Online Trading

Online Trading

After having received emails from readers new to online trading, I thought it would be good to write an article that gives some instruction on how anyone new to the market should prepare.

As an online trading site it is important for us to not only discuss the benefits of online trading but to point out the risks involved in trading online.

Before you become involved in online trading, there are several areas of investigation that you should look at, and the first one starts with yourself. You have to look at your financial position and your levels of sophistication within the markets and ask yourself if, at this time, you are ready to take the leap into online trading. First let’s look at your level of sophistication in the market.

Your level of skill.

We are assuming that you have decided to go down the path of trading your own funds online, and for this you have to look at your level of skill and understand your limitations. How do you make your trading decisions? Is this based on information on the web or your own view of the markets. Do you understand how to mine the information on companies and understand the information which you are looking at. If not then this is the first area you need to address.

You don’t, suddenly, have to become a market guru before you can press the button on opening an account, but you do have to have a strategy for the stocks you pick. The easiest way to begin this process is look at a sector that you understand and form an opinion based on your knowledge and track those stocks that could be appropriate, perhaps making some fantasy investment on their performance.

Trading is, like any other skill, an acquired talent so time and effort needs to be spent on learning how and why stocks and markets move. There is volumous information on the web that can be found for free. Remember, if you are serious about making money from trading, the time you spend increasing your skill and honing your strategies will pay off in spades.

Brokers

The old joke ‘If I need a heart transplant, get me a stock broker’s as it has never been used’ is not particularly true these days. Yes, there are firms that you should avoid and the web gives up information on those by the bucket load but remember this: The financial services world is so competitive these days, you only have to look at the plethora of companies offering services in this area now and you will realise that you, as a client, are a sought-after commodity.

Any broker who, in this day and age, is looking more at the commissions than at the performance of your funds is one of; terminally ill, terminally stupid or ‘regulatory challenged’. What I mean by this is that clients are the lifeblood of a business and with the ‘cost of acquisition’ of a new client becoming upwards of £1000 per client, short term thinking is not a smart move for a broker.

This may seem incredible but the top slot on Google Adwords for the term ‘online trading’ costs around $30 per click. Downloads converting to clients is about 100:1 making each client from that advertising cost $3000 (£1500).

In this case when a broker finally brings on a client, the smart ones know that the performance and the service a client gets will determine how long that client remains a client and, therefore, a revenue source. With this in mind you should be looking for your broker to help you with your knowledge and learning in the markets. You should use him to give you recommendations and then, if needed, talk you through why those recommendations have been made. A good broker will be happy to help you along and build your skills.

Look at it this way, if you, with the help of your broker turn your funds from £10,000 to £1mn you are a happy bunny, recommending the brokers services and sitting on piles of cash, the broker is happy because he is getting new clients from you and also is earning more commissions.

Your Finances

Assuming that you have a level of skill that gives you your trading edge and a broker willing to help you with recommendations then your next step is opening an account and depositing funds.

How much? That is where a good look at your finances needs to undertaken. The biggest mistake I have seen by investors is either over funding an account or underfunding, let me explain.

Over Funding

Investing funds into your account that are, really, beyond your budget is not a smart move. You must have the ability to psychologically write-off the money that you have invested in the account. If you cannot afford to lose the money that you are thinking of investing then reduce your level of funding.

Apart from the obvious financial troubles you may get into, the over funding of an account is also detrimental to trading. That is because trading requires patience and anything that makes you execute trading decisions based on worries about losing money you can’t afford is bound to hurt your profits.

Under Funding

A contentious one this but nonetheless important. You have to understand that in trading it is likely that you will lose more times than you win. The skill is in making the most of profits on winning trades and cutting losses on losers along with having diversified trades. If you have a small amount of funds on account, relative to your ability to fund an account you run the risk of not being able to diversify trades. If for example, you have $10,000 that your could risk, but only put £1000 into your account, you are limited on the amount of trades you can enter. Your broker will also be frustrated in his efforts to give a clear view on your account.

With £1000 it is more likely that you will be executing one trade at a time, if that trade loses you may become disillusioned with trading or worse, put in another thousand and do the same thing again. With enough funds on account to make several trades either long or short term, you and your broker will have more options to trade profitably.

There is a caveat here. If you are new to trading and have £100,000 to invest you may want to put £10,000 on account first and use these funds to learn about the markets, create a relationship with your broker and discover how your broker’s recommendations are working out.

It is important, however, to let your broker know the extent of your funds and your goals for that money.

Trading Goals

Online Trading platforms such as the one available from HF Markets have features that allow profit taking and loss cutting to be automatically selected by placing trading targets on each trade. This will allow you to have a goal and target for each trade. Trading in this manner will make your investment funds go further and give you greater success.

One of the things that is important when trading is to have some sort of outcome for your trading activities. One of my clients trades the indices and had a goal of paying his kids college fees from his trading activities, he achieved this, cleaned out his account, paid the fees and funded his account and started again.

Having such goals focuses your mind on what you are trying to achieve out of each trade. Many traders just want to ‘make as much money as possible’, having such an amorphic target may skew the way you look at trades, running profits too long and cutting losses too late, looking for the ‘big pay-off’. The way to consistently make money in the markets is to be focused and targeted.

Risk Profile

It is important for you to understand your own risk profile and, if you use a broker, to make him understand too. The simple situation in the stock market is that the higher the risk you take the higher the potential profit should be. Look at it this way, if Manchester United were playing my local Sunday league side the odds (if you could get them) on Manchester United Winning would not be great for a gambler. Betting £10 might get you back your stake and 10p… but it would be a pretty sure bet. The odds on my Sunday league side would be 1000 to 1. So every £1 you bet, you would get your stake and £1000 back.

This would be an attractive bet, but unlikely to happen. This is an extreme example, but you need to look at the risks your are taking in relation to the goals set for your money and your risk profile.

Your risk profile should be based on your capacity to lose the money invested but also your capacity to replace those funds. If you are a 25 year old computer genius on £100,000 per annum then £10,000 lost, while it would hurt, would not kill you financially. But if you are a 60 year old on the verge of retirement, your ability to replace that £10,000 may be more difficult. These are stereotypical situations, but your see where I am coming from.

Conclusion

My final point is that trading is not the preserve of rocket scientists and Harvard grads, many of the world’ most successful traders have not come from a trading background but have learnt the skills necessary and put many long hard hours into honing their skills.

As long as you prepare yourself, continue to learn, understand the risks and do not trade more than you can afford to lose then you will have a good basis for becoming a profitable trader.

A great start for new traders or those looking to move to the next level, would be to download our online trading system and begin familiarising yourself with the markets and instruments that we trade.

Good luck with your trading!