Trading for a living offers the opportunity for traders to become their own boss in addition to being able to set their own working hours, the ability to work from anywhere and the ability to break away from the artificial cap which is placed on salaries.
Choose your quick section of our Trading for a Living Guide below.
A Quick Overview of our Trading for a Living Review:
- ✔️Types of trading
- ✔️The basics of Stock Trading
- ✔️The basics of Forex Trading
- Trading strategies
- What technological advances help traders?
- Common trading mistakes to avoid
- How to trade more consistently and profitably
- How to choose the right broker
At first, the world of online trading may be a vast and daunting concept for beginners, but soon they will discover its endless possibilities.
Types of trading
Traders have various financial markets within which they can trade, and it is important to explore these options. However, for the purpose of this article, the focus is placed on two of the largest financial markets and the trading involved with them namely Stocks and Forex.
Stock trading
This involves the art of buying, holding, and selling of stocks and securities which are listed on global stock exchanges including NASDAQ, NYSE, AMEX, JSE, and numerous others.
Forex Trading
This involves the buying and selling of currency pairs with the aim of making profits on the differences in the value of these currencies in a global economic landscape.
The basics of Stock Trading
Stock trading involves four primary asset classes including equity, debt, cash and cash equivalents, and real estate and commodities.
Stocks are a part of equity securities which represent ownership, for instance, when an investor purchases the shares of a specific company, they become a part-owner of the company, and, depending on the type of stock, the investor may even have voting rights when members of the board of directors is chosen, amidst other important business matters.
Common and preferred stocks
These are the two types of stocks which can be purchased. Common stocks represent the largest portion of stock which is held by the public which provides owners thereof with voting rights in addition to owners being eligible for dividend pay-outs.
There is, however, one drawback to owning common stocks. Should the company be forced into liquidation or it goes bankrupt, common shareholders are the very last to receive pay-outs.
Preferred stocks are always paid out first and in full before common shareholders can receive their payments. Preferred shareholders may not have as many rights as common shareholders, but they receive president where dividends are concerned.
Companies who offer preferred stocks normally make provision in paying dividends which means that preferred shareholders can expect some return on investment when dividends are paid out quarterly.
Dividends
The earnings per share, or the EPS, of a company is the profit divided by the number of outstanding common shares that the company has. This is an important measurement to consider when looking at investing in the shares of a company.
Dividends are paid every quarter and they present the pay-out that the company makes to shareholders as an extra incentive to encourage continued investment. When comparing EPS between companies, it is important to compare companies within the same industry with one another.
Advantages and Disadvantages of stock investment
Stock investment or trading involves the potential for high returns regardless of daily fluctuations in stock prices as they show consistent increase in value over time.
An investor’s portfolio should, however, not only consist of stocks, but should be diversified to ensure that risk management is spread over a broad range of asset classes.
Stock trading and investment involves substantial amount of risk due to factors which are not in the control of the investor and these factors often influence the price and the performance of stocks.
In having a portfolio which contains a majority of mainly stocks, a market decline may be the difference between comfortable retirement and having to work for longer even after reaching retirement to make up for the losses experienced.
The basics of Forex Trading
Foreign Exchange Trading, or more commonly referred to as either Forex or FX trading can simply be described as the buying and selling of one currency in exchange for another.
The Forex market is the largest and most traded market in the world as people, businesses, and countries across the world participate in it. It is also the market which is the easiest accessible without a large amount of capital, it features lower transaction costs, and offers a variety of currencies to be traded.
The demand for a certain currency can push the value thereof up or down in value relative to numerous other currencies, and in understanding factors such as these will make it easier for those who want to trade in Forex for a living.
Currency Pairs
Currencies are always traded in pairs; hence the name Forex pair, and it involves the quotation of two different currencies where the value of one is quoted against the other. The first currency shown in a pair is always the base currency whereas the second is the quote currency.
Currency pairs can also be further divided into various classifications such as Major, Minor, and Exotic pairs. Major Forex Pairs are the most popular and traded pairs which include the US Dollar – as it is the strongest currency in the world – such as EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, and USD/CAD.
Forex minors and exotics make up currencies which do not contain the US Dollar. They are not traded as often, and they do not offer as much liquidity as Forex majors.
When starting to trade Forex, traders are going to come across numerous terms which they might, at first, not understand, these are:
- Exchange rate – which is the value of one currency which is expressed in terms of another
- Pip – which is the smallest increment that prices can move.
- Leverage – which is the ability to gear the account of the trader into a greater position than the total margin of the account.
- Margin – is the deposit which is required at the start of a trade which will act as collateral.
- Spread – is the difference between the bid and the ask price, or the sell quote and the buy quote.
- Bid price – is the price at which the market, or the broker, will buy a certain currency pair from the trader.
- Ask price – is the price at which the market, or the broker, will sell a certain currency to the trader.
How does market pricing work?
It is important for traders to understand how prices move in the market to understand how traders can calculate their profits when trading.
Forex pairs can move between 50 to 100 pips per day, even less or more than that depending on the market conditions.
A pip, as explained, is the smallest increment with which the price on a Forex pair can move and it indicates the fourth decimal place in a Forex pair, or the second when JPY is in the Forex pair.
For instance, when the price on EUR/USD moves from 1.0200 to 1.0250, it is a 50-pip move and should the trader have bought EUR/USD at 1.0200 and it is subsequently sold at 1.0250, it means that the trader made a 50-pip profit.
To calculate the actual profit, traders can multiply this with their trading or position size to get a value denominated in US Dollar.
What are the key drivers for the Forex Market?
- Central Bank Interest rates
- Central Bank Intervention
- Options
- Fear and Greed
- News
- Economic circumstances and situations in various countries
Trading strategies
A trading strategy is imperative when trading and it must include a market ideology, the goal that the trader has set which will act as a motivational factor in addition to the strategy including the allocation of assets and moves of diversification.
As a beginner trader, it is important to note that traders must not have more than 1, or at most 2% of their trading capital on a single trade and that the reward risk ratio is 2:1 or 3:1 where the reward is twice, or thrice, that of the risk that they are taking.
The trading strategy which is used must include a mixture of both fundamental and technical analysis. Fundamental analysis includes information on global events, economic news, and more while a technical analysis includes trading rules based on price and volume transformations.
Where some traders may only use either the one or the other, beginners are encouraged to make use of both to direct their trading decisions.
What technological advances help traders?
Stock Screening
There are numerous mobile apps which help traders identify the best stocks to trade and it prevents traders from adopting a herd mentality where traders only follow the stocks of large companies while there are numerous viable stocks that do not always make the headlines in the news.
The stock screener helps tot sieve through thousands of stocks to identify potential viable options for investments which allows traders to invest in them before they make their big break and professional traders gather them all into their portfolios.
Trading Bots
These trading robots are software programs which trade on behalf of the trader according to set instructions, predetermined rules, market indicators, or parameters.
These parameters dictate when the bot must enter a trade, when to exit, how much capital to trade, and more.
The bot also allows for trading 24/7 while the trader continues with their busy life without having to worry about running the risk of loss or missing out on great trading opportunities.
Trading algorithms
These should not be confused with trading bots as it is a tool which helps traders execute orders automatically based on trading instructions which have been pre-programmed including price, volume, and timing.
Algorithms such as these also help to break down large orders that the trading platform may not be able to execute in a single trade.
Social Trading
This is another trading style where traders can rely on user-generated financial content which has been collected from various networks and helps them to make trading decisions.
Traders are also offered with a platform where they are a part of a trading community consisting of successful traders who gladly share their trading experience, knowledge, and wisdom.
Social trading can be done in an array of financial instruments and although closely related to copy trading, copy trading involves the process of copying the trades of signal providers, such as professional traders, to the profile of the trader so that they can improve their trading.
Common trading mistakes to avoid
- A lack of education and trade preparation.
- Not developing a trading plan.
- Not following the trading plan.
- Not using enough risk management tools.
- Trading with a poor risk reward ratio and risking too much.
- Being impatient.
- Not using proper position sizing.
- Micromanaging trades.
- Having unrealistic profit goals.
- Failing to keep a record of trades.
- Not using educational tools such as a demo account.
- Taking profits too early or hanging onto losing trades believing that they will turn in the favour of the trader.
- Tyring to use too many strategies and overcomplicating things instead of finding one good strategy, learning it, and mastering it before moving on.
How to trade more consistently and profitably
- Find the right trading style.
- Do not skip the learning curve.
- Formulate a solid trading plan and keep to it.
- Leave room for continuous improvement and growth.
- Set realistic goals.
- Focus on the journey one step at a time and do not skip ahead.
- Use a demo account for practising and testing strategies.
- Practice patience and control emotions through discipline.
- Understand the motives behind trading and become self-aware.
- Be honest with yourself and take responsibility.
How to choose the right broker
Once traders understand what type of trader they are and they understand what type of trading needs they have, they need to choose broker that is aligned with their objectives so that they can more easily achieve them.
There are several considerations when choosing a broker, including:
- Regulation and authorization
- Education and research tools, material, and resources.
- Fees – commissions, spreads, and other fees.
- The trading platform offered.
- Account types and features.
- Deposit and withdrawal options, and
- Customer support.
Conclusion
At first, the world of online trading may be a vast and daunting concept for beginners, but soon they will discover its endless possibilities.
The trading world and all that traders have to learn in order to become professionals may seem like a mountain when starting out, but it merely takes one step at time for traders to progress in their journey to become professionals who trade for a living.
There is a world of information available to traders, if they only know where to start and they understand what they want to achieve, they understand themselves, and how the world of trading works.
Beginners may struggle in understanding how the financial markets work due to the sheer amount of information that they are presented with and the inability to separate what is useful to them from that which is not.
It is indeed daunting, but it takes a relatively small step to get started on obtaining a fundamental understanding into what trading is, what it involves, and then proceeding with building up knowledge, skills, and experience, and starting to trade.
Technology has developed and improved in a vast amount of ways within the financial industry and it has made trading easier than ever. Anyone can start trading these days and it is not merely just a pipe dream to become a professional trader who trades for a living.
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