Trading basics for beginners

CFDs

• Contracts for difference (CFDs) are a popular way of trading on the price of cryptocurrencies, stocks, indices, commodities, and forex without owning the underlying assets. Instead of buying the asset (as you would when investing), you trade on the rise or fall in its price – usually over a short period of time.
• Essentially, a CFD is a contract between a trader and a counterparty (sometimes a broker, sometimes the market itself), to exchange the difference in value of an underlying security between the opening and closing of a position.
• With CFDs, you can profit on a market by speculating on its price rising (known as going long) or on its price falling (known as going short). And because a CFD enables you to trade using just a fraction of your position’s value – known as trading on margin, or leveraged trading – you can open larger positions than your initial capital may otherwise allow.

• For example, a margin of 5% means you’ll need at least 5% of the total value of the position on account. The remaining funds are effectively advanced to you by the broker.

• Let’s say you want to make a long trade on a single $100 stock at 5% margin. Your margin requirement is $5. The stock goes up to $105 and you close the position. Your profit is the full $5, minus fees, despite only putting down 5% of the value of the position.

• Now let’s say the stock falls in price to $95, and you close out. Your loss is also $5, despite only having $5 on margin.

• Trading with leverage means you have the potential to profit and lose amounts that exceed your initial deposit. Because of this, it’s important to trade with caution and have a solid risk-management plan in place.

• Margin requirements differ depending on the market you want to trade. The lowest margin requirement ratio we offer currently is 0.05% (max leverage 200:1). You can check the margin requirements of the instrument you are trading on our asset pages, like our gold price page.

• It’s worth noting that if the equity in your account falls below a certain level, you’ll get a margin call requesting to fund your account or reduce the size of your position(s). In extreme cases, if you don’t take action, a broker may be forced to close your positions.

Stop-loss orders

• A stop-loss is a key risk-management tool that closes a position when a specified price is reached. Stop-losses are primarily used to limit potential losses on a trade. They can help limit trading risks as they may prevent you from losing too much when the price goes against you. So it’s not surprising that when markets are volatile, stop-losses can become a trader’s best friend.
   
• On Capital.com, you can also use a guaranteed stop-loss at an additional fee.^* This stop-loss order acts as your insurance against excessive losses – or any gaps in the instrument you’re trading – allowing you to close a trade at a specific price while limiting losses.

^{*Not all stop-losses are guaranteed. On Capital.com, a guaranteed stop-loss is charged as a percentage on the open volume for the client, and is shown in the realised profit or loss of the position. It is also broken down in the client transactions.}

Take-profit orders

• A take-profit order is used to specify a predetermined price at which an open trade should be closed to secure a profit. Essentially the opposite of a stop-loss order, with take-profit orders, once the asset's price has reached the take-profit level, the order is converted into a market order or a limit order for execution.
   
• By using take-profit orders, traders can manage risk and protect their gains from potential market reversals or adverse price fluctuations, providing them with better control over their trading strategy.

Find your trading style

• When you’re establishing a trading style, it's helpful to firstly understand the fundamentals of – and differences between – popular types of trading. The most popular trading styles include day trading, swing trading, and position trading. It is these very strategies that determine how long you spend in a position and what timeframes you use to open and close a trade.
   
• For instance, position trading may encompass holding positions over weeks or months, while swing trading aims to capitalise on shorter-term market movements spanning days and weeks. Day trading strategies involve entering and exiting positions within a single day.
   
• Your trading style will also depend on other important factors – from your account size and time commitments, to your trading experience and risk tolerance.

Optimise your trading technologies

• Trading efficiency depends on the speed and reliability of the technology you’re using to trade. High-speed internet, a powerful computer with ample processing power and memory, up-to-date software, and robust antivirus protection are a must.

Utilise trading orders

• There are various types of trading orders, including market orders, limit orders, stop orders, trailing stops, stop-loss orders, and conditional orders. Each serves a specific purpose in managing trades and helping you to minimise the risks associated with trading.

Develop a trading plan

• Before you start trading, it's essential to create a well-structured trading plan. A strong plan is indispensable for establishing and executing your strategies effectively, while also minimising risk. Your plan should encompass various critical elements, including whether you’ll be using fundamental or technical analysis or both, as well as the selection of trading instruments, timeframes, position sizing, and specific entry and exit conditions.

• To develop your plan, firstly determine what assets you want to trade. You can do this by considering market conditions and factors such as volatility and liquidity. It’s worth noting that assets are not limited to buying stocks and shares. Forex, cryptocurrencies, commodities, and indices are just a handful of the other markets traders can access.

• Next, you can define your timeframe, position size, entry and exit conditions, and risk-management rules. In regards to timeframe, remember that short-term trading is generally associated with higher risk. Similarly, when it comes to position size, it’s wise to start with a small position and build up to something more significant in time – especially if you’re new to trading. Finally, when you’re deciding your entry/exit criterias, resist the temptation to ignore an exit rule if you anticipate future profit potential. Knowing when to take your profit is a key risk-management tool.

• Once you’re confident you’ve got a tailored plan in place, you can test its effectiveness using historical and forward data. However, it’s important to bear in mind that past performance is not an indicator of future success, and trading results are never guaranteed.

• To see how your plan will work in action, you could also open a demo account with virtual funds. This will allow you to practise trading and refine your strategies before you trade with real money using a live account.