A successful trader profits by actively taking the right opportunities, in both rising and falling markets. This is a different approach to the traditional buy-and-hold strategies and requires different techniques. Getting those techniques wrong may be an expensive mistake. So how can you get it right? There are some important fundamentals you should know before you take your first step into trading.
The trading style that will suit you best depends on several variables: the size of your account; the amount of time you plan to dedicate to trading; your experience; and your tolerance to risk. Not everyone will fit exactly into a certain style and some traders find a combination works best.
This style has the longest time frame and most closely represents the traditional ‘buy-and-hold’ trading model. This type of trader will hold positions over months and years, ignoring short-term fluctuations in price. Position traders make their investment decisions based on technical and fundamental analysis.
The key difference between position trading and traditional buy-and-hold investing is short trading. Buy-and-hold investors will only place long trades, which benefit from a rising market. Position traders do place long trades, but they may also place short trades, which generate returns when markets are falling.
Traders who do not have the time to closely monitor their positions are suited to this style. Investment decisions are based on the long-term time horizon, not on short-term fluctuations.
Swing traders operate on a shorter time frame than position traders. They tend to place trades over days and weeks instead of months and years, attempting to benefit from shorter-term market moves. Swing traders pay less attention to fundamentals, and more to technical analysis and movements in price.
This style of trading is also suitable for time-poor traders, who cannot constantly monitor every short-term market move. Swing trading is a very popular style.
Day traders – as the name suggests – enter and exit positions on the same day. All positions are closed by the end of the day’s trading, dependent on various criteria, including: if a profit target has been reached; a stop loss put in place; or a specific exit time given (for example, the end of the day).
Prices rarely move dramatically in just one day, so day traders use small gains to build profits. They typically trade on margin to build additional gains – effectively borrowing from a broker. This is profitable when the trader anticipates earning more from the trade than he is paying in interest on the margin (loan).
This type of trading requires constant monitoring and is not suitable for time-poor traders who trade as a hobby.
The speed and reliability of technology plays a major role in trading. You will need a high-speed internet connection, a reliable computer with a large memory and fully-charged back-up phones in case all else fails. An extra second here or there could mean you lose out on trades, while those with faster IT solutions profit. The shorter the trading time frame, the better the tech needs to be.
20 years’ ago, traders would call their brokers and place orders over the phone. This process could take minutes, in which time the market could have moved and gains lost. Today, traders can watch prices through their live data feed and make calls on positions to the second, minimising error. They just need up-to-date technology.
A trader’s technology needs to be robust. Traders should adhere to the following point to avoid any technology mishaps:
· Power. Ensure your computer’s processor is up to the job. A slow computer means a slow reaction to market movements so make sure your computer has significant processing power and memory.
· Software. The software on a trader’s computer needs to be able to cope with market analysis, testing and executing positions. Don’t get left behind with out-of-date software.
· Anti-virus. Keep your computer healthy by installing the latest anti-virus software and make sure any confidential information is well protected.
· Back-up plan. In case of emergency, keep a spare fully charged mobile phone should your computer crash and you need a way of contacting your broker immediately.
The broker you choose to work with matters too. Time and research will be required to find the right one. Trading platforms, such as Capital.com, allow you to transact efficiently, accurately and at a low cost. If you are unsure of anything, there is plenty of educational content on the website and an online support team able to quickly resolve any issues.
A trader will make a decision about whether to enter or exit a position and then inform a broker who will realise the trade. However, this process will inevitably take a few seconds and the optimum price may be missed in a delay known as ‘slippage’. Slippage is the difference between the expected price and the price actually realised. Various protective orders can be put in place to prevent this type of loss.
Long and short trades
A trader enters into a long position when they expect markets to rise. They aim to profit from a transaction where they buy stock for a lower price than they sell it. If prices move in the opposite direction – they fall when the trader expected them to rise – the loss on the position is considered ‘limited’ as prices can only go as low as zero..
Conversely, a trader enters into a short position when they expect markets to fall. This means that a trader borrows and sells an asset or instrument, agreeing to buy it back in the future (when prices have fallen to a certain level), therefore profiting from re-purchasing the same asset or instrument, but more cheaply. However, if markets rise and the prices move in the opposite direction, the trader’s losses are ‘unlimited’ as there is theoretically no limit at which prices could stop rising.
A market order simply instructs the broker to buy or sell at the best available price. This type of order will usually be realised immediately, so has the benefit of reliably fulfilling a trade. The drawback of a market order is that no price is guaranteed and there is no precision in market entry, so costly slippage can occur.
A trader places a limit order when they instruct a broker to buy or sell at a specified price or better. A buy limit order can only be executed at the specified limit price or lower, whereas a sell limit order can only be executed at the specified limit price or higher. The downside of this type of order is that if the specified price is not reached, the trade will not be filled at all and therefore a trading opportunity is lost.