Trading means buying and selling assets. If you buy an asset at a lower price and then sell it at a higher price you have a profit. And the opposite, when you sell an asset at a price which is lower than the buying price, you have a loss.
To become a successful trader, you will need some time and effort. And here we would like to show you five steps to start your trading journey:
- Choose a market
- Study basics
- Choose your style
- Choose a broker
- Define your strategy
Choose a market
At Investorean, we mainly focus on the stock market, but it’s important to know that multiple markets are available for trading. They have many things in common but also differ from each other.
Let’s review some of them:
Stock Market: The stock market is where shares of publicly traded companies are bought and sold. It provides a platform for individuals and institutions to invest in ownership stakes of companies. Stocks represent ownership in a company and offer the potential for capital appreciation and dividends.
Bond Market: The bond market, also known as the fixed-income market, is where debt securities are traded. Bonds are issued by governments, municipalities, and corporations to raise capital. Investors buy bonds as a means of lending money to the issuer in exchange for regular interest payments and the return of principal upon maturity.
Foreign Exchange Market (Forex): The forex market is the global marketplace for trading currencies. It facilitates the buying and selling of currencies between individuals, banks, corporations, and governments. Forex trading involves speculating on the relative value of different currencies, aiming to profit from currency fluctuations.
Commodities Market: The commodities market deals with the trading of physical goods or raw materials, such as agricultural products (wheat, corn, coffee), energy resources (crude oil, natural gas), metals (gold, silver, copper), and more. Commodity trading can be done through futures contracts, options, or spot trading.
Derivatives Market: Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. The derivatives market includes various instruments like futures contracts, options, swaps, and forward contracts. Derivatives are often used for risk management or speculation.
Options Market: The options market involves trading options contracts. Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame. Options can be used for speculation, hedging, or income generation.
Futures Market: The futures market deals with contracts to buy or sell commodities, currencies, or financial instruments at a predetermined price and date in the future. Futures contracts are standardized and traded on exchanges. They are commonly used for hedging against price fluctuations or speculative purposes.
Crypto Market: It refers to the decentralized market where various digital currencies are traded. Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate on decentralized networks called blockchain technology.
Once you have chosen a market to trade on, let’s learn the main concepts that every trader needs to understand:
Buy and Sell Orders: Trading involves buying and selling financial instruments, such as stocks, currencies, or commodities. When you want to purchase an asset, you place a buy order, and when you want to sell, you place a sell order.
Market Orders: A market order is an order to buy or sell an asset at the current market price. It guarantees execution but does not guarantee the specific price at which the trade will be executed.
Limit Orders: A limit order allows you to specify the maximum price you are willing to pay to buy an asset or the minimum price at which you are willing to sell. The order will be executed only if the market price reaches your specified limit.
Bid and Ask Prices: In trading, the bid price refers to the highest price a buyer is willing to pay for an asset, while the ask price is the lowest price a seller is willing to accept. The difference between the bid and ask prices is called the spread.
Bid-Ask Spread: The bid-ask spread represents the transaction cost in a trade. It is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). The tighter the spread, the more liquid the market. It's important for traders and investors to consider the spread when placing trades, as it directly affects the cost of executing a transaction. A narrower spread is generally more favorable for traders as it reduces their transaction costs, while a wider spread can eat into potential profits or increase losses.
Long and Short Positions: In trading, going long means buying an asset with the expectation that its value will rise. On the other hand, going short involves selling an asset with the expectation that its value will decline. Short selling allows traders to profit from falling prices.
Stop-Loss Orders: A stop-loss order is a risk management tool used to limit potential losses. It is an order placed to sell an asset if it reaches a specified price level. Stop-loss orders help traders protect their capital by automatically closing a position when the market moves against their expectations.
Take-Profit Orders: A take-profit order is the opposite of a stop-loss order. It is an order to sell an asset when it reaches a specified profit level. Take-profit orders help traders lock in profits by automatically closing a position when the desired profit target is reached.
Technical Analysis: Technical analysis involves using historical price and volume data, as well as various indicators and chart patterns, to analyze and predict future price movements. Traders use technical analysis to identify trends, support and resistance levels, and potential entry and exit points.
Fundamental Analysis: Fundamental analysis involves evaluating the financial health and performance of a company or asset. It includes analyzing factors such as financial statements, earnings reports, economic indicators, and industry trends to determine the intrinsic value of an asset.
Choose your trading style
There are multiple styles of how people approach trading. It may depend on your lifestyle, availability and preferences. It’s much easier to focus on one specific style at the beginning because they all imply slightly different mindsets.
Here’s the list of the most popular trading styles (think of which one may work the best for you):
Day Trading: Day trading involves executing multiple trades within a single trading day. Day traders aim to take advantage of short-term price fluctuations and often close all their positions by the end of the day. They rely on technical analysis, charts, and intraday patterns to identify trading opportunities.
Swing Trading: Swing traders hold positions for a few days to weeks, aiming to capture shorter-term price movements. They seek to profit from the "swings" or fluctuations in the price trend. Swing traders typically use a combination of technical analysis and fundamental analysis to identify potential entry and exit points.
Position Trading: Position trading involves holding positions for an extended period, ranging from weeks to months or even years. Position traders aim to capitalize on long-term trends and are less concerned with short-term price fluctuations. They rely on fundamental analysis and market research to make investment decisions.
Momentum Trading: Momentum traders focus on stocks that are experiencing significant price momentum and volume. They aim to ride the wave of buying or selling pressure, entering trades when stocks show strong upward or downward movement. Momentum traders often use technical indicators and chart patterns to identify potential trades.
Value Investing: Value investors seek to identify undervalued stocks based on their fundamental analysis of the company's financials, industry position, and growth prospects. Value investors aim to buy stocks at a price below their intrinsic value, expecting the market to eventually recognize their true worth over the long term.
Growth Investing: Growth investors focus on companies with high growth potential and strong earnings prospects. They invest in stocks of companies that are expected to grow rapidly in terms of sales, profits, or market share. Growth investors often prioritize future potential over current valuation.
Contrarian Trading: Contrarian traders take positions opposite to the prevailing market sentiment. They believe that markets can be driven by emotions and that excessive optimism or pessimism can create opportunities. Contrarian traders often buy when others are selling and sell when others are buying.
High-Frequency Trading: High-frequency traders use sophisticated algorithms and computer programs to execute a large number of trades within very short timeframes. They aim to profit from small price discrepancies that may only exist for a fraction of a second. High-frequency trading requires advanced technology and access to market data.
Choose a broker
There are many different brokers and choosing the right one is a very important task. Let’s review main points to consider when choosing a broker for the stock market:
Regulation and Reputation: Ensure that the broker is regulated by a reputable financial authority. Regulation helps protect your funds and ensures that the broker operates in a fair and transparent manner. Research the broker's reputation by reading reviews, checking online forums, and looking for any past regulatory actions or complaints.
Trading Costs: Evaluate the broker's fee structure and trading costs. Consider factors such as commissions, spreads, account maintenance fees, inactivity fees, and any other charges associated with trading. Compare the fees of different brokers to find one that offers competitive rates and aligns with your trading strategy and frequency.
Trading Platform and Tools: Assess the broker's trading platform and the tools it offers. A user-friendly and intuitive trading platform can enhance your trading experience. Look for features such as real-time market data, charting tools, order types, customization options, and mobile trading capabilities.
Paper trading: Paper trading, also known as virtual trading or simulated trading, is a practice where individuals simulate trading without using real money. It involves executing trades and tracking their performance in a simulated or virtual trading environment that replicates the real market conditions. Some brokers call it a demo account, which is essentially the same. All this allows you to test the broker and its trading tools before committing real funds.
Product Offerings: Consider the range of products offered by the broker. Ensure that they provide access to the specific markets, stocks, and investment instruments you are interested in trading. Some brokers may also offer additional investment options like mutual funds, ETFs, options, or futures.
Customer Service and Support: Evaluate the broker's customer service and support channels. Look for brokers that offer responsive customer support through multiple channels such as phone, email, or live chat. Prompt and helpful customer service can be crucial when you encounter issues or have questions about your trades or account.
Account Types and Minimum Deposits: Consider the different account types offered by the broker and whether they align with your trading needs. Some brokers may offer different account tiers with varying benefits and minimum deposit requirements. Evaluate the minimum deposit required to open an account and ensure it fits your budget.
Research and Educational Resources: Assess the broker's research and educational resources. Look for access to market analysis, research reports, educational materials, webinars, and tutorials. These resources can help you stay informed, improve your trading skills, and make informed investment decisions.
Execution Speed and Order Types: Evaluate the broker's execution speed and the types of orders they support. Fast execution is important for day traders and those who rely on precise timing. Additionally, check if the broker offers advanced order types such as stop-loss orders, limit orders, and trailing stops.
Additional Services: Consider any additional services or features that the broker provides, such as robo-advisory services, portfolio management, or access to IPOs (initial public offerings). These services can provide added value depending on your investment goals and preferences.
Define your strategy
Creating a trading strategy involves a systematic approach to identify, evaluate, and execute trades based on specific criteria and rules. Here are the general steps to develop a trading strategy:
Define Your Trading Goals: Start by clarifying your trading goals and objectives. Determine your desired level of profitability, risk tolerance, time commitment, and trading style. Setting clear goals will help shape your strategy and guide your decision-making process.
Choose a Trading Style: Select a trading style that aligns with your goals and personality. Common trading styles include day trading, swing trading, position trading, or a combination of styles. Consider factors such as time availability, risk tolerance, and the type of assets you want to trade.
Conduct Market Research: Gain a thorough understanding of the markets and assets you plan to trade. Stay updated on market news, economic indicators, and industry trends that may impact the prices of the securities you are interested in. Use both fundamental analysis (company/asset research) and technical analysis (chart patterns, indicators) to identify potential opportunities.
Set Entry and Exit Criteria: Define the criteria for entering and exiting trades based on your research and analysis. Determine the specific indicators, signals, or patterns that will trigger a trade entry and exit. This can include factors such as price levels, technical indicators, volume, or specific news events.
Risk Management: Develop a risk management plan to protect your capital and manage potential losses. Determine your position sizing, stop-loss levels (the price at which you will exit a losing trade), and take-profit levels (the price at which you will exit a winning trade). Consider implementing trailing stops to protect profits as a trade moves in your favor.
Test and Backtest Your Strategy: Before applying your strategy with real money, backtest it using historical data to evaluate its performance. Assess how it would have performed in various market conditions and ensure it aligns with your expectations. Consider using software or trading platforms that allow you to simulate and backtest your strategy accurately.
Paper Trade: Implement your strategy in a simulated or paper trading environment. Execute trades without using real money to evaluate how the strategy performs in real-time market conditions. Monitor and analyze the results, including the win/loss ratio, profitability, and drawdowns.
Refine and Adjust: Based on your paper trading results, refine and adjust your strategy as necessary. Identify strengths and weaknesses, and make appropriate modifications to improve performance. Continuously learn and adapt based on market conditions and feedback from your trading activities.
Track and Analyze Performance: Maintain a trading journal to record your trades, including the rationale behind each trade and its outcome. Regularly review and analyze your performance to identify patterns, strengths, and areas for improvement. Identify any emotional biases that may influence your decision-making and work on mitigating them.
Learn Continuously: The markets are dynamic, and continuous learning is essential. Stay updated on market trends, news, and trading techniques. Read books, attend webinars or seminars, join trading communities, and analyze the work of successful traders. Continually enhance your knowledge and refine your strategy.
Remember that trading strategies should be adaptable and evolve over time. Market conditions change, and what works today may not work tomorrow. Regularly review and update your strategy to stay aligned with market dynamics and your evolving goals and circumstances.