Trading explained: going from novice to pro

Trading has considerably increased in popularity in the last few years. Thanks to the emergence of online discount brokers, anyone can easily set up a trading account and generate income. However, the trading world is not as simple as it seems – there are many financial products available, along with a virtually unlimited choice of trading strategies and portfolios.

In this article, we’ll introduce you to the basics of trading, types of trading, benefits and drawbacks, and step-by-step instructions on how to embark on your trading journey and explore the diverse array of available products.

Meaning of trading

Trading refers to buying and selling financial assets, such as stocks, bonds, currencies, commodities, and other products, with the aim of generating profits. However, there are certain differences between investing and trading.

Investors typically seek to make large returns over a longer period by buying and holding assets (known as a “buy and hold” strategy). On the other hand, traders use both falling and increasing markets over a shorter period to make profits.

It is a practice that involves risks and requires specific knowledge and skills to navigate the markets effectively. While trading can yield high returns, it also carries the potential for significant losses if risks are not carefully managed.

As a result, successful traders rely on proven strategies to maximise their gains. For instance, a more conservative strategy is one that limits exposure in the market and adopts a long-term perspective. On the other hand, a more aggressive approach seeks quick gains by speculating on short-term price movements.

Types of trading

Next, let’s have a look at the most popular types of trading.

Positional trading

Positional trading is similar to an investment strategy because it implies entering positions for weeks or even months. However, unlike investors, positional traders may enter into both long and short (short-selling) trades.

The key advantage lies in capitalising on long-term market trends, without the need to constantly monitor trades and close/open positions.

Swing trading

Swing trading is a form of short-term trading that focuses on taking advantage of short-term price movements in financial markets. The main goal of this technique is to make profits in periods that can last (usually) a few days.

This technique relies heavily on technical analysis and uses strength and momentum indicators, such as MACD, RSI, and moving averages, to identify optimal entry and exit points.

Intraday or day trading

Day trading, also known as intraday trading, involves buying and selling financial assets within the same day to secure quick short-term profits, often facilitated by leveraging.

This strategy demands an extensive understanding of the market, experience, and emotional control, as it requires swift and precise decision-making based on technical analysis.

Scalping

Scalping is a high-speed trading technique wherein multiple transactions are executed within an extremely short timeframe, with the goal of capitalising on small price fluctuations. Scalpers typically operate on very short time charts, such as 1 or 5 minutes.

Successful scalping demands exceptional discipline and emotional control, given the rapid pace of operations, where any misstep can lead to costly consequences. Additionally, effective scalping necessitates access to a trading platform offering excellent order execution, low spreads, and high leverage.

These are some of the most popular trading strategies for active traders.

How to start trading in 6 steps

If you are considering starting trading, here are six steps to help you with your journey.

#1. Build knowledge & skills

Before starting in the world of trading, it is essential that you familiarise yourself with the basics of trading. You must keep in mind that trading is not a simple activity, but rather requires a deep knowledge of financial markets and the products traded in them.

Therefore, it is important that you read as much as you can about:

• Different financial products and derivatives
• Trading strategies
• Technical and fundamental analysis
• Economic and other news that can affect the market

#2. Become familiar with the main asset classes

To create your trading strategy, you need to decide what assets you will trade (i.e., some traders only trade forex, others stocks, while other strategies may be diversified, including a wider range of assets).. Before starting to trade, it is important that you know the different financial products that exist in the market, such as:

Financial assets	Difficulty of trading	Average expenses
Stocks	Easy	Low
ETFs	Easy	Low
Bonds	Medium	Low
Currencies	Difficult	Medium
CFDs	Difficult	High
Futures	Difficult	High
Options	Very difficult	High
Cryptocurrencies	Medium	Medium

Of course, each product has specific characteristics and different risk levels, so it is essential that you understand them in order to select the ones that best suit your goals and investment profile.

#3. Choose a good broker according to your strategy

The choice of a broker is crucial when starting trading. The broker will execute the orders in the market on your behalf and will provide you with access to a trading platform and research tools. Hence, it is very important to take your time when opening a brokerage account. Here are some examples of aspects you need to consider:

• Regulation – the broker must be fully regulated to avoid exposing yourself to unnecessary risks
• Cost structure – check the costs for the asset classes you want to trade
• Trading platform – this is crucial for order placement, risk management, and research
• Variety of products – you need to make sure the broker provides access to the assets you want to trade (i.e., some brokers offer real assets, others offer only CFDs and spread betting).

#4. 2% rule: keep your risk under control

Risk is a key part of trading, and it is important that you learn to manage it properly to avoid significant losses. Money management strategies are crucial when it comes to trading and investing.

For example, a commonly accepted rule is the 2%, which implies that you should not risk more than 2% of your capital in a single trade. That is, if you have £10,000 in your trading account, you should not risk more than £200 euros in one single trade.

#5. Start trading

Once you have informed yourself enough and have selected your broker, it is time to start trading. As a beginner, it’s crucial you choose a broker that offers a demo account and is among the best brokers for beginners. This type of account allows you to trade with virtual funds to familiarise yourself with the trading platform. Also, it’s a crucial element of testing your strategy before risking real cash.

Many advanced traders use demo accounts to refine their current strategies or develop new ones. Make sure you test and polish your trading strategy and risk management strategy.

Once you become familiar with the broker’s platform via the demo account, it’s time to fund your account and start trading.

#6. Learn from your mistakes

A good practice to improve your trading is to keep track of all your trades. This will allow you to analyse your successful ones and learn from your mistakes, so you can improve your trading strategy. You can use a spreadsheet or a trading journal to record your trades, the size of the position, the risk level, and the result, among other relevant aspects.

Financial products available for trading

Here are some of the most popular financial products that you can use when crafting your trading strategy.

Trade stocks

When you purchase stocks, you acquire a share in a company. If the stock price rises, your investment will appreciate, but if it falls, your investment will decrease accordingly. Have a look at the best commission-free brokers that allow you to trade stocks with 0% commissions.

Trade CFDs

CFD trading has gained widespread popularity in the financial market. Contracts for Difference (CFDs) offer traders the opportunity to profit from both upward and downward market movements, enabling them to trade various financial assets such as indices, stocks, commodities, currencies, and more.

Find out more about CFD trading and the best brokers to trade CFDs.

Trade futures

Financial futures present another option for trading. While some traders and investors use futures to hedge against potential losses in physical goods or investment portfolios, most traders nowadays use them to speculate on price movements. Trading with futures is considered relatively safe as it occurs in regulated markets.

Check out our guide on futures trading and the best futures brokers.

Trade forex

Forex trading involves trading currencies through a broker’s online platform. The broker provides the necessary data and information to facilitate informed decision-making. Developing a sound strategy is essential, including factors like position size, duration of the operation, and price target levels. It is also important to allocate a specific capital amount for each trade.

Forex trading is quite complex, and there are many factors to consider. For instance, macroeconomic data often influences the forex markets, such as the release of non-farm payroll reports. However, if you want to learn how to trade forex, have a look at the best forex brokers right now.

Trade warrants

Buyers of warrants have the right, though not the obligation, to buy or sell the underlying asset (stocks) at a predetermined price within a specific timeframe. This allows investors to profit from price fluctuations during the established period. Warrants are a type of derivative issued directly by the company, so they are not as common as other assets.

Trade commodities

Investing in commodities involves buying and selling raw materials like gold, silver, soybeans, oil, and wheat, among others. Traders seek to profit from daily price fluctuations in response to macroeconomic conditions. Additionally, some investors utilise commodity trading as a hedge against inflation, as commodity prices may rise during periods of high inflation.

Trade options

Options trading involves buying and selling options contracts on underlying assets, such as stocks, indices, or commodities. An option contract grants the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specified date.

Option trading can be a profitable method to speculate on price movements, but it also entails higher risk, demands in-depth knowledge and analysis of financial markets and choosing one of the best brokers for options that allows you to implement your chosen strategy. This is because there are different types of options available (i.e., covered call and protective put).

Trading cryptocurrencies

Cryptocurrency trading has become a very popular activity in recent years. Basically, it refers to buying and selling digital coins, such as Bitcoin or Ethereum, with the aim of obtaining profits. This type of trading is carried out on specialised exchange platforms, where various options can be found to invest and take advantage of the volatility of the cryptocurrency market.

You can also use brokers to trade crypto, but it’s worth keeping in mind that crypto derivatives are banned in the UK. Have a look at our best crypto brokers in the UK.

Trading for professionals

If you’re already looking to take your trading skills to the next level, you may be interested in discovering trading strategies.

In a nutshell, a trading strategy refers to a set of rules and techniques used to make buy and sell decisions in the financial markets. These rules can be based on technical indicators, fundamental analysis, or a combination of both. The primary objective of a trading strategy is to maximise profits and minimise losses.

It’s important to keep in mind that not all trading strategies are the same, and what works for one trader may not work for another. Moreover, it is essential to have a good understanding of the financial markets and risk management before implementing any trading strategy.

What is the purpose of technical analysis in trading?

Technical analysis is a crucial technique employed in trading to analyze price movements in the market and predict potential future trends. This method relies on studying price charts and historical data to identify patterns and trends, aiding in making informed investment decisions.

For traders, technical analysis serves as a valuable tool, providing an objective way to analyze information and make well-founded choices based on historical data. By examining patterns and trends, technical analysis helps identify investment opportunities and mitigate risks associated with trading. Some of the key indicators commonly used in technical analysis include:

• Relative strength index (RSI)
• Moving average (MA)
• Volatility index (VIX)

For a detailed explanation of the main technical indicators, check out our guide to technical analysis and pick one of the best trading platforms to get started.

Can you make a living off trading?

Yes, it is possible to learn to trade and potentially make a living from it, but it requires dedication, effort, and strong discipline.

The first crucial step is to grasp the basic concepts of trading, which include understanding various financial markets and the fundamentals of risk management. These foundational concepts serve as the building blocks of successful trading.

Next, you must identify a trading strategy that aligns with your individual trading style and investment objectives. This necessitates thorough study and practice before venturing into real-money trading.

Moreover, implementing effective risk management is essential. Setting clear limits on the maximum acceptable losses before closing a position is vital for preserving capital and minimising potential risks.

Trading can be an excellent way to make money, but it requires time, effort, and strong discipline. If you are truly interested in trading as a way of life, you must dedicate time to learning the fundamentals of trading and practising your strategy before you start trading with real money.

You can start by reading about the best trading books.

Top 7 best traders of all times

1. Peter Schiff
2. George Soros
3. Jesse Livermore
4. Simon Cawkwell
5. Paul Tudor Jones
6. John Paulson
7. Jim Rogers

Find out who the best traders are and how much a trader earns.

Summary

In conclusion, trading can indeed offer a pathway to financial independence and even a living, but it demands a commitment to continuous learning, diligent practice, and disciplined risk management.

Understanding the fundamental concepts of trading, finding a suitable strategy, and implementing effective risk management are crucial steps towards success.

Remember, trading is not a get-rich-quick scheme; rather, it requires time, effort, and patience to develop the necessary skills and navigate the dynamic world of financial markets.

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