In the past, trading was an activity reserved only for professionals and a few individuals. Today, with the Internet and the globalization of financial markets, it is quite possible to open a trading account from home. Online trading has become a hobby for many people looking to build their capital to prepare for their future, or more modestly, by supplementing their salary, but many apprentice traders are embarking on the adventure believing that online trading will provide them with the wealth they are so keen on. Outside of trading is a very complex activity that requires a lot of knowledge in finance and financial markets, so if you want to start trading online and you are not sure where to start, this guide is intended to provide you with some insight.
- 1 Online Trading: The basics of becoming a trader.
- 2 How to choose your broker to trade online?
- 3 Our advice to implement an effective trading strategyAny
- 4 pitfalls of 5-point online tradingAs
Online Trading: The basics of becoming a trader.
Before you start trading headlong, it is important to know the basics such as how financial markets work or analyze the price of a financial asset, how much money to invest etc.
Understanding how markets work
A stock exchange is nothing more than a huge global network, also called the Marketplace. It allows the exchange of huge amounts of money every day. In all, nearly €60 trillion is traded each year. Much more than the value of all goods and services in the global economy. Financial assets are traded daily by these different financial centres around the world.The best known financial asset is the stock. A share is a contract representing a share of a company. Generally, the larger a company is, the higher the value of its share (its price). The more money a company generates, the more it can afford to invest in new projects to generate more and more money. On the contrary, if the same company sees its turnover decrease and make fewer and fewer profits over time, it will see its share price decrease. The more investors buy a share, the higher its price will increase. On the other hand, if several investors sell their shares (“Sell”), this company will see its share price fall.
Analyze and choose a market for online tradingConcerning
the choice of market in which to trade online, it will depend on your investment style. If you are an investor who focuses on the short term and very short term (IntraDay), focus on markets with high volatility. Large price differences will be very present and there will be many opportunities to make a profit.If you are oriented towards investments based on the medium and long term (swing trading for example), prefer markets with very little volatility. Indeed, it will limit your risks. In addition, prefer markets where companies are confident, i.e. where their business results are available for analysis. Avoid Pennystocks at all costs, which are dangerous actions because they are unable to value the companies in which you invest. The price of these shares is determined only by supply and demand. Thus, many scammers (scammers) will encourage you to invest in a particular company in order to take advantage of price fluctuations. If you invest in markets where the currency is different from the one in which you opened your trading account, consider hedging your position by selling or buying the corresponding currency pair. Despite a sharp increase in the value of a stock in which you have invested, it is possible to lose everything if the currency of that stock decreases. Thus your profits will be reduced to 0% despite your positive return on investment in the share. If you are a Day trader and you have a professional activity in addition to trading, it will be difficult for you to combine trading and work. If your schedules do not allow you enough free time to trade online, opt for foreign markets whose opening corresponds to your lifestyle. The American market opens in the afternoon, for example. Ideal if you only work in the morning, or if you invest for the long term, the question does not arise for you. All you need to do is concentrate on the opportunities in the markets, so don’t hesitate to consult our page on stock market investment to find out more.
Establishing Capital for TradersNow
that you know a little more about how financial markets work and in which market to trade, you will need to establish capital for online trading.If you want to have a chance to make a profit, forget about opening a trading account with only €250. With such a large amount of money in trading, you will not have enough funds to implement real trading strategies. You will also not be able to manage/hedger your risks. However, a small amount can allow you to familiarize yourself with and reassure yourself with this universe if you are a beginner, we consider that a low investment from the start is a necessity when you start to see if you are really made for trading, especially if you go to the Forex or CFDS market (binary options are an exception to the rule here, you can very well start with a micro/mini account but your return will be lower).If you are starting to have some experience it is recommended to open a trading account with at least €5,000 to €15,000. There is nothing to prevent you from investing this amount in a “margin account”. A “margin account” is a trading account that allows an investor to use leverage effects in order to have greater trading power.Let’s say you deposit €10,000 into your margin account. If you use a leverage effect x2, your portfolio will be worth €20,000. This will allow you to make twice as much profit in the markets. However, when you lose, you will lose twice as much money as well. Be careful not to receive a “margin call” from your broker!the more profits you make over time, the more you can afford to use greater leverage. If you lose money, reduce your leverage effects. Never use high leverage from the start, start with an X100 leverage offered by many brokers and unconscious and irresponsible. You will incur a total loss of your capital. Any self-respecting trader starts by taking as few risks as possible and then increases his risks when his trading results allow him to do so.
How to choose your broker to trade online?
Thanks to the democratization of online trading, many brokers have embarked on the adventure and have opened their business on the Internet. Some offer Full services, advising you on your investments (and therefore charging higher commissions) while others are only there to place your orders.In any case, choosing a good broker is very important. Evaluate their customer service, their speed in taking market positions and their terms and conditions in detail. Prefer an online broker regulated by institutions such as the AMF or CySEC.
tradingBinary options are financial instruments that make it easy to trade on price fluctuations in multiple markets. Classified as “exotic” products, binary options are different from traditional options. Indeed, they have different commissions, returns on investment and risks. The best known binary option is the “High-Low” binary option. Its underlying asset may be a stock, an index, a commodity, or a currency pair.A “High-Low” binary option is also called a “Fixed Return Option“. This is because this option has a “strike price” (price fixed in advance in the contract, usually 25 euros for a traditional binary option) and an expiry date. if a trader correctly measures the direction of the market and the price of this underlying asset is on the right side of the strike price, the trader is paid a fixed amount depending on how much the price of the instrument has moved. A trader who mispredicts the direction of the market will lose his capital invested in the binary option. if a trader thinks the market will increase, he will have to buy a “Call“. On the contrary, if the trader thinks that the market will be down, he will have to buy a “Put“.
- For a call to be profitable, the price of the financial asset at its expiry date must be above the strike price.
- For a “Put” to be profitable, the price of the financial asset on its expiation date must be below the strike price.
There are also many other binary options that you can read about by reading our tests of the different brokers in the binary market, and last but not least about binary options, trading robots. We devote an entire dossier to these products. We strongly recommend that you read our tests before you start doing so.
Trading CFDs and/or Forex
Like binary options, CFDs are derivatives whose value depends on their underlying asset. A CFD, from the term (Contract for Difference) is an agreement to exchange the difference in value of a financial asset from the time the contract is opened until the time it ends. Whether it is up or down. With a CFD, you never own the financial instrument it represents, but you can still benefit from it if the market moves in your favour. Let’s take an example to understand CFDs: If you think a particular market will grow, you can buy a CFD. This position is called “Going Long”. The more the market grows, the greater your profit will be. On the contrary, by being “Long”, the more the CFD will decline and the greater your losses will be. The same rules apply inversely if you predict a declining market. In this case, it is always possible to make a profit by opening a sales position: “Going short”. By being “Short” on a position, the more the price of the CFD will decline and the more money you will earn. The more it increases, the more you will lose. CFDs are similar to traditional equities except that they are more convenient because you do not really own the asset you are trading. In addition, the costs associated with trading these financial instruments are much more attractive: CFDs can represent equities, stock market indices, commodities, currency pairs and many other instruments. A CFD has two prices, the “bid price” and the “offer price”. The difference between these two prices is the spread (also present in Forex). If you think the price will increase, the price you will pay to buy the CFD is the “offer price” (the higher of the two).If you think the CFD price is down, the price for short selling will be the bid price (whichever is lower), the number of shares or contracts you choose to trade is your own judgment as long as you meet the minimum size required to invest in a particular market, for more information on CFDs, see this article.
Our advice to implement an effective trading strategyAny
trader who respects himself has his pre-established strategies before starting his trading day. It is important to implement these strategies to maximize your chances of making a profit and especially to preserve your capital, the goal in trading is to generate positive results over the long term because the more you earn in trading, the more your returns on investment will grow exponentially. To do this, risk management, money management and psychology strategies must be defined before even starting an investment.
Establishing Money ManagementIn
the context of investments in financial markets, the principle of money management refers to allocating capital in an “intelligent” and diversified way in order to limit risks.When setting up your portfolio, you will need to invest an amount equal to all your investments, initially allocate no more than 10% of your capital for each trade, you can even start with 5% if you are cautious. Also keep in mind that a well constructed portfolio is a diversified portfolio containing several financial assets. If you are a complete novice, it will still be preferable to use less than 5 active ingredients to familiarize yourself with them through technical and fundamental analyses.As a result, allocate an approximately equal amount of shares to currency pairs, commodities and derivatives. Also set up “stop-loss” during your trades. They will protect your capital if things turn out to be against you. Another important point: Never trade money that you may need right away. When you start trading, losses are part of the game. Another important trading rule that many apprentice traders seem to forget: Trading should not be used as a source of additional income if you want to speculate in the long term. So never withdraw money from your trading account if you want to earn large amounts of money in trading.By leaving your capital in your account and assuming that you are often positive, your capital will increase exponentially over time. On the contrary, if you take these funds out of your account, your portfolio will change very little over time. This last rule applies especially to trading on Forex and CFDs. Concerning binary options, the dynamics remain different and more malleable. By applying a good money management you will be able to make regular withdrawals and still have an operational trading account to place your positions. As binary options do not have levers, the risk is necessarily lower.
Use Demonstration AccountsThe
demonstration accounts offered by online brokers are an essential step in your trading learning. Indeed, these demo accounts, generally offering between 50 000€ and 100 000€ fictitious, will not only allow you to familiarize yourself with your broker’s platform but also to implement your trading strategies without risking a cent.You will also be able to test your risk management strategies and implement advanced trading techniques. Note, however, that placing trades with fictitious money is totally different from committing real capital on the markets, as the results you will obtain through these demo accounts may be different from your portfolio. This is because investing your own money in the markets creates stress that can influence your decision-making, so it is important for any trader to be psychologically strong and to have a structured and organized mental approach regardless of the circumstances. This eliminates any form of irrationality that could impact your trading performance. Less essential, the demo account on binary options is a solution that tends to disappear.
Free resources to learn online tradingTrading
and the financial markets are constantly evolving and much in the news. Stay informed about investments at all times.There are now many ways for you to learn about trading and other topics. Books and articles are available, as well as videos on the Internet. The Internet is an unlimited source of knowledge where you can find everything you need to a certain extent. So take advantage of it and learn constantly. Moving averages, trader psychology, economics, finance, don’t limit yourself to a particular subject and always look for new things to learn. MassLib also offers folders to teach you different techniques such as the Ichimoku indicator which allows you to establish trends at a glance. The
Psychology of a trader and the acceptance of lossesTrading
is a very self-controlled activity. A trader who is psychologically weak may suffer heavy losses as a result of decisions taken hastily or out of irrationality. Trading is subject to stress, especially when markets are down. To avoid getting into this spiral, it is important to establish psychological rules, for example, if you lose 10% of your portfolio, immediately close all your positions and take a one-week break. Taking a break from trading will allow you to rest and come back with new ideas, with peace of mind. Give yourself time to take your losses. On the other hand, it will preserve your capital. Your trading strategies may not have been good.Remember that it is impossible to earn money on trading. Losses are part of the game. However, it is important not to expose your capital to too much risk. This is why risk management techniques exist. Thus, a properly housed portfolio will rarely be negative when unexpected events occur, and many people who engage in trading set goals for themselves. Apart from setting trading objectives can be dangerous. It is not the trader who decides how much money he will generate per day but the market itself. The market is the only actor that can decide on the profits you will make, so it is useless to set a target of 1000€ of profit per day for example. If opportunities are not available in the markets, trying to achieve this result will make you invest out of spite and you would then risk losing your money unnecessarily. Use stop-losses about your losses, they will be useful in case of unexpected price drops. The psychology of the trader is one of the points that you will see most often when talking about this activity. The
pitfalls of 5-point online tradingAs
mentioned above, the democratization of trading has opened doors for millions of people. Among these millions of people, some have taken advantage of this democratization by making money on the backs of other less experienced traders. Others noted that many adopted the wrong approaches to trading and had bad habits, and we will see in this last chapter the 5 main pitfalls to avoid when trading online.
- Trading is not a cheap way to save money: Never withdraw your money from your trading account if you really want to grow your business. Thus it will increase exponentially. Close your account once you have finished any trading activity.
- Beware of social trading and scammers: Social trading is the act of relying on others to trade online following their advice and views. This may be useful, but keep in mind that your own analyses will always be important. Many people, often dishonest, aim to make you trade as much as possible so that they themselves earn commissions behind your back.
- Never use too much leverage: Using too much leverage, especially if you are new to tading, will get you a call from your broker explaining that you will need to add more capital to your portfolio or close some of your positions. This is the margin call! Start with the lowest leverage and as you generate profits, increase it gradually.
- Forget intraday and short-term trading if you are a beginner: Nowadays, there are robots that trade at the micro second and other robots designed to predict what these robots will trade. You might as well say that your chances of making a profit in the very short term if you do not understand the markets and your assets when trading intraday are almost nil. Prefer longer time frames ranging from a few weeks to a few months.
- Technical analysis should not be used to predict the price of a stock: Indeed, many traders believe that by using technical analysis, it will provide them with an overview of the evolution of a stock. This is not true! First of all, focus on fundamental analysis of a company and then use technical analysis to place your trades at the right time.
Finally, trading is a risky activity. The term “investment” is often used in trading sites. We use it ourselves, but be aware that if you are not made for trading there are many ways to make financial investments. Feel free to consult our investment guide and discover other possibilities.