Trading basics for beginners
There are a few trading basics you need to know before getting started in the markets. This trading introduction will take you through the most important concepts – from how to start a trade, to the different types of trading strategies – so you can start your trading journey confidently and responsibly.
The basics of trading: what is trading?
Trading is the act of buying and selling financial instruments with the aim of making a profit, and involves speculating on the price movements of stocks, currencies, commodities, indices, and other assets. Trading typically involves leverage, meaning you can control large positions with a relatively small amount of capital. However, leverage can amplify your losses as well as your profits, meaning careful risk management is advisable. Traders use a variety of strategies and tools to predict whether an asset's price will rise or fall. These can include fundamental factors such as macroeconomic drivers, or technical influences such as key support and resistance levels.
CFDs
- Contracts for difference (CFDs) are a popular way of trading on the price of 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.
Spread betting
- Spread betting is a type of derivative trading available primarily in the UK and Ireland, but also in a few other countries worldwide.
- Like CFD trading, spread betting is a popular way to trade on margin. In both cases, you don’t buy or sell any asset physically – you merely speculate on the price direction of the underlying asset.
- But while the two may appear similar, there are key differences between them. For one, spread betting is usually exempt from capital gains tax and stamp duty in the UK, but you should always check with a tax specialist if this is the case for you. Secondly, CFDs are traded as contracts (and fractions of contracts), while spread betting involves staking a unit of currency per point of market movement.
How to start a trade with Capital.com
You can trade forex with us by following these steps:
- 1. Choose an asset to trade, based on your trading goals
- 2. Choose whether to trade with a CFD or spread bet
- 3. Decide on your trade size
- 4. Consider applying a stop-loss to manage risk
- 5. Open your position long or short
- 6. Manage your position, monitoring fundamental and/or technical drivers
- 7. Close your position
What can you trade with Capital.com?
Indices
Go long or short on all the major stock indices, including the Germany 40, UK 100, US 500 and US Wall Street 30.
Commodities
Trade a range of hard and soft commodities including gold, silver, oil, and natural gas.
Margin and leverage explained
Leveraged trading, also known as trading on margin, refers to your ability to control a large position with a relatively small amount of capital. When you spread bet or trade with CFDs, you’ll only need to put down a fraction of the total trade size to open a position, known as the margin, while being exposed to the price movements of the whole position.
- For example, a margin of 5% means you have to have at least 5% of the value of the trade 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 20% margin. Your margin requirement will be £20. The stock goes up to £105 and you close the position. Your profit is the full £5, minus fees, despite only putting down 20% 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 £20 on margin.
- Trading with leverage means you have the potential to win 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 3.33% (max leverage 30:1). 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 positions. In extreme cases, if you don’t take action, a broker may be forced to close your positions.
Unleveraged trading
If you’re new to trading, you might want to trade without leverage. This means you can’t lose more than your initial deposit, minimising your risk compared to spread betting or CFD trading.
Our 1X account enables you to trade unleveraged CFDs on equities and indices with easy access to learning materials in a low-cost, lower-risk environment.
You can start trading on 1X by registering an account with us. Once approved, go to My Accounts, then Add Live Account, and choose 1X. You’ll need to complete an eligibility test to determine your appropriateness for this product.
Create a live account Create a risk-free demo account
Risk-management strategies
All trading is risky, and leveraged trading is no different. While trading with leverage means your profits can exceed your deposit, your losses can too.
All our retail client accounts have negative balance protection, so any losses are limited to the value of the funds in your account. But that alone does not minimise the risk of trading.
Saying this, there are various ways to mitigate the risk that you can implement as part of your overall risk-management strategy, most notably, by using stop-loss and take-profit orders.
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.
*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.
Please note your account will only be adjusted for the funds you are borrowing. For example, if the margin on the position is 20% then your account will be adjusted by 80% of the above figures.
How to get started with trading
So, how can you get started with trading? Here are some important fundamentals you should know before you take your first steps into the markets, covering trading styles, the importance of establishing a trading plan, and more.
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.
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
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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.
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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, commodities, and indices are just a handful of the other markets traders can access.
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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.
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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.
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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.
Want to learn more about these trading basics in more detail? Try our:
Trading courses
We have a range of free, easy-to-follow courses on our education hub. Learn all about trading from industry experts, from how to start a trade to managing risk and more.
Risk management course
Learn how to manage risk on our dedicated risk and reward trading course.
Demo account
If you want to practise trading, but you aren’t ready to deposit funds just yet, you can trade with virtual funds via a Capital.com demo account.