Steve has 29 years of financial market experience including 3 years at Credit Suisse and 15 years at Merril Lynch. Steve is the Academic Dean for The London School of Wealth Management and has won many awards from Technical Analyst Magazine.
Basically, online trading is using an electronic device – a computer, tablet or smart phone – to buy and sell financial products using an online trading platform. Brokers based on the internet, and there are many of them, provide the platforms and you can use them to try to profit on the financial markets. As you learn more about the process you will be able to develop strategies for online trading that suit your own knowledge and skill levels.
There are several ways you can develop your knowledge and understanding of trading strategies, and once you have set up your first trading account you can start to learn how online trading works. Before setting up your account you should carry out a broker comparison so that you are able to select a broker that suits your own trading style. By checking out what the various platforms offer, you can see what level of complexity they have. Some brokers offer their own bespoke trading platforms but will often also offer the popular MetaTrader4 (MT4) platform, whilst others may offer MetaTrader5.
Whichever broker you choose, you will need to familiarise yourself with what the platform offers, the types of charting and tools available to you and the depth of educational tools such as videos, seminars, webinars and explanatory documents. Trading can be a very risky business, so it is important that your research is thorough and that you fully understand what the risks are. There are many online trading guides you can access to help you, but perhaps the best tool for beginners is to open a demo account with a broker. These provide you most of the functionality of a live account, but you are using virtual money rather than your own. This type of account will help teach you the ins and outs of trading and is the first step to developing your own stock trading strategies.
You can utilize several stock trading strategies once you get involved in active trading. Active trading is when you buy and sell securities that are based on short-term movements in a market to try to profit from price movements on a stock chart. If you intend to be an active trader, you may want to focus on more volatile stocks and foreign currency trades (Forex). These are highly liquid markets which can be difficult to read and will behave unpredictably at times. It is important that you develop your knowledge of technical analysis by using predictive methods that are based on the price charts of a stock. Brokers offer powerful tools to help you with your speculative decisions on whether a product is likely to rise or fall in price.
Active traders will usually have a high volume of trades so that they can make profits, because short-term price swings are likely to be relatively small. Provided you are keeping a close eye on what the markets are doing, you have more possibilities for turning a profit by using high volumes. Techniques include frequently using limit orders which let you set specific price levels that determine when securities are sold. A take-profit order allows you to set an upper price limit; in this scenario, you could find that if prices unexpectedly rise high you may not make as much profit as you may have anticipated. As you gain more experience you will find which method best suits you.
The converse to active trading is buy and hold, a passive investment strategy that might suit the more cautious investor, though you can use both stock market strategies to hedge your bets. With buy and hold, you buy stocks and hold them over a long-time period, no matter how the market fluctuates. You can actively select stocks, but you will not be interested in short-term price movements. Though if you are doing active trading as well, then you will be keeping a close eye on what the markets are doing in the short-term.
There are, as one might expect, differences of opinion about which type of strategy is superior. There is certainly considerable risk with the active trading strategy, especially if you are a newcomer to investing. But experienced traders can often make good profits from speculating on short-term price fluctuations. If you go for a buy and hold strategy, you may be able to get tax benefits, depending on your financial circumstances. If you hold investments over the long term you could be in a position to defer capital gains taxes. You should check the situation with a financial advisor before making a decision.
These are both stock market strategies used by active traders and the most well-known is day trading. Day trading is what you do when you buy and sell securities within the same day, as the name implies. You take a position in whichever market or markets you want to trade on and close that position the same day, so you do not hold it overnight. Day trading tends to be the province of professional traders who are alert to all the possibilities of short-term gains or losses. But with the arrival of online brokers, there are many novice traders who can practise to see if this type of active trading suits them.
Position trading is considered by some in the business to be similar to a buy and hold strategy rather than active trading, but when it is carried out by an experienced trader it can arguably be called a method of active trading. If you want to test out position trading you will be using longer-term charts, which could be from daily to monthly. You would then combine this information with other methods so you can work out where the current market direction is going. You want to look for the long-term market trend in the securities you are interested in, take a position depending on how you think the trend is going to go, and exit that position when the trend breaks and starts to do something different. If markets are volatile, then trend trading can be difficult.
Swing trading normally happens after a trend breaks, since when a trend ends you can expect some price volatility as a new trend tries to get established. It is not always the case, but if price volatility does set in, then swing traders will buy or sell the relative asset. Swing trades are generally held for over a day, but for less time than trend trades. These types of traders will frequently create a set of rules that are based on fundamental or technical analysis.
Fundamental analysis is how traders evaluate a security to try to assess its intrinsic value. They do this by looking into related financial, economic and other quantitative and qualitative factors that
may affect the value of the security. This would include the conditions of the economy and industry, macroeconomic factors, and the company’s management and its financial conditions (microeconomic factors). The basis for doing this type of analysis is so that a trader can get an indication of whether the security is overvalued or undervalued and then trade appropriately with this information.
The set of rules swing traders implement, known as algorithms, are designed so that traders can identify when it is the right time to buy or sell a security.
The term scalping sounds a bit drastic, but it is used by active traders and is one of the fastest strategies they employ. The idea behind this strategy is to get as many profits as you can on minor price changes. Traders who employ this strategy reckon that you can catch small moves in stock prices more easily than large ones, and those who implement this are known as scalpers. The idea is to try to make many small profits that will compound into large gains as long as there is a strict exit strategy that is designed to prevent large losses.
If you want to try scalping, then you need to be an experienced trader because the strategy requires precise timing and execution of trades. Your plan would be to use larger-sized positions to get smaller price gains, but in a short period of holding time for one day or a period during that day when trading is open. Your main objective is to buy or sell a certain number of shares at the ask (bid) price and then sell as fast as possible, either at a slightly higher or lower price to make a profit. Speed is of the essence with this type of strategy as holding times could be seconds, minutes or sometimes hours. Scalping requires you to be highly proactive as a trader, so you need to watch interval charts with a smaller time frame and a range of other indicators.
Trading strategies are used to try to determine the best way to profit from playing the financial markets. All trading carries risk and it will depend on your own risk appetite as to which strategies you want to use. If you are a beginner, you should always practice with a demo account using virtual funds as you build up your knowledge and experience before you go live and use your own money. By testing out strategic options as you practice you will get to know what you are comfortable with and what best suits your style of trading. One size does not fit all in the world of online trading, so take the time to thoroughly explore your options. When you do make the decision to go live, make sure that you are able to cover any losses if your trades do not turn out the way you had planned.
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