Choosing a direction

In the previous lesson, we looked at how to choose a market. In this lesson, we’ll explore the next step in placing your first trade: how to choose a direction – buy or sell.

Going long or short

To place a trade, you’ll need to decide between going long (buy position) or going short (sell position). This will depend on what you think the asset’s price will do.

When you think the market price will rise, it’s known as feeling “bullish”. Bullish traders will take a long position, buying the asset with the aim of selling at a higher price. For example, you might buy shares of a company anticipating positive earnings reports.

Short-selling, also known as “shorting” or “going short” is a strategy traders use to take advantage of markets that are falling in price. When you believe that the market price will fall, you’re “bearish”.

Whether you go long (buy) or short (sell), you’ll only make a profit if your prediction is correct. Similarly, you’ll incur loss if the market moves against your prediction. Read more about going long or short here.

How short selling works

While many people’s default idea of trading often relates to going long (buying an asset and later selling it at a higher price), opportunities can also arise in markets that are heading for a downturn, so traders also stand to benefit by short selling.

The traditional way to short-sell involves selling a borrowed asset in the hope that its price will go down and buying it back later for a profit. This comes at a cost, which is normally a small percentage of the asset’s value.

Short-selling can also be done via CFD trading. CFDs are financial derivatives , which enable you to speculate on the price movements of the underlying asset without taking ownership of it.

Most short-selling takes place on shares, but you can short-sell many other financial markets, including forex, commodities and indices.

How do I decide whether to buy or sell?

Essentially, this comes down to what you believe the price will do. You’ll have to perform thorough research to determine whether you think the asset price will either rise or fall.

To arrive at this conclusion, you’ll need to employ market analysis. There are two main types: technical and fundamental.

• Technical analysis focuses exclusively on the price movements of a market and is based on the belief that what happens in the past can be used to predict what might happen in the future (although this can never be guaranteed, which is why technical analysis shouldn't be used in isolation). By examining the trends and patterns in market prices for example, by using price charts), technical analysts aim to interpret the behaviour of buyers and sellers to help give an indication of where the market could go next. Learn more in our technical analysis course.
• Fundamental analysis looks at the wider economic factors that can affect the price movements of a market and is based on the belief that every asset has a real, fair value. However, at certain times, for example when traders have not yet taken account of new factors affecting this value, the market may not necessarily reflect the asset's true worth. This results in the price being higher or lower than it really should be, and savvy traders can capitalise on their potential movements as the value corrects over time. Learn more in our fundamental analysis course.

Platforms such as the IG web trading platform provide various tools for technical and fundamental analysis.

The key technical analysis tool is the price chart of a financial instrument. Let’s take a closer look.

Using charts

Charts come in three main forms: line, bar and candlestick. The default view on the IG web trading platform is a candlestick chart.

Each candlestick shows four key pieces of information about price movement for that time period:

1. Open: the price when the period started
2. Close: the price when the period ended
3. High: the highest price during the period
4. Low: the lowest price during the period

The “body” of each candle on the chart shows the range between the opening and closing price. The “wicks” or “shadows” (the thin lines above and below the body) show the high and low prices.

The colour tells you the direction:

• Green (or white) usually means the price went up during the period (close is higher than open)
• Red (or black) means the price went down during the period (close is lower than open)

Candlestick charts help traders to spot trends and reversals, identify patterns that may signal buying or selling opportunities, and to make faster decisions based on visual cues.

On the IG web trading platform, you can work with charts to monitor market behaviour and apply tools like drawings and technical indicators to help you choose a market direction and decide when to enter a trade.

First, select the market you’d like to view. The chart will appear on the right. To open it in your workspace, use the Add to workspace button at the top right.

You can also customise the chart by right-clicking directly on it or by using the menu in the top left corner. From here, you can:

• Change the time frame (e.g. from monthly to hourly)
• Add technical indicators (e.g. Bollinger bands or Average True Range)
• Add drawings, such as trend lines (including adding a text box to label and describe it, helping you keep track of what each line represents)

Tip: Find the full list of indicators and drawing tools you can use on IG charts here.

Once you’ve edited your chart to suit your needs, you can save the layout by right clicking, hovering over layouts and selecting Save As.

Charts and time frames

Traders will often change the time frame displayed on a chart to try to understand both the big picture and the short-term movement of a market.

Longer time frames show the market trend; shorter ones help with planning timing to enter or exit a trade. Combining both gives you a more complete view of the market.

By checking different time frames:

• You have confirmed you are trading with the trend (find out more about trend trading here)
• You are able to enter a trade at a more strategic point, and
• You reduce the risk of exiting the trade too early because of short-term noise

Want to understand more? Here’s a video tutorial on using charts in the IG web trading platform.

Fundamental analysis tools

Aside from undertaking technical analysis using charts and exploring the various market signals available on the IG web trading platform (which are based on technical analysis), you can also carry out fundamental analysis by researching news and economic data. Tools you might find useful include the News and Economic Calendar tabs in the left navigation, as well as IG’s market analysis (available within the News dashboard).

Once you’ve chosen a market direction, your next step in placing your first trade is to populate your deal ticket, which we’ll explore in the next lesson.

Turn theory into practice, with a free IG demo account.