine that they're in the business of prediction. This point of view often generates unproductive effort. Traders who realize they're in the business of risk management begin to focus their efforts more productively.
3: Use Technology to Your Advantage
Trading is a competitive business so it's safe to assume that the person on the other side of a trade is taking full advantage of all available technology.
Charting platforms give traders infinite ways to view and analyze markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via your smartphone allows you to monitor trades anywhere. A high-speed internet connection can increase trading performance. Using technology to your advantage and keeping current with new products can be fun and rewarding.
4: Protect Your Trading Capital
Saving enough money to fund a trading account takes time and effort. It can be even more difficult if you have to do it twice.
Protecting your trading capital isn't synonymous with never experiencing a losing trade, however. All traders have losing trades. Protecting capital means not taking unnecessary risks and doing everything you can to preserve your trading business.
5: Become a Student of the Markets
Traders have to remain focused on learning more each day. It's important to remember that understanding the markets and their intricacies is an ongoing, lifelong process.
Hard research allows traders to understand the facts such as what the economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances. World politics, news events, economic trends and even the weather can all impact the markets. The more traders understand the past and current markets, the better prepared they are to face the future.
6: Risk Only What You Can Afford to Lose
Make sure the money in that trading account is expendable before you use real cash. A trader should otherwise keep saving until it is.
Money in a trading account shouldn't be allocated for college tuition or the mortgage. Traders must never allow themselves to think they're simply borrowing money from these other important obligations. Losing money is traumatic enough. It becomes even more so if it's capital that should have never been risked in the first place.
7: Develop a Methodology Based on Facts
Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the "so easy it's like printing money" trading scams that are prevalent on the internet but facts should develop a trading plan, not emotions or hope.
Traders who aren't in a hurry to learn typically have an easier time sifting through all the information available. You would probably have to study at a college or university for at least a year or two before you qualify to apply for a position in a new field if you want to start a new career. Learning to trade demands the same amount of time and fact-driven research and study.
8: Always Use a Stop Loss
A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or a percentage. It limits the trader's exposure during a trade. Using a stop loss can take some of the stress out of trading because you know you only lose X amount on any given trade.
Not having a stop loss is bad practice even if it leads to a winning trade. Exiting with a stop loss and a losing trade is still good trading if it falls within your trading plan's rules.
9: Know When to Stop Trading
An ineffective trading plan and an ineffective trader are two good reasons to stop trading.
An ineffective trading plan shows greater losses than anticipated in historical testing. That happens. Markets may have changed or volatility may have lessened. The trading plan simply isn't performing as expected for whatever reason. Stay unemotional and businesslike. It's time to reevaluate the plan and make a few changes or start a new one. It's not necessarily the end of the trading business.
10: Keep Trading in Perspective
Stay focused on the big picture when you're trading. A losing trade is a part of trading. A winning trade is just one step to a profitable business. It's the cumulative profits that make a difference. Emotions have less effect on trading performance when a trader accepts wins and losses as part of the business.
What are the risks of trading?
There are a number of risks associated with trading. Since CFDs are leveraged products, they give you increased exposure to the underlying asset at a fraction of cost.
However, any losses you make will be based on the full position size and could exceed your initial deposit so, it’s important that you manage your risk properly.
Setting realistic goals is an essential part of keeping trading in perspective. Your business should earn a reasonable return in a reasonable amount of time. You're setting yourself up for failure if you expect to be a multi-millionaire by next Tuesday.