Before diving into the world of online trading, there are a few things that you should know to start off on the right foot.
Online trading might be perceived by some as a quick and easy way to make money, since it has low entry-barriers (all you need is an internet connection). However, veterans of the field will tell you that it’s a tricky craft, which involves a lot of risk and requires a lot of know-how. If you’re to become a successful trader, you need to have the right tools and experience in order to make educated decisions. Therefore, you should familiarize yourself with the field before diving into it, so we’ve gathered 4 basic tips, to give you a better starting point.
The first thing you should know about online trading is that unlike traditional trading, you’re not buying the actual stock, but engaging in a Contract for Difference (CFD) agreement, meaning you can bid on whether a stock will go up or down, without buying it. In most cases, the process is streamlined so you can place all of your orders online, as if you were dealing with the market directly.
On the topic of placing orders, there are two important orders that can be utilized for each transaction: “Stop loss” and “take profit.” A stop loss order means that you determine a certain amount you’re willing to risk on a certain contract, and if you lose that amount, the transaction ends automatically. A take profit order has pretty much the same concept, only it applies to a certain profit that is made. There are two types of positions that can be opened for each contract: A long position means you hope that the asset you’re investing in will go up in value, and then you can sell it at a profit, and a short position, which is the opposite, meaning you gain if the asset goes down in value.
Knowledge is power
Staying informed is key for making good decisions. Keeping your finger on the pulse by following asset prices, important announcements, and reading financial news could serve you well when making investment decisions. Depending on the type of assets you invest in, there are various online calendars that can give you solid information regarding upcoming events relevant for each asset. For example, when a central bank from a major economy (such as the Federal Reserve in the U.S.) announces a change in interest rates, it usually affects that country’s currency, and others. You could receive even more information by signing up to relevant newsletters, some of which are distributed daily.
Diversify your portfolio
As opposed to “classic” investing, which is usually long-term with low risk and low yield, trading usually deals with shorter periods of time. Some traders open and close deals within minutes, shaving off minuscule amounts from each transaction, but working in high volumes in order to reach substantial sums. However, day traders often let deals run for an entire trading day, with the hopes that the asset they invest in will have a higher closing price than its starting price (or the opposite if they open a short position).
It is important to remember that some assets affect one-another, so it is best to diversify between different asset-classes (such as stock, commodities, indices etc.), and even within the asset class itself. The logic behind diversity is as old as the saying “don’t put all of your eggs in one basket,” and could safeguard you from losses across the board if one asset or asset-class has a losing day.
Start with virtual money
Most trading platforms enable you to open a virtual-money account – so use it. If you’re just getting into the realm of online trading, it might be a good idea to practice with virtual money, getting the “feel” of the various markets and determining your trading style and level of engagement you’re comfortable with. Since there are various approaches to online trading and thousands of assets to choose from, it is best to hone your skills without risking real money.
True, it is tempting to start trading right away, but beware of the gambling mentality and remember that trading always involves risks. However, if you come prepared, educated, and with some experience – you are more likely to be careful and not take unnecessary risks.
* All trading involves risk. Only risk capital you’re prepared to lose.
* Past performance does not guarantee future results.
*This post is not investment advice.