Guide To Online Trading

Guide To Online Trading

Online trading may not be for everyone, but here are five questions to help you navigate the uncertainty of today’s financial markets to become a successful online trader.

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Individuals can grow their wealth in financial markets by trading or investing. There are some fundamental differences between these two methods – one of which is the investment time horizon: how long does each one hold on to a security or investment? Investors buy and hold for longer periods, building their wealth over time – while traders frequently buy and sell in financial markets to make gains.

In this guide, you will learn about:
• the differences between trading and investing;
• what questions to ask yourself to better understand what type of trader you are; and
• how to choose the right broker or online trading platform.

DID YOU KNOW ...

Due to the fact that investors buy and hold their securities or investments for longer periods of time, they are more capable of riding out market volatility. However – although traders may take on more­­ risk compared to investors – they have the potential to earn higher returns.

Traders also use derivatives such as futures and options to express their views on a particular investment instrument and have a defined pay-off as well as downside.

Taking on shorter time horizon views in order to capture market opportunities can be easy for the experienced investor. If you are considering having more control over your own portfolio, here are five questions you need to ask yourself before you start.

1. What type of trader do I want to be?

Understanding the different trading strategies available to you will help you decide the kind of trader you want to be. This also depends on your goals, personality as well as how much time and capital you’re willing to invest in online trading.

Intraday trader. These traders – who are decisive and quick to act – usually buy and sell financial instruments within the same trading day.

Short-term trader. Short-term traders buy and hold their positions between two days to a few weeks.

Arbitrage trader. This form of trading takes advantage of price differences in markets, where the trader buys a financial instrument at a lower price and sells it in the market where the price is higher.

Scalper trader. This strategy involves making small profits from a large number of trades, taking advantages of slight changes in prices and hoping that these small quick profits will add up to a more significant amount at the end of the day.

News trader. These traders make decisions based on their prediction of how markets respond to news announcements.

But beyond identifying the type of trader you want to be, it is also important that you learn the advantages as well as the disadvantages of each trading strategy and determine what you’re comfortable with. After that, you need to maintain the discipline to stick to one trading strategy – lest you swing from one to another without ever adhering to a plan.

2. Which instrument should I use?

Whether you’re taking a hedge position for an investment portfolio or seizing a market opportunity with a margin trade, you should be armed with the knowledge of which instrument you should use. Consider your preference for exchange-traded versus over-the-counter (OTC) instruments.

However, specific instruments perform better than others with certain strategies. For example – forex is good for frequent short-term or intraday trading as the transactional cost and capital requirements are low while liquidity and volatility are high.

Prices are often given to four decimal points, so small moves allow for opportunities to make profit as the prices rise and fall regularly.

Stock options are another popular and useful investment instrument that can be traded online. They are used to express a view on a particular stock that can either be held by the investor or not. Trading stock options can be used to hedge a position or amplify returns within a given time period.

3. Do I understand how margins work in the futures market?

In the futures market, a margin is the initial deposit that is required of both a buyer and a seller to start trading contracts. This is different from the stock market, where a margin is a loan used to reduce the payment for the purchase of a security.

However, margins in both markets are similar in that they can magnify gains and losses as trades are made based on a low percentage of actual prices.

The margin in each type of futures contract is set by an exchange or clearing house and the minimum amount to be paid is usually 5-10% of the actual contract value. Having said that, additional payments may be required to cover periodical losses.

While losses in the futures margin system must be settled within the trading day, the advantage of margins in futures trading is that they can prevent losses from snowballing. Given that the exchange allows you to top up your margin – to maintain your position until the market turns around – this provides a buffer to preserve the liquidity of your asset.

4. What are my goals?

Are your goals process- or results-driven? This will help you plan, strategise, and determine when to exit. Setting goals also helps with decision-making – both minor and major ones.

The first step to setting goals when trading online is to have realistic expectations. If the amount you’re looking to make is disproportionately more than what you’ve put into your trading account, what you’re doing is essentially taking a gamble when trading and exposing yourself to unnecessary risks.

It is also important to set realistic goals so you don’t end up chasing questionable trades in a desperate attempt to make a certain amount of money by your deadline.

The second step is to focus on how and when to enter (and exit) a trade as well as how much money you’re intending to manage. You should always have two exit plans for every trade – one to limit your losses in the event that the tide turns against you and another that is your profit target.

Another point to consider – which people often fail to do – is to determine when you should take no action at all. Reacting too quickly to markets can be risky – take time to deliberate on your decision and act upon it only if you’re certain it’s the right one.

5. Who should I choose as my broker?

Screenshot of SaxoTraderGo – SaxoTraderGo is the online trading application from Saxo Trading Market

Another thing to determine is the level of self-direction you’d like to have when you trade. While the autonomy is an advantage in self-directed online trading, you need sufficient time to learn about market conditions as well as the underlying factors that contribute to market movements. The other thing you need is a good broker or trading platform.

Two important elements to look out for when choosing the right broker or trading platform are their credibility and transparency – are they licensed and under the oversight of local regulators? Do they publish statistics of their track records?

It is also advisable that you find out about the fees for an account and the accompanying transactions so there are no hidden surprises after you’ve signed up. A good trading platform will also offer you a network of support staff to attend to your queries and problems.

If you have decided on a specific instrument you’d like to trade, finding a broker that is strongest in that market will be helpful. Otherwise – if you’re looking to widely diversify your trades – identify a platform that gives you a wide range of options.

An added benefit is the platform’s interface – do you find it user-friendly and intuitive? Is the platform compatible with a wide range of devices? Tools that allow you to easily map charts and run analyses are also useful to help you make quick decisions when trading.

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