A Beginners Guide to Online Trading

The first thing you should know about trading is that it is a business and requires serious consideration before you begin to risk capital.  Trading is not gambling, it is not a game of luck. You want to study the market, learn as much as you can about trading, and use sound risk management to make sure you have a strategy that is very likely to succeed.

Also Read: How to Earn Money by Investing in the Share Market?

Your First Step:

Before you take the plunge and begin to risk capital on an investment, you need to learn about the market you plan to trade. If you are diving into something foreign, you should perform substantial research before you begin.  Don’t take a tip like the Euro is moving higher as god-spell, learn about the currency markets before you make your first trade. 

The best way to educate yourself is to perform some due diligence by evaluating the education section of your brokers website. In fact, before you pick your broker you should check out their education section and see if it has articles, video’s and webinars, that help new traders learn about different markets. You can sometimes find an education section on a brokers online trading app.

Your Next Step:

Once you get a feel for the different markets and products available, you should target 1 or 2. Follow these markets and read about how you can design a trading strategy that will make you money. There are a few steps that you need to follow when you design a trading strategy. The first is what type of analysis can you use? The second is what kind of risk management is prudent for the strategy you plan to employ.

Types of Analysis:

There are two basic types of analysis, fundamental and technical analysis. You can combine both of them or use them separately. Fundamental analysis is a macro analysis, where you determine if new information will change the value of the security you plan to trade. For example, will stronger than expected earnings results push a stock price higher? Technical analysis is the study of price action. Here you go on the notion that all the relevant information available is already incorporated into the price. If this is the case, then studying past price movements will give you clues to future price movements. Technical analysis can include support and resistance levels, pattern recognition, momentum, mean reversion as well as trend following. Each of these types of analysis will provide a different type of return profile which is important to your results.  If you like to catch a diving knife or sell when euphoria is at its highest, then you will perform well with a mean reversion strategy. Instead, if you like to ride the trend, you are best served with a trend following or momentum strategy.

Lastly, you need to have a sound risk management strategy. Before you place any trade, you should have a strong idea where you will take profit and where you will stop out of your position. Part of trading is to understand that you will not win on every trade. You want to make sure the total gains outweigh the total losses which provide you with a net profit.