How to Approach Online Trading for the First Time

 

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Over the last year, everything we know underwent a paradigm shift. The pandemic ravaged the world, claiming millions of lives, leaving economies in its wake. Insurmountable tragedy resulted in Operation Warp Speed with multiple COVID-19 vaccines unleashed on the world to stop the pandemic dead its tracks. 

Today, we can reflect back on what has transpired with sadness, and a renewed sense of hope. We are better equipped to deal with what has happened by dint of our innovation, determination, and resilience. The nations of the world united to defeat the coronavirus, and little by little we are inching towards the strategic objective.

Effective Techniques for Trading Online

In the midst of the mayhem, increasing numbers of first-time traders registered at trading platforms, hoping to generate a ROI. All major trading platforms and brokerages, including Robinhood, Charles Schwab, Fidelity, E*TRADE, and Interactive Brokers reported a huge uptick in retail trading activity. 

Fortune.com reported in December 2020 that, ‘… a surge in retail trading took place owing to COVID-19, with home-based traders now accounting for 20% of US stock orders, up 5% in a $42 trillion market over just 1 year.’ With thousands of first-time traders scrambling to cash in on potentially lucrative trades, it behooves the novice to step back and implement sage trading advice before getting started.

What Every First-Time Trader Needs to Know

It may seem disingenuous to compare trading for beginners, to driving for beginners. Yet, one cannot legally get behind the wheel of a vehicle without a learner’s permit, and a driver’s license. Even then, careful attention needs to be paid to the road, motorists, pedestrians, potential hazards, and peripheral elements. 

Believe it or not, all of this features in trading activity too. 

While no permit is required to trade, it is incumbent upon first-time traders to learn as much as possible before risking real money on uncertain outcomes. The trading milieu can be a foreboding experience to the untrained. Trading platforms such as MetaTrader 4, MetaTrader 5, and other proprietary systems need to be mastered. A trader who understands the intricacies of a trading platform is better poised for successful trading activity than one who isn’t.

The sheer variety of actionable trades that are possible is astounding. Consider the following:

  • Transaction types – Stock/ETFs, mutual funds
  • Actions – Buy, Sell, Sell All Shares, Sell Specific Shares
  • Order Types – Market, Limit, Stop Loss, Stop Limit, Trailing Stop Loss %, Trailing Stop Loss $, Trailing Stop Limit %, and Trailing Stop Limit $.
  • Time in Force – Day, Good till Canx, Fill or Kill, Immediate or Cancel, On the Open, On the Close. 

Each trading platform is designed differently, often with proprietary software styled to the broker’s requirements. As a new trader, it is imperative that you understand precisely how the trading platform works before simply inputting an order type. The wrong selection can make or break a trader’s budget, and there’s no going back once an action has been executed. 

Therefore, Trading Tip #1 mandates that all new traders take the time to become au fait with their chosen trading platform. Try paper trading online to avoid any unnecessary downside risk while you are familiarizing yourself with the trading platform.

How to Prioritize the Selection of Financial Instruments

In the trading arena, scores of financial instruments are available. These include, but are not limited to the following: stocks, currencies, commodities, indices, bonds, ETFs, cryptocurrencies, and options. In fact, pretty much anything can be traded in any format whatsoever. 

Blockchain-based technology has facilitated value transfers between individuals without third parties intervening. Derivatives trading instruments such as CFDs are equally popular nowadays, with options to trade contracts based on the underlying prices of financial instruments.

As a new trader, it is important for you to decide which trading options you feel most comfortable with. Many traders are of the traditional mindset where you buy low and sell high. This linear model is effective insofar as it is easy to gauge profits or losses based on the buy and sell prices. As a day trader, your job is simple: pick a volatile stock whose price is likely to move up or down before the end of the day. 

Call the trade correctly, and the difference between buy and sell prices represents your gain. If the trade moves against you, losses ensue. You may be unaware that it is entirely possible to profit from financial instruments with falling prices. By short selling these assets, you are borrowing from the broker and paying back the future price. If the differential works in your favor, that represents your profit. If not, you owe the broker money.

Tips for New Traders

  • Pick a financial instrument that you are familiar with. This may be a company that you buy from such as Apple, Microsoft, Nike, Amazon, Tesla, and the like. If you follow that company’s news, you probably have a better understanding of how the stock is likely to perform. That’s your point of departure. 
  • Immerse yourself in learning. The learning process continues in earnest. Next, check out the technical and fundamental factors that are pertinent to the stock price. Are there financial reports? Is there breaking news? Are there trends in the charts? What do the technical indicators say?
  • Try paper trading before you trade for real. Much like a new driver, you have to practice before you become adept at trading. Unfortunately, your budget restricts you when you trade for real money. Too many traders fall by the wayside when they experience a blowout on real money trades. 

Paper trading is a viable solution. It mimics real market conditions, with zero risk. Of course, a trader’s psychology is much different when real money is at stake. Nonetheless, you can learn valuable lessons from paper trading.

  • Learn the lingo of trading. Every single industry has its own colloquialisms, parlance, and terminology. Important terms should be understood in their entirety, such as bearish, bullish, retracement, buying the dip, on the bubble, stop loss, stop limit, arbitrage, averaging down, blue-chip stocks, technical analysis, fundamental analysis, penny stocks, bid price, day trading, dividend, yield, volume, volatility, short selling, sector, quote, pink sheets, OTC, moving averages, margin, leverage, et cetera. 

Without an understanding of these terms, it is impossible to succeed as a competent, professional, and skilled trader.

The list of tips, tricks, and trading advice goes on ad infinitum. Your goal as a day trader is to focus intently on your chosen financial instruments. Think of day trading as the equivalent of a fling, while investing is the equivalent of a long-term relationship. Both are outcomes-based activities, one is short-term and the other is long-term. In trading, there is no emotional connection between you and your chosen assets. 

A good place to start with day trading is penny stocks. These are low-cost stocks ($5 or less) which typically trade OTC, or as pink sheets. They may be listed on the NYSE as well. These stocks are particularly interesting to new traders, since they are low-cost options with tremendous volatility. A penny stock typically fails for the most part over time, however what happens in the interim is where all the ROI gets generated.

As a new trader, there is potentially more yield in penny stocks trading than there is with blue-chip stocks whose pricing tends to be stable over the long-term. Recall that blue-chip stocks are high-value stocks with proven returns, dividends, and listings on primary exchanges. They are mature companies with significant brand recognition. Unlike penny stocks which are largely no name brand stocks, blue chips (a derivation from the blue chips in poker) tend to hold their value well over time.

Follow this trading advice, and supplement it with additional reading of your chosen financial instruments. Pour over trading charts, graphs, and fundamental analysis to better understand price movements over time. Trends are especially important as indicators of likely price movements in the future.