These days, more and more people are engaged in trading. However, many beginners still face basic pitfalls that could be easily avoided from the start if they knew where to begin from. We can explain this. Here are the 4 most common things beginners should know before they start trading.
Ways To Trade
In a nutshell, when you trade, you purchase assets and then sell them to earn on the difference between prices. However, not always you will actually own underlying products. In most cases, you will use contracts for difference – special instruments that give you the possibility to win from price fluctuations without buying assets. What’s interesting is that when trading CFDs, you can benefit from both falling and rising prices. If you expect the price of an asset to fall, you go short, but if you think it will increase, you go long.
How does it work? Through a brokerage service and its trading platform, you can buy CFDs and earn the difference between prices if your prediction is correct. Your ability to make an accurate forecast depends on your knowledge of a certain market and your ability to analyze the performance of different assets.
Before you start trading, you should also learn such terms as margin and leverage. Leverage is an instrument that gives better exposure to the underlying tradable product. In simple words, leverage is what increases your buying ability as you pay only a portion of the full trade instead of the whole value.
Margin and leverage requirements depend on the condition of the chosen provider of financial services. Let’s imagine leverage is 20%. In this case, a deposit of $200 will be enough to open a position with a total value of $1,000. Margin requirements might also differ from market to market.
If you are willing to get full exposure to underlying assets with the help of the leverage tool, you should bear in mind that this approach comes with additional risks. Shortly speaking, losses can be the same quick and significant as potential gains from the full exposure. To mitigate risks, you can apply for special stop-loss orders if, of course, such features are enabled by your trading platform.
Learn More About Different Assets And Markets
If you are a beginning trader, you should learn how different markets work and what factors affect their prices the most. Also, you should examine which markets and assets are offered by your brokerage services. The selection of tradable instruments differs from broker to broker. Some companies might offer a full scope of trading products, including even cryptocurrencies or binary options, which have problems with regulations, while others might be focused specifically on the stock market, offering shares of companies and the most popular stock indices, such as S&P 500, Dow Jones Industrial Average, and Nasdaq Composite.
The most popular markets and assets offered by modern companies are the following:
- Shares: securities of the world’s largest corporations like Amazon, Netflix, Tesla, and many others.
- Indices: global indices that consist of stocks from the most developed US and EU markets.
- Foreign exchange: currency pairs that are subdivided into major (EUR/USD, USD/JPY, GBP/USD, USD/CHF), minor (pairs without dollar but with at least one of the other major currencies), and exotic.
- ETFs: Exchange-Traded funds are securities that can cover different sectors of the financial markets.
- Bonds: securities usually issued by governments of countries that provide regular interest payments.
- Commodities: exchange CFDs for raw materials that are necessary for manufacturing and other industries.
- Crypto: digital coins issued within decentralized virtual ecosystems based on blockchain technology.
Learn About Trading Styles
Your future success in trading heavily depends on how well you will master your trading style and what strategy you will develop in the long run. This strategy should include not only the information about assets you trade but also risk management tools, technical analyses, fundamental analyses, etc.
Why is a trading style so important for market participants? The first reason is that it determines how frequently you will open and close trades. It should be based on your preferences. For example, if you have a full-time job and don’t want to leave it yet, you cannot choose a trading style that requires your complete involvement.
As a rule, traders choose between position trading, swing trading, day trading, and scalping. Here, they are listed in terms of falling timeframes, meaning that the holding period in position trading can last for up to several years, while in scalping, it lasts for no longer than several minutes.
Copy trading is one more common way, but it’s something bigger than a trading style. When you copy trade, you start following a more experienced trader and his deals are copied to your account automatically.
Begin With A Demo Account
As we outlined at the beginning of this guide, beginning traders face pitfalls because they don’t know where to start.
Our suggestion is that newbies should start with trading on a demo account if it’s available on the chosen trading platform. With it, you will have the possibility to practice different trading styles and strategies and determine which is the best without running the risk of losing your initial deposit.
That’s it for now. We hope that this guide will help beginners to start trading and avoid all the pitfalls they can potentially face.