Trading: A Beginner’s Guide

Introduction

Increased liquidity and financial product innovations have created several avenues and asset classes accessible for first-time traders. Combined with technology platforms that make trading more effortless than ever before, there has been a surge in retail trading activity, in many cases across asset classes and transcending geographies. If you are considering becoming an active trader, either professionally or as a personal project, here are some of the primary objectives you should consider before taking a plunge into the world of trading.

Key Takeaways

  • A breakdown of the three primary financial markets- FX, equities and cryptocurrencies
  • Categorise the benefits of the forex, equities and cryptocurrencies trading.
  • Identify the parameters of a good broker.
  • Learn to analyse financial markets.
  • Plan your trading strategy.
  • How to start with a practice account before attempting to trade with real money.

How to decide what to trade?

For a first-time trader, the capital markets may look like a very confusing proposition – with over 35,000 trade-able products across several product classes with varying trading hours, liquidity, margin rules and other criteria. For instance, the New York Stock Exchange (NYSE) is the largest global exchange for equities trading. The exchange has a market capitalisation of over $25 trillion and daily trading volumes exceeding billions of dollars. If you add up the other large equity exchanges globally, the daily volumes traded is a mind-boggling number. Global currency trading has already topped $6.6 trillion-a-day in 2019 (as per BIS https://www.bloomberg.com/news/articles/2019-09-16/global-currency-trading-surges-to-6-6-trillion-a-day-market). With all this trading activity, it becomes imperative to decide which instrument and market should one start trading. We limit our discussions to three asset classes – forex, equity and the emerging asset class crypto-currencies as we evaluate all of them below.

Trading Forex

The Forex market – short for foreign exchange market is the world’s largest financial market. It is the world’s foremost decentralised currency market where traders and investors can buy and sell currencies, speculate on their rise and fall, or trade on contracts that derive their value from the underlying currency pair. The participants in the forex market comprise several key players. Some of them are central banks, investment banks, investment management firms, commercial firms, governments, corporations, hedge funds, brokers, and retail traders.

The FX markets have several benefits and advantages over other asset classes for first time traders. Here are a few of them

  1. Markets are open 24 hours, five days a weekIn contrast to some of the other asset classes like stocks, you can carry out forex trading at any point of the day at your convenience and does not depend on the market opening hours.
  2. High liquidity – Foreign exchange markets are very liquid, which means that the spreads are low, and execution happens instantly. It contrasts with some of the instruments in other asset classes that may not have very high liquidity, thereby increasing execution risk.
  3. Ability to go long or short – A trader always wants the flexibility to trade on both sides of the market. Buy the instrument and bet on its price rise or short (sell) and bet on a price fall. This flexibility is not a given for all asset classes.
  4. Leverage There is an opportunity for traders to lever up their positions. Leverage allows traders to take a much bigger bet on instruments than their cash balances, which potentially magnifies the profits one can make without needing to invest a large amount.

Trading Crypto

Cryptocurrency or Crypto as they are otherwise known refers to a decentralised digital currency created using cryptography which makes counterfeiting very difficult. The most significant difference between cryptocurrencies and the regular currencies is that there is no central issuing authority. The feature makes them immune to any government interference by way of regulations. Most cryptos are open-source currencies having open and public ledgers of all transactions on the blockchain for anyone to view.

Several FX brokers offer cryptocurrencies trading alongside their other financial instruments on their trading platforms. All you need to do is create a wallet, fund it, and bet on the price movements.

Benefits of trading the crypto market

  1. Transparency of information – Most crypto exchanges operate on a blockchain platform, and traders can view all the transactions except the user’s personal information. The protocol is immune to manipulation from anyone because it is decentralised across several computers and networks.
  2. Currency independence – Transferring money across borders with regular currency pairs involves time and money. However, with cryptocurrencies, payments can be made with any currency across any geography instantly.

Trading Stocks

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

Benefits of stock trading are:

  1. Wider choice of tradeable instruments – While the forex and crypto markets offer a limited number of trading instruments, the choice of equities instruments in the stock markets is by far the highest. As a trader, the number of scrips is much higher than the currency pairs and crypto instruments put together.
  2. Ownership and right to vote – Every share acquired is a fundamental part of the company and allows individuals to voting rights on some of its decisions.
  3. Regulatory Environment reduces risk – Stock markets are regulated by the regulatory agencies of the country. These agencies actively protect the investors’ interests and help minimise the risk of fraudulent activities.

How to Open an Account with a Trusted Broker?

There are several brokers with different business models and product offerings. Traders can choose to open an account with any broker, and it is straightforward these days with the introduction of electronic KYC checks and document submissions.

A few pointers while choosing a broker–

  • The broker must be regulated by at least one primary regulatory agency as it reduces the risk for a trader in case of disputes
  • Must have been around for a few years and have a sizeable customer base – This ensures that the platform is scalable and reduces execution risk
  • Provides competitive prices with low trading cost and fees.

Investor Education

Before venturing into trading any asset class, a trader must research, review and understand the basics of the financial instruments that he/she intends to trade. Here is some information on a selected few sites that provide you with the necessary knowledge before trading.

Forex Education

    1. Babypips: It is one of the leading forex education websites on the internet. Their school of Pipsology allows traders to be guided in the basics of forex trading and is entirely free.
    2. Financial freedom through forex by Greg Secker: This book is ideal for trading novices and experts alike and is a “must-read” for all beginner traders.
    3. Investopedia: This website has tons of information for beginner forex traders. Go through the website in detail to get a good grounding on the basics of forex trading before putting your learning to practice.

Crypto Education

    1. Binance Academy: For those new to cryptos and digital currencies, Binance Academy offers tons of information on anything Crypto with their articles, explainer videos, and educational programs.
    2. Cryptocurrency Education Apps: Users who prefer to consume content over mobile phones can download mobile apps that teach cryptocurrency. An example is the B21 Life app, a dedicated education app with a focus in cryptocurrencies.
    3. Investopedia: Again, Investopedia is also a very informative source of information for cryptos.

Stock Trading Education

      1. Stock Education Directory: Benzinga offers plenty of resources and an online directory to get you started with trading on the stock markets. They shortlist 9 courses, some of which are Udemy video tutorials geared towards beginners. (Website: Benzinga.com)
      2. Stock Educate: It offers a rich resource of stock trading information in straightforward terms. The interactive content makes it easy for beginners to understand. (Website: stockeducate.com)
      3. Trading Academy: Trading academy offers some free and paid educational courses for traders who want to make their chunk of wealth online through trading. Among other things, they offer four paid courses for traders. These courses include one each on forex, options, stocks, and futures.

Market Analysis

The financial markets are always in a state of volatility. The demand and supply leading to the movement of prices are continuously changing, and traders are required to make quick decisions that would determine if a trade could end up being profitable or not.

Market analysis involves traders trying to understand the market movements. There are two types of market analysis – Fundamental Analysis and Technical Analysis.

Fundamental Analysis

Fundamental analysis is the method of finding a security’s intrinsic value by analysing factors such as a firm’s financial health, competition and economic factors impacting the market. The end analysis of all these factors should determine whether the underlying security’s current price is justified, higher than what it should be or below the ideal price. The analysis allows traders to make a buy or sell decision on the security.

Technical Analysis

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

A successful trader spends much time researching the security’s value using either or both of the above techniques to analyse the markets.

Trading Plans and Initial Strategy

Trading without a strategy is identical to relying on plain luck, which is not a sustainable strategy in the long term. Every trader should have a trading plan and strategy. Trading plans are checklists of conditions and events to be met before a trader jumps into the market.

Your initial trading plan and strategy should include:

  • The markets/ asset classes to trade
  • Position sizing – Allocating money judiciously across financial instruments so that the risk is evenly spread.
  • Trading frequency – Deliberate on how often you should trade on a security.
  • Signals/confirmations to look out for before placing a trade – Is there a take profit or stop loss that you enforce to ensure that you are cutting loss-making positions and taking profit on those that have moved in the direction of your bet.

Practice Trading on a Demo Account

It is always advisable for beginners to start trading on a demo account before risking money in LIVE trading. Demo accounts allow traders to experience trading in real-time markets with virtual currency. Demo accounts also come with live charts, live market news, and other technical tools to acquaint yourself with the market. Depending on the broker and their trading platform, traders can access a wide array of trading instruments like FX, metals and other CFDs such as ETFs, and shares.

Trading with Real money

While the lure of making profits is always there, a beginner should first hone skills with virtual currency trading on a demo account ideally for at least 2-3 months before getting comfortable trading with real money.

Trading with real money involves overcoming a range of behavioural aspects around euphoria on making the right calls to despairing if initial calls go wrong to maintaining a strict discipline by cutting losses and taking profits at pre-determined margins. The discipline also must include situations when a trader sits out of the market when they cannot make sense of the prices. Good trading psychology and not letting emotions cloud your trading behaviour are one of the most significant factors in determining whether a trader can cut it out in the market or not.

A final point to note is that no-one should be risking any money unless they cannot afford to lose. A sound trading strategy also depends on an individual’s risk tolerance –the ability to lose money. Borrowing to trade is never advisable due to the risky nature of the markets. A trader who can withstand the rise and fall of his/her portfolio, stick to financial discipline, has a sound investment strategy and overcomes emotions is likely to succeed in the markets. All this takes time and patience to build. For traders who are only at the beginning of this journey, it is advisable to remain dedicated and patient to succeed.

Summary

Investing or trading in the financial markets could be rewarding, especially in the current setting where global interest rates are at all-time lows. But, that doesn’t mean you have to jump in

straightaway. Financial markets are risky, and if you’re not careful, you could lose all your money in the blink of an eye.

Prudent investors spend time to acquire information about the markets, asset classes, trading platforms and conditions, pricing, risk and the key personnel. After all, investing in the financial markets is similar to a business setup. Those who jump in after understanding all the risks are successful while a majority fail. So, prepare yourself for a safe and pleasant trading journey.

Sources

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