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Trading: A Beginner's Guide

Increased liquidity and innovation in financial products have created several destinations and asset classes available to novice traders. Combined with technology platforms that make trading easier than ever before, there has been a surge in retail trading activity, in many cases across asset classes and regardless of geography. If you plan to become an active trader, professionally or as a personal project, here are some of the main goals you should consider before taking the plunge into the world of trading.

How do you decide what to trade?

For the novice trader, the capital markets can seem like a very confusing proposition – with more than 35,000 tradable products in several product classes with different trading hours, liquidity, margin rules and other criteria. For example, the New York Stock Exchange (NYSE) is the world’s largest exchange for trading stocks. The exchange has a market capitalization of more than $25 trillion and daily trading volumes in excess of billions of dollars. If you add up the other major stock exchanges around the world, daily trading volumes are staggering. Global currency trading has already surpassed $6.6 trillion a day in 2019. With all this trading activity, it becomes imperative to decide which instrument and market to start trading. We limit our discussions to three asset classes – forex, stocks and the new asset class cryptocurrencies, as we rate them all lower.

Forex Trading.

Trading: A Beginner's Guide

Trading: A Beginner’s Guide

The forex market, short for currency market, is the largest financial market in the world. It is the world’s largest decentralized foreign exchange market where traders and investors can buy and sell currencies, speculate on their rise and fall, or trade contracts whose value is determined by an underlying currency pair. There are several key players in the forex market. Some of them are central banks, investment banks, investment management firms, commercial firms, governments, corporations, hedge funds, brokers and retail traders.

Foreign exchange markets have a number of advantages over other asset classes for novice traders. Here are a few of them

Markets are open 24 hours, five days a week – Unlike some other asset classes such as stocks, you can forex trade at any time of day at your convenience.

High liquidity – Foreign exchange markets are very liquid, which means that spreads are low and execution is instantaneous. This contrasts with some instruments in other asset classes that may not have very high liquidity, which increases execution risk.

The ability to open a long or short position – a trader always wants the flexibility to trade on both sides of the market. Buy an instrument and bet on its price going up or short on its price going down. Such flexibility is not inherent in all asset classes.

Leverage – traders have the ability to increase their positions. Leverage allows traders to make much larger bets on instruments, potentially increasing the profits that can be made without having to invest large sums.

Cryptocurrency trading

Cryptocurrency refers to a decentralized digital currency created using cryptography. The most significant difference between cryptocurrencies and conventional currencies is that there is no central issuer. This feature makes them immune to any government intervention in the form of regulations. Most cryptocurrencies are open-source currencies with open and public registries of all transactions in the blockchain that anyone can view.

Several FX brokers offer cryptocurrency trading along with other financial instruments on their trading platforms. All you have to do is create a wallet, fund it, and bet on price movements.

Advantages of trading in the cryptocurrency market

Transparency of information – most crypto exchanges operate on a blockchain platform, and traders can view all transactions except the user’s personal information. The protocol is immune to any manipulation because it is decentralized across multiple computers and networks.

Currency Independence – Transferring money across borders using conventional currency pairs takes time and money. However, with cryptocurrencies, payments can be made instantly with any currency in any geography.

Trading stocks

Investing in stocks can be very rewarding. After all, who wouldn’t want to own global companies like Apple, Cisco Systems, Facebook or Tesla! For those who like the idea of trading or investing in corporate stocks, stock trading is the best way to go.

The advantages of exchange trading:

Trading: A Beginner's Guide

A wider selection of instruments traded. While forex and cryptocurrency markets offer a limited number of trading instruments, the selection of equity instruments in stock markets is by far the highest. A trader has far more scripts than currency pairs and crypto instruments combined.

Ownership and voting rights. Each share purchased is a fundamental part of the company and gives people a say in some of its decisions.

The regulatory environment reduces risk – stock markets are regulated by the country’s regulatory agencies. These agencies actively protect investors’ interests and help minimize the risk of fraud.

How do I open an account with a trusted broker?

There are several brokers with different business models and product offerings. Traders can open an account with any broker, and these days it has become easy with the introduction of electronic KYC checks and filings.

Some tips when choosing a broker

Trading: A Beginner’s Guide

The broker should be regulated by at least one major regulatory body, as this reduces the risk to the trader in case of disputes.

Must be in existence for several years and have a significant customer base – this ensures platform scalability and reduces execution risk.

Provides competitive pricing with low trading costs and commissions.

Investor Education

Before starting to trade any asset class, a trader must learn, analyze and understand the basics of the financial instruments he/she intends to trade. Here is some information on a few select sites that provide you with the knowledge you need before trading.

Market Analysis

Financial markets are always in a state of instability. The supply and demand leading to price movements are constantly changing and traders must make quick decisions that will determine if a trade can be profitable or not.

Market analysis involves traders trying to understand market movements. There are two types of market analysis – fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis is a method of determining the intrinsic value of a security by analyzing factors such as a firm’s financial condition, competition and economic factors affecting the market. The final analysis of all of these factors is to determine whether the current price of the underlying security is justified, above or below the ideal price. The analysis allows traders to decide whether to buy or sell the security.

Technical Analysis

Technical analysis involves analyzing past prices and volumes to determine whether or not it is fairly priced. This analysis depends on the availability of past price and volume data.

A successful trader spends a lot of time researching the value of a security by using one or both of the above methods to analyze the markets.

Trading Plans and Initial Strategy

Trading without a strategy is the same as relying on simple luck, which is not a sustainable strategy in the long run. Every trader should have a trading plan and strategy. Trade plans are checklists of conditions and events that must be met before a trader enters the market.

Real Money Trading

While the temptation to make a profit is always present, a beginner must first hone their virtual currency trading skills on a demo account, ideally for at least 2-3 months, before learning how to trade real money.

Real money trading involves overcoming a number of behavioral aspects related to euphoria, from proper calls to despair if initial calls go wrong, to maintaining strict discipline by reducing losses and locking in profits at a predetermined margin. Discipline should also include situations where the trader exits the market when he cannot understand prices. Good trading psychology and preventing emotions from overshadowing your trading behavior are some of the most important factors in determining whether or not a trader can exit the market.

In conclusion, no one should risk money unless they can afford to lose. A good trading strategy also depends on individual risk tolerance-the ability to lose money. Borrowing to trade is never recommended because of the risky nature of the markets. A trader who can withstand the ups and downs of his portfolio, maintain financial discipline, has a sound investment strategy and overcomes emotions is more likely to succeed in the markets. All of this takes time and patience. Traders who are just at the beginning of their journey are advised to remain committed and patient in order to succeed.

Conclusion: Trading for Beginners.

Investing or trading in financial markets can be rewarding, especially in the current environment where global interest rates are at record lows. But that doesn’t mean you need to jump into it all at once. Financial markets are fraught with risk, and if you’re not careful, you could lose all your money in the blink of an eye.

Prudent investors take the time to learn about markets, asset classes, trading platforms and terms, prices, and risks. In the end, investing in financial markets is like setting up a business.

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