If you’re new to trading, it is easy to become overwhelmed by all the information about markets, different strategies, and how you can turn a profit. But the truth of the matter is: your journey to becoming a successful trader should be unique to you, your goals and attitude to risk.
However, there are some key steps that anyone looking to trade should follow, to make sure that they understand the basic principles of markets and how to trade them.
Step one: research the markets
Build a strong foundation of knowledge about financial markets, as the level of risk and strategy required can vary between them. It is a good idea to start by researching the markets on offer to you, and make sure you understand the key differences between them.
With IG, for instance, you can trade a range of asset classes:
- Shares are one of the most popular financial instruments. When taking a position on a share, it is important to research the company, the industry and the stock exchange it is listed on. Unless your provider offers out-of-hours trading, your dealing will be confined to the exchange’s opening hours
- Indices trading could be for you if you want to deal on the performance of a group of shares, rather than just one company. As there are many constituents that can move the market, stock indices tend to see more volatility than individual shares
- Forex (FX) is the world’s most liquid market due to the vast number of currency dealers. It is also the most volatile, creating a unique set of risks to traders. For example, FX markets trade 24 hours a day so the market can move while you aren’t around to monitor it
- Commodities trading is popular as it provides vast opportunities for profit, but the nature of the market creates a high level of risk. The price of commodities can fluctuate constantly as the rate of their production and consumption changes
- Cryptocurrencies can be speculated on just like physical currencies. The crypto market doesn’t move under the influence of traditional factors, but rather presents a new field of knowledge that traders need to familiarise themselves with, such as scalability and the blockchain
Step two: build a trading strategy
The next step is to establish a trading strategy that will help you generate a profit in your chosen market, and define exactly how you will enter and exit your trades. A trading strategy is the driving force behind your trading plan – it should help quantify your goals, making sure that you are being consistent and aren’t just making decisions based on emotions.
There are a variety of styles that you can use to trade. These are four of the most common:
- Day trading is the practice of buying and selling assets within a single trading day, to take quick profits from small price movements.
- Scalping is a type of day trading that involves the opening and closing of positions quickly – within seconds, or at most a few minutes – to profit from small changes in asset price
- Swing trading is the practice of entering trades at the point the market is expected to change direction, profiting from movements in asset price
- Position trading involves holding a position for long periods of time, be it weeks, months or even years, to profit from large shifts in price
The aim of each style is the same – to profit from movements in an asset’s price. The difference lies in how often you want to trade, and how long you will run each trade. There is no ‘one size fits all’ solution, as the right style for you will depend on your lifestyle, personality and how much time you want to spend trading.
Once you have decided your style of trading, you can begin to build your trading plan. This should set out the actions you will take to fulfil your trading strategy, and should include your motivations, goals and how much capital you can afford to dedicate.
A key part of creating a trading strategy is market analysis, which attempts to use the information available to predict the behaviour of markets and create a methodology for identifying entry and exit points.
These methods for market analysis fall into two broad categories:
- Technical analysis is based on the principle that what has happened in the past can inform what might happen in the future. Traders can examine charts and utilise price-based indicators to build their trading strategy, creating a system that exploits price patterns and tendencies for profit
- Fundamental analysis is based on an asset having a ‘fair value’. By identifying under-priced and over-priced assets, a trader can potentially capitalise on the market correction. Traders use macro-economic data – including gross domestic product (GDP) figures and employment statistics – alongside news coverage and political commentary to identify opportunities
It is important to note that markets can be extremely volatile, and it is impossible to predict their behaviour completely. But a good trading strategy can help you prepare for any outcome – good or bad.
In trading, ‘risk’ refers to the possibility that your decisions will not result in the outcome you desire. This can mean a variety of things, but most commonly that a trade will make a loss. If you are using leverage, a trade could lose even more than you put in.
Loss is an unavoidable part of trading, and something that traders must be prepared to accept when they participate in the markets. However, potential losses can be minimised by putting a strategy in place to manage your risk.
You can take control of your trading by learning more about the unique risks each market poses, and using risk-management tools such as stops and limits.
Read more about trade planning and risk management.
Step three: gain trading experience
The final stage in becoming a trader is taking the plunge and trading for yourself. But there is no finish line: you can always do more to progress your knowledge of markets and refine your trading strategy. The best way to do this is to find out what works for you, by executing your strategy and back-testing the results.
Gaining experience doesn’t have to mean risking your capital on live markets. You can start developing your skills and putting your theory into practice in a risk-free environment with an IG demo account.