I’m new to trading financial markets. Where do I start?
Trading financial markets is like any new skill. It is developed by learning and practice. Please beware the glossy and expensive trading courses. Often they just burn a hole in your pocket. Many offer little more that you couldn’t get out of a good book. Don’t get me wrong. It’s important to educate yourself. Just don’t fork out a fortune before checking out the free information such as is available at OnlineFinancialMarkets.com. You will then be in a more informed position to invest in more education if you wish.
After you gain an understanding of what’s involved then practice. Once again this dosen’t cost you any money. Open up a simulated trading account offered by many online brokers and practice placing orders and implementing your trading strategy.
Once you get some confidence then you can open an account with real money. Just remember that there is a world of difference between a simulated account and a real account. There are no real consequences from the outcome of simulated trading. Trading financial markets with real money opens up a completely different pscyhological context. Now you’re hard earned money is at stake.
How difficult is it to trade?
That depends on how difficult you make it. You can’t control the markets but you have total control over your response to them. Like any worthwhile skill, learning about financial markets and developing a trading system takes a little bit of time but is not beyond anyone. It can be done in your spare time. Trading financial markets isn't rocket science and you certainly don't need a PhD in Finance or Economics. Have a quick look at the Support and Resistance pages to prove this point. It demonstrates that making money from trading is not necessarily a complicated process.
The more challenging aspect in trading tends to be the discipline involved and the individual traders psychology. Markets are driven by emotions such as greed, fear and hope. It is impossible to escape the emotional aspect of trading. Any reasonably thought out trading strategy should produce profits. Unfortunately, being human, we tend to interfere with the system.
Read more on Psychology of Trading.
How much money can I make trading financial markets?
Trading is a scalable business. Focus on the percentage profits and consistency of your trading. If you can consistently make 10 or 20 per cent on a small account there is no reason why you can’t do it on a large account. If you can master consistent percentage growth in profits and avoid large drawdowns there really is no limit to the amount of money to be made.
Should I quit my job and trade full-time?
No. Not until you have a track record that justifies it and have the capital to back yourself. If you have a verifiable track record, backed up by trading statements, but do not have sufficient capital to trade full time you might get work with a proprietary trading firm.
Should I spend money on an expensive trading course?
There are plenty of good books, free online resources such as this website and free simulated accounts to practice trading financial markets. I recommend you use these first. However, this may feel like information overload and its likely you will need some guidance. Implementing a trading strategy that suits your needs and temperment is what is important. Reading a book with 100 different trading strategies or technical indicators will only be helpful in the sense that it gives you an idea how different people view and trade the markets.
A mentor or course may help transform the knowledge to something you can use to successfully profit in the market. If the vendor is making claims that sound too good to be true then it is too good to be true. Trading financial markets is not easy money, at least not until you know what you’re doing and even then there are no guarantees. It’s a craft that you learn. Think about it. If anyone is selling a trading system that promises the riches you’ve always hoped for, they would have used it do so for themselves. Alternatively a large investment bank would have given them many millions to buy it. Use your common sense when purchasing education services. Try to find out where they are getting their results from. Over what period has the system being tested? Will this method suit your needs and lifestyle?
How much money does a trader need to start trading financial markets?
It depends on the method used to trade, e.g. Futures, Options, Exchange Traded Funds (ETFs), Contracts for Difference (CFDs) or Spread Betting. However, you can start with quite a surprisingly small amount of money. I see some online brokers saying you can open an account with 100 euro or dollars. You can do this but its probably not worth your while. Trading financial markets is a business. You have to invest a bit of time in educating yourself and developing a trading strategy. The return you will make on $100 will not justify that investment in time. On the other hand you can open up a Spread Betting account with as little as €1000 and trade small. Remember the percentage profit is key.
Who is the better trader over a monthly period:
· Trader A who makes $200 on a $1000 account
· Trader B who makes $1000 on a $100,000 account.
Trader A has made less money but a 20% profit. Trader B only made 1%.
If you wish to trade futures you will need a bigger account due to the larger margin required. It depends on the market you’re trading and the time frame you’re trading in but you could be talking 10k for a day trader and 20k to 30k for a position trader.
How long does it take to make a stable income from trading financial markets?
That depends on alot of factors but trade for a year or two to assess the consistency of your profits. Despite what others may say it’s impossible to say until you are tested in the real world. Consider questions like:
How much money is a stable income to you?
Are you hoping to live off trading alone?
If so what are your consistent weeky/monthly percentage profits?
Is the percentage profit on your account enough to live on?
How much time will you invest in learning how to trade?
Do I have to accept large losses when I start out trading financial markets?
No. Success in trading is contingent on strict risk management and stop loss strategy. Trading financial markets without losses is impossible regardless of whether you are a beginner or professional. However, in my opinion, percentage losses should be in the single digits and even less for day traders. Basically this means that when you are wrong you get out and take the loss.
I’ve often heard it said that you shouldn’t trade with money you can’t afford to lose. That’s a statement that can easily be misunderstood. It does not mean that if you open a trading account with 10K of your hard earned money that you should be willing to lose it! Markets are volatile in nature so your account will continuously fluctuate between losses and profit BUT it should always be growing over time. Two steps forward one step back is the nature of trading financial markets.
Can I trade without affecting my full time job?
Absolutely. It is easy to organise your trading without it having any
affect on the hours you spend at work. Once you know your trading strategy,
orders can be placed on the market outside work hours. You do not need to sit
at a computer looking at the markets all day. In fact your results will
probably be better. Constantly checking markets all day can be emotionally draining
and it is more likely you will interfere with your trading strategy.The big money tends to be made in time frames longer than day trading.
Surely I need some special qualifications for trading financial markets?
No. Those working in the industry may not like to hear this but a large part of trading is learning not to do stupid things rather than being a financial wizard. Granted, when investment banks are recruiting, invariably they look for those with higher qualifications in finance, economics, mathematically based subjects, etc. If you want to work in an investment bank then that is a consideration. However, women and men from any walk of life can learn to trade. The maths is of the basic kind and after that it is about developing an approach that suits your lifestyle and applying it with discipline.
Is online trading the same as daytrading?
No. Daytraders trade online but you can also engage in longer term trading and investing over the internet. Longer term trading covers anything from a few days to months or years.
What are the risks of online trading?
The risks are pretty much the same as those in trading with a broker over the telephone. Markets go up and down and you must ensure that you protect your capital. Regardless of whether you’re trading over the phone or online its the same market.
However, one specific risk of online trading is if the internet connection goes down. Online brokers usually offer phone trading aswell to ensure that this is not disadvantageous to the customer. Of course brokerage houses have been known to go bust aswell so this risk applies to online as well as traditional brokers.
Is trading financial markets the same as investing?
The mechanics of buying and selling are similar but the approach is different. Generally investing is regarded as buying to hold for the long term (i.e over a year) whereas trading is shorter term.
Investors tend to buy and hold an asset and hope it grows in value over time. The profit target may be unknown when the investment is made. The number of decisions to be made are less frequent. It is often said that stock markets outperform over the long term but this is not guaranteed. Ask investors who invested in the S&P500 in early 2000. In 2012 the S&P was still below these levels. So even if you are a long term investor its important to get the timing right.
Trading could be said to be a more active approach to financial markets. They tend to keep a closer eye on market movements and actively manage their positions. Traders take advantage of shorter term moves. They will as easily go short as go long. Trading strategies are more exact in terms of timing entry and exit into the markets. Targets for profits and limits for losses are well defined (or should be anyway!).
What is the best market to trade?
There is no correct answer to this question. Suffice to say its important that you get to know the market you trade very well. After some study and observation you will get a sense of how it behaves. Of course there has to be enough volume of trades in the market so that you can enter and exit as you choose. Most markets will fulfil this requirement.
Technical analysis of financial markets can be applied to all markets whether it is Stocks, Exchange Traded Funds, Currency Futures / Forex, Commodities or Bonds so don’t be worried that your technical analysis study will be inapplicable if you decide to apply it to another market. Most trading strategies can be applied to all markets or tweaked to suit the individual characteristics of each.
After that it’s down to which market is of interest to you. It is advisable to trade a market that has been trading for a few years so that you have a historical perspective from which to trade.
When do I know I’m ready to start live trading?
Test your trading strategy over a period of time and evaluate the results you achieve.
The time period will depend on the time frame of your trades. Trades that last a few weeks or more will require testing over a longer period than a day trading strategy. It is possible to test a strategy using historical data aswell. Pick a period when the market was trending or in congestion to see how it would have performed.
I heard that 90% of people who trade financial markets fail. Is that true?
I don’t know what the exact percentage is but it is high. It doesn’t have to be that way. For those worried about that statistic its worth noting that there are only a handful of reason why traders fail rather than a multitude of pitfalls to avoid. These reasons include:
· Lack of adequate preparation,
· Over-trading (trading too much)
· Trading positions too big for their account
· Unwillingness to contain losses
· Fear of entering the trade
All of these challenges can be overcome. Note that most of them are to do with discipline and trading psychology rather than lack of knowledge. So its the human factor, the lack of discipline that causes most of the problems. A decent trading strategy will keep you safe.
What is technical and fundamental analysis?
Technical analysis is the study of market action using price charts to forecast future price direction. Technicians are concerned with the trends and patterns implied by past data, charts and indicators. Support and Resistance are good starting points for studies in technical analysis.
It can be quite amazing to see patterns
emerge in markets that are supposed to be chaotic. It's even better to
trade and make money from them. Check out the pages on Fibonacci Retracements, Measured Moves and Swing Trading for more advanced studies.
Fundamental analysis attempts to understand and predict the intrinsic value (rather than the market value) of stocks based on an in-depth analysis of various economic, financial, qualitative, and quantitative factors.
Can you recommend any good books about trading financial markets?
You could fill a football stadium with books about trading. Here are a few excellent books that cover the topics of technical analysis, fundamental analysis, trading pscychology and trading advice.
Market Wizards: Interviews with Top Traders by Jack D. Schwager
Reminisces of a Stock Operator by Edwin Lefevre (Jesse Livermore)
The Intelligent Investor – Benjamin Graham
Technical Analysis of the Financial Markets by John J. Murphy
The New Market Wizards: Conversations with America’s Top Traders by Kack D. Schwager
The Investors Quotient by Jake Bernstein
Trading Systems and Methods – Perry J. Kaufmann
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