Buy, sell and make a profit – or absorb the loss: trading means using the fluctuations of the financial markets (volatility) for your own purposes. In the private sector, this short-term form of investment has become particularly popular since the advent of online trading. User-friendly online custody accounts also make it possible for hobby investors to buy and sell shares and other securities.
Trading is often seen as comparatively little work with high returns – but the opposite is true. Hobby traders therefore have to pay attention to a number of things before they can get into the game with the markets.
Trading describes the short-term buying and selling of financial instruments such as securities, currencies, commodity certificates or the so-called contract for difference (CFD). Trading is therefore practically the opposite of long-term planned investments. The wish of most traders is probably to earn comparatively much money with little effort within a short time.
If you want to bet on trading, however, you should always be aware that this is basically speculation. Traders try to predict market developments and use this to their advantage. Where a trader invests his money is usually of secondary importance to him – it is not about buying a share in a company and participating in its development in the long term.
For example, a trader buys a share, hopes for a price increase and sells it again immediately – often within one day (intraday trading). The difference in value minus the transaction costs, for example the brokerage fee, is the trader’s profit.
What Traders trade: Shares, CFDs (contracts for difference), foreign exchange (Forex trading) and Cryptocurrencies
Among the classic products that traders trade with are stocks. Traders watch the market and then try to buy or sell at exactly the right moment. Of course, no one can predict the course of the prices, but experienced traders develop a feeling for the market over the years – provided they can hold on that long. Especially at the beginning of a trader’s career, luck has to play a part when traders bet on a certain stock performance.
To bet solely on the rise and fall of share prices seems too one-sided to many traders – and not lucrative enough, especially compared to other investment products. With CFDs, for example, traders conclude contracts with a broker: one party assures the other that it will pay the difference between the current value of a price and a future value.
CFDs, also known as contracts for difference, are therefore basically instruments for betting on price movements (for shares) and changes in value (for commodities, currencies). Foreign Exchange Trading (Forex Trading) is another lucrative alternative to normal stock trading. The basic issue here is how two currencies relate to each other.
CFDs, Forex and crypto Trading promise high profits – and losses – with relatively low stakes. This is made possible by the so-called leverage: The trader invests only a small amount of his own capital, the rest is lent by the broker. Nevertheless, the trader profits completely from the price fluctuations – or is liable for them: Because with leveraged financial products he can gain a lot, but also lose just as much.
Outside the USA people can trade Bitcoin with leverage that even goes up to 200x, like on PrimeBit. It’s not as much leverage as you can use with Forex (usually between up to 500x to 1000x), but the volatility of cryptocurrency can be compared to price movements in Forex, that’s why leverage has to be more restricted in crypto.
Be careful with CFD Speculation
CFDs, Forex and crypto trading are highly speculative and therefore very dangerous, especially for trading beginners. In the USA the trade with CFDs originating from England is even forbidden. Therefore, the finer points of these financial instruments will not be discussed further here.
Online Trading: Trading in Real Time
Buying shares and selling them two hours, two minutes, two seconds, even two milliseconds later at a better price was still almost unthinkable for private investors in the 1990s. It took too long to buy shares by phone, fax, mail or directly in the bank branch.
However, with the Internet and online trading, almost everyone now has the means of the professional investors of yesteryear. If you want to get into trading, you theoretically only need a computer and a stable, fast Internet connection. Information can be obtained quickly over the net, and share purchases can be made at the click of a mouse.
Intraday trading has also received a boost through technical progress: “day traders” open and close positions within a day. If price falls they use the strategy of shorting which can be just as profitable as betting on rising prices (long trading). This broker comparison shows the best brokers for each trading style, instument and strategy regarding cryptocurrency trading. The magic word of the traders is volatility, the fluctuation of a price. The higher the volatility, the greater the chance of both profit and loss for traders. In the absence of volatility, however, traders have a poor chance of making large profits.
In the meantime, a number of apps have been established that enable mobile online trading. These apps provide various features, such as a chat or the ability to transfer cash and deposit checks by taking pictures with a phone camera.
Curves, Charts & Stock Market News: A Trader’s Tool
You may be familiar with the picture: Stock exchange traders sit in front of many screens that display curves, tables and figures. Even a professional private trader usually has several screens on his desk. One screen shows the trading platform to which the trader is logged in.
This is where he earns his money: With a click of the mouse he buys and sells stocks, foreign exchange, commodity certificates and other securities. On the other screens the trader observes the development of the markets, for example the DAX on the Frankfurt Stock Exchange, the American S&P 500 share index or also commodity futures exchanges such as Euronext, on which commodities are traded.
The prices change almost every second. If it flashes red, this means that prices are falling; green indicates that prices are rising. A feed with the latest economic and financial news indicates possible changes. Professionals also rely on risk management software and other tools to predict the course of the curves.
Curves for the course of the share price are available in numerous variations. Especially among day traders, the candlestick chart is very popular. Here, the trader can read the movement of the price at a glance, including the opening and closing price. The upper “wick” or lower “fuse” indicates the distance to the high and low of the respective interval.
Learning to trade: How does it work?
There is no uniformly regulated training to become a trader. Numerous – partly self-proclaimed – trading professionals offer short-term seminars, mostly online and often, it seems, with hidden costs. If you would like to try trading, a free demo account can be a way. Watch out for cost traps and don’t rush into real money trading if the trial trades go well unexpectedly.
Among professionals, there are various rules of conduct designed to prevent excessive losses. They can be summarized under the umbrella term “self-discipline”. All Pro traders agree that traders absolutely need their own rules and should strictly adhere to them. Exceptions could often have fatal consequences. Furthermore they say that day trading is rather out of question for thoughtful, conscientious people.
Professional traders usually follow an individual system, which they have often acquired over years. No successful trader buys a share indiscriminately at good luck and hopes that it will behave according to his ideas. Professionals plan exactly what they buy, when they buy and when they sell again. Traders protect themselves against losses with a so-called stop-loss order, which means that they automatically get out when the price falls below a certain limit.
Furthermore, it is part of money management, for example, which is how traders describe their value protection strategy, the stake per trade and the total trading stake. The stake per trade should not be higher than one to two percent of the value of the portfolio, the total trading stake should not exceed 10 percent.
Trading Strategies: Chart Analysis and Co.
With the business some trading strategies have also developed, but a reliable success of such strategies cannot be guaranteed due to the unpredictability of the market. Renowned economists such as the American Eugene Fama are of the opinion that no participant in a financial market can be successful in the long term through analysis or other methods.
Numerous trading strategies can be summarized under the umbrella term of chart analysis, it is also known as technical analysis. Chart analysts use historical data to try to predict the best possible time to buy or sell a stock, for example.
In chart analysis, traders examine anomalies and patterns in the price development. For example, if a stock has already reached a similar high or low several times, analysts speak of resistance or support. If the price runs in a similar direction, up or down, for a longer period of time, traders refer to this as a trend. Finally, from the interplay of all these key figures, traders try to predict the probability of the further course of the curve when analyzing the chart.
With certain strategies, traders try to reformulate certain characteristics of prices into numerical values. Among the best known trading strategies are the trend-following and momentum strategies.
Trend Following Strategy
This strategy, which is also suitable for beginners, is based on the well-known sentence “The trend is your friend”. Simply put, the trader assumes that trends will continue. The probability is high that a falling price will continue to fall or a rising price will continue to rise. Analysis programs for traders can also show the trend of a stock in numbers.
With this strategy, traders try to determine when the price of a stock will accelerate. The theory is based on the assumption that prices often move sideways for a long time and then suddenly rise or fall sharply. This immediate change in momentum should be adjusted to buy or sell in time. To determine the momentum, traders divide current prices by past prices. The result is a graph, also known as the momentum curve.
Trading: A Job with high Risk
Successful traders with a good hand can live from their business, their income is theoretically unlimited. The reality of many traders, however, looks very different: Studies on the subject, among others from the University of California, show that very few day traders actually earn anything. The only constant winners are the brokers, who collect fees for every trade executed and also profit from speculative trading.
So trading has little to do with what many people think: Instead of confirming a bomb-proof trade with a few mouse clicks from the comfort of your own home and thus having worked out your day’s target, professionals spend hours analyzing price developments and thinking very carefully about how and where to invest. Professional trading is therefore no less labor-intensive than a normal job and does not provide any income security.
The entry into trading should be well thought out. As a general rule, trading is unlikely to yield significant profits unless the capital invested is at least in the lower four-digit range. Start with a demo account and obtain detailed information, for example on reputable trading platforms and through specialist literature.
Only use Money you can spare
Never invest money that you cannot do without. Especially with the trading of speculative financial instruments such as CFDs, small investors can quickly make big losses. And even if you do not necessarily need the capital invested, you should set limits.