Before you invest your hard-earned money in the markets, you need to understand how you can place a trade as well as what makes the markets move. You need to spend some time educating yourself on some of the nuances related to trading before you dive in. Here are a few things you need to know before you start trading.
Know Your Broker
Your broker is your trading partner. You need to execute due diligence and find a broker that will facilitate trading. The process starts with your trading education. You want to make sure, especially if you are a novice trader, that your broker offers educational trading programs. This should include videos, as well as articles that explain how to trade. Topics should include technical analysis, fundamental analysis and risk management. You will also want to make sure your broker provides information on how to use their platform.
Your broker’s platform is the lifeblood of your trading experience. When you execute a trade and manage your position, you will be surfing through your broker’s platform. You’ll want to have the ability to analyze charts as well as receive real-time news. Each broker will have a unique trading platform. Some use a pre-fabricated platform that is white labeled from a technology company while others will use a customized platform. Many brokers will also have a mobile trading platform which you can use anywhere that has WIFI service. A good mobile platform will allow you to execute trades while you are on the go. You should also be able to manage your positions, underlying assets, and deposit and withdraw funds.
Types of Strategies
Before you risk your capital, you want to make sure you have developed a trading strategy that will (hopefully) pave the path for you to generate gains consistently. There are several types of trading strategies. Your education of both fundamental and technical analysis should help you develop a strategy that works well over time. Technical analysis based strategies could include trend following, momentum trading or mean reversion trading. The strategy you pick could depend on your personality. Technical analysis can also help you enter and exit a trade. By using support and resistance levels, you can target the best levels to enter and exit the market.
Fundamental analysis is a type of analysis where you use economic values or monetary policy or earnings results to drive your trading decision. Each asset you trade will have different supply and demand factors, and fundamental analysis will help you gauge if an asset is overbought or oversold.
Incorporating Risk Management
Another item you need to check off your list before you begin to trade is risk management. Since you might get ‘paid’ to take risks in an effort to make money in the capital markets, you need to manage this risk actively. Risk is the amount of capital you are willing to lose. It’s advisable to make sure that the reward you receive is commensurate with the risk you assume. The risk versus reward ratio will depend on the type of trading strategy you choose.
Before you start to trade, you need to make sure that you execute your due diligence and pick a reliable broker. You can formulate a trading strategy that is based on fundamental analysis, technical analysis or both. Lastly, make sure you understand the risk you are taking before you place your first trade.