How to Start Trading
Trading is an active style of participating in the financial markets that seeks to outperform traditional buy-and-hold investing. Rather than trying to profit from long-term uptrends in the markets, traders look for short-term price moves to profit in both rising and falling markets.
As a trader, one of the most important things you can do to improve your chances of success is to approach trading as a business. A successful trading business requires a strategic plan that covers your actual business and your actual trading. Your business plan will include things like short and long-term goals, the amount of capital you have available for the business and how you will set up your office. Your trading plan includes the details of trading: what you will trade and how you will trade it. Your plan should be so objective and concise that you could hand it over to another trader and they would be able to execute it exactly.
It’s important to understand that your trading plan is not simply a set of rules that you think will work, a list of set-ups that you are somehow fond of, or someone else’s plan. A good trading plan is one that you have researched, tested on historical data, tested in a live market and continue to evaluate at regular intervals.
Successful trading involves more than reading a few articles or books. You should plan on devoting a substantial amount of time and effort before ever placing a trade in a live market. This can be difficult because most new traders are anxious to get in the market. While the research and time commitments may sound daunting, they're a realistic and integral part of becoming a profitable, independent trader.
This tutorial serves as an introduction to help you get started trading. For more information, be sure to check out part two of our series, which covers more advanced topics including charting, leverage, risk and strategy automation.
How to Start Trading: Trading Styles
Many people who become interested in trading are first introduced to the financial markets through investing.The purpose of investing is to build wealth slowly over time. This is typically accomplished through a buy-and-hold approach: making investments – such as in a stock, ETF or mutual fund – and allowing price to fluctuate over time. Investors “ride out” the inevitable downtrends with the expectation that prices will eventually rebound and rise over the long term.
After years or decades, the investment will, in many cases, increase in value and provide positive returns for the investor. Long-term returns can be further amplified by compounding through the reinvestment of profits and dividends. Investments are often viewed as a means of building wealth to provide stability and income during the retirement years.
Trading Time Frames
While investments are typically held for a period of years or even decades, traders buy and sell stocks, commodities, currency pairs and various other investment vehicles with the intention of generating returns that outperform a buy-and-hold strategy. Trading profits are viewed as income since profits are “taken off the table” on a regular basis (as opposed to investing, where positions are generally left alone for the long haul).
Trading profits are achieved through buying low and selling high – and selling high and buying (to cover) low, in the case of short selling – and all trades are entered and exited within a relatively short period of time. This time period can vary from a few seconds to months or even years, depending on the trader’s style. The following chart lists the four primary trading styles - position, swing, day and scalp – with the corresponding time frames and holding periods for each.
Position Trading
Position trading encompasses the longest trading time frame; trades generally span a period of months to years. Position traders may use a combination of technical and fundamental analysis to make trading decisions, and often refer to weekly and monthly price charts when evaluating the markets. Typically, short-term price fluctuations are ignored in favor of identifying and profiting from longer-term trends.
This style of trading most closely resembles investing. However, while buy-and-hold investing typically involves long trades only (profiting from a rising market), position traders may utilize both long and short trading strategies.
Swing Trading
Swing trading refers to a style of trading in which positions are held for a period of days or weeks in an attempt to capture short-term market moves. In general, swing traders rely on technical analysis and price action to determine profitable trade entry and exit points, paying less attention to the fundamentals. Trades are exited when a previously established profit target is reached, when the trade is stopped out (moves a certain amount in the wrong direction) or after a set amount of time has elapsed.
Because swing trading takes place over a period of days to weeks (with an average of one to four days), this trading style does not necessarily require constant monitoring. As such, traders who are unable to monitor their positions throughout each trading session often gravitate toward this popular trading style.
Day Trading
Day trading refers to a style of trading in which positions are entered and exited on the same day. Unlike position and swing traders, a day trader does not hold any positions overnight, and all trades are closed by the end of the trading session using a profit target, stop loss or time exit (such as an end-of-day exit). Day traders typically use technical analysis to find and exploit intraday price fluctuations, viewing intraday price charts with minute, tick and/or volume based charting intervals.
Because trades are held for a period of minutes to hours, large price moves are uncommon, so day traders rely on frequent small gains to build profits. To leverage their buying power, day traders usually trade with margin. Day trading is a full-time job since positions have to be constantly monitored and traders need to be immediately aware of any interruptions to the technology chain (for example, a lost Internet connection or a trading platform issue).
Scalp Trading
Scalp trading is an extremely active form of day trading that involves frequent buying and selling throughout the trading session. Scalp traders target the smallest intraday price movements and rely on frequent and very small gains to build profits. Profit targets and stops are used to manage positions that are generally held for a period of seconds to minutes. Because gains are small on any one trade, scalpers may place dozens or even hundreds of trades each trading session; as a result, it's imperative that scalpers have access to low trading commissions.
It should be noted that scalp trading is considered very risky because it relies on having a high percentage of winning trades. And because the average winning trade is generally many times smaller than the average losing trade, it can take just one or two losing trades to wipe out all of your profits. Precision is paramount with this style of trading, and scalping requires constant attention to the markets.
High-Frequency Trading
One other style of trading that we'll mention here is high-frequency trading (HFT). These traders use complex (and typically proprietary) algorithms to analyze multiple markets and execute orders based on market conditions. Because the traders who have the fastest execution speeds are the most profitable, independent traders trading from home simply cannot complete. As such, they stay away from this style of trading.
The idea of trading for a living – or having your own trading business – is appealing to many people: You get to be your own boss, set your own schedule and work from home while enjoying virtually unlimited income potential. In addition to these factors, anyone with a computer, Internet connection and a small trading account can give it a try. Unlike many other jobs, no degrees, special training or experience is required.
Steep Learning Curve
Because trading is so easy to get into, new traders may not realize there's a very steep learning curve involved: Being successful is difficult and takes a lot of time and effort. Here are some quick facts about trading:
About 90% of day traders fail within the first year.
There is no way to completely eliminate risk in trading.
There is no trading system that wins 100% of the time.
You will always have losing trades, even if you are a rock star trader.
You need money to make money – it will take a long time to get rich with a small trading account.
Successful independent traders can earn a comfortable income, but most do not become millionaires.
The ease with which you can start trading (just open a trading account and hit the “buy” button) in no way implies that becoming a successful and profitable trader is easy. Many of the 90% of traders who fail within the first year do so because they start trading without having developed any type of logical business or trading plan. Any business entered into with such a lack of planning is likely to fail. Another common reason for failure is that the trader is undercapitalized; meaning, he or she doesn't have enough money to take on the risk and absorb the inevitable losses.
No Easy Button
There is also a lot of deception associated with learning the business of trading. Late-night infomercials and hundreds of websites would have you believe that trading is easy and that anyone can generate a huge and consistent income from the financial markets, with little or no effort. While there may be the rare case where a trader manages to make a huge amount of money in a short time, that's not the norm. For most people, trading involves a lot of hard work before becoming successful.
As a business, trading requires constant research, evaluation and discipline. There are no guarantees in the trading business, and you could work a 40-hour week and end up losing money. Anyone considering trading should make sure they have both the personality and financial means to take on this type of business activity.
You might ask yourself:
Am I driven to succeed?
How do I handle losing?
Do I have time to dedicate to learning the business of trading?
Can I stick to a plan?
Do I have my family’s support?
Do I have money that I can afford to lose?
How do I deal with stress?
Do I have realistic expectations?
If you want to become a part-time or full-time trader, it's important that you take the time to research and plan your trading business; these are essential steps in your overall success as a trader. This is not a profession at which you will become skilled overnight. Traders who start putting their money in the market too soon or without a well-researched trading plan often find themselves back at the beginning, but with a lot less trading capital. Traders who have realistic expectations and who treat trading as a business – not as a hobby or a get-rich-quick scheme – are more likely to beat the odds and become part of the group of traders who succeed.
Two keys to successful trading are taking a business-like approach (complete with a business and trading plan) and effectively using available trading technology. The Trading Plan Development section of this tutorial introduces how to make a trading plan; in this section, we'll take a look at the various technology traders use.
Not That Long Ago …
Not long ago, you would have had to pick up the phone and call your broker to place an order. The broker would have called the order in to a floor trader who was physically at the exchange. The floor broker would find a match for the trade, and by the time your order was filled, the price could have changed dramatically. Not that you would have known…you probably wouldn't have had access to a live data feed.
Technology Today
Today, however, the technology that was once reserved for the exchanges and institutional traders is readily available to retail traders: Faster computers, all-electronic markets and direct-access trading have all helped level the playing field for the independent retail trader. Additional advancements such as trade automation, innovative market research tools, sophisticated testing platforms and apps have given traders even more technology to work with. To get started trading, you'll need a computer, a reliable high-speed Internet connection and trading software.
Computers
A computer is your primary tool. This is where the action takes place and where you will research, test and trade your plan. In a perfect world, your trading computer would be used for one thing: trading. The reality, however, is that most computers have various applications running and are used for things like gaming and Internet surfing.
That said, if you must use your trading computer for pursuits beyond trading, be sure it is adequately protected with anti-virus software. Many companies offer free or trial versions of their virus protection software (keep in mind, though, that free versions don't always run scans automatically). Regardless of the software that you select, the key is to install it, update it often and perform regular scans to keep your computer healthy.
Your computer should have the fastest processor and the maximum amount of memory that you can reasonably afford (the shorter-term your style of trading, the more important this becomes). If at all possible, your computer should be capable of supporting multiple monitors. Trading with two (or more) monitors gives you the “real estate” you need to view multiple markets and trading charts, while having a dedicated order entry window. This can improve your situational awareness and allow for more precision in your trading.
You should also have a phone that works even if you lose power – such as a fully charged cell phone. That way, you'll be able to call in an order to your broker if you've lost power. Keep your broker’s trading desk phone number in your contacts and have your account information handy.
It's also a good idea to have a back-up battery for your computer – an uninterruptible power supply (UPS). Think about how long you would need to keep your computer and other essential equipment running to properly manage and/or close out trades in the event of a power loss, and shop for a UPS based on that criteria, as well as the number of inputs you will need.
It's worth noting that, depending on the type of trading you're doing, you may be able to research, execute and manage trades from your mobile device or tablet. Most trading platforms today offer robust mobile interfaces, in addition to their web-based on downloadable software. Even if you don't make your mobile device your primary trading machine, it's a good idea to have your platform's mobile app loaded – just in case you need it while you're traveling or if your main computer crashes.
The TradeStation mobile platform has advanced charting and order entry capabilities.
Internet Connection
In fast-moving markets, it's definitely to your advantage to have a fast, reliable Internet connection so your trade orders are submitted and filled as quickly as possible. While most retail traders can't complete with institutional traders in terms of execution speed, a lag time of just one or two seconds can still mean the difference between a winning and losing trade. Depending on where you live, you may be able to pay a higher rate to your Internet Service Provider (ISP) to get faster speeds. In general, if you're doing anything faster than position trading, it's worth the added expense to have a faster connection.
Trading Software
Trading software serves three main purposes:
market analysis
testing
order execution
The market analysis component of trading software is what allows you to view and customize price charts and display price quotes. Depending on your style of trading, you'll need end-of-day market analysis (with delayed quotes) or real-time quotes that instantly update as market conditions change. Longer-term traders (position and some swing traders) may be able to use the EOD data; shorter-term traders (some swing, and all day and scalp traders) will need access to real-time data.
The next component is the software’s backtesting application. Not that many years ago, the ability to backtest at all was a fairly advanced feature of trading software. Today, however, traders can not only backtest, but also perform multivariable optimizations and walkforward optimizations/testing. These tools can greatly improve your ability to accurately test a trading system.
Lastly, your trading software will have at least one order-entry interface. Some trading software offers very basic order entry, while others support advanced and even customizable interfaces. Many platforms support various levels of trade automation, from conditional orders to fully automated strategies.
Many trading platforms – the software that provides the market analysis, testing and trade entry capabilities – provide a simulated environment where you can practice taking trades and try out trading ideas. These “sim” accounts provide valuable experience for new traders, but it's important to remember that sim trading and live trading are different animals.
Sim trading, for example, often generates order fills that would never happen in live trading (giving you a false sense of profitability in many cases), and the emotions involved in sim trading can never be relied upon to represent how you will feel and act in live trading. That said, sim trading is an excellent way for traders to gain experience in the markets and with actual order-entry placement.
While some trading software is sold as a complete package, most is leased on a monthly basis (from your broker, for example). In some cases, the monthly fee is waived if you trade a specific volume (e.g., 10 round-trip trades per month). It is important to note that in addition to any software/platform fees, you may also have to pay for certain data feeds, such as quotes from specific exchanges. These fees differ depending on your status as a trader: in general, the fees are relatively low for individual traders, but can be quite high if you are considered a “professional” trader.
Apps
Today, there are apps for everything, and trading is no exception – whether you're looking for market-moving news, real-time price charts or technical analysis. Apps let you stay on top of the market when you're not in front of your computer. Some broker/platforms, such as TradeStation, have libraries of apps from third-party vendors that integrate directly with the platform to enhance its capabilities. Most apps, however, can be downloaded directly to your smart phone or tablet. Some noteworthy apps include:
MarketSmith – free technical and fundamental stock data, such as earnings and sales history, proprietary ratings and rankings, performance reports and charts
Stocks Live – paid ($9.99) app that allows you to sync and trade your portfolios with major brokers, real-time quotes, global news coverage, watch lists, and scans
Stocks Tracker – free streaming live quotes, pre-market/after-hour quotes, portfolio monitoring, market news, economic calendar and full-screen charts
StockTwits – free market insights, updates, sentiment and analysis from thousands of real investors and traders
Brokers and Trading Accounts
Brokers are an essential partner in the trading business and allow you to interact with the markets. As a retail trader, you can't buy and sell directly at the exchanges, so you have to work with a broker, which acts as an intermediary. Choosing a broker requires a bit of time and research, and you may want to consider factors such as:
Do they provide their own order-execution software and is there a platform fee?
Do they service markets that you want to trade (i.e., stocks, futures or forex)?
Do they support simulated trading?
How do they handle order execution?
How efficient is their customer service?
What are their commissions and fees, including “hidden charges?”
What are their hold times when calling?
What are their margin requirements?
What type of data feed do they provide?
Once you have decided on a broker, you will be able to open and, if desired, fund a trading account
Source article : https://www.investopedia.com
