Tuesday, October 9, 2007

Online Trading: Where Should I Start?

New to the trading scene? Overwhelmed by all the trading jargon out there and dont know where to start? Dont worry, you are not alone! Virtually all traders go through this experience! Allow me to share my opinion with you.

Where you should start depends firstly on your preference to risk. The tradable financial markets basically get split up into two main categories. The first category is Stocks or Shares and everything else I would classify as Derivatives, which include CFDs (Contracts for Difference), Options, Warrants and Futures (Indexes, Forex, Commodities, Currencies etc).

For those of you who have never traded before, I suggest you start off with trading plain and basic shares or the underlying stock. An example of this would be buying and selling shares in Microsoft. When you buy shares in Microsoft, you own a part of Microsoft. When Microsoft shares go up by $1, then you make $1 for every share that you have purchased in Microsoft. This flip side is also true. When Microsoft shares drop by $1, you lose $1 for every share you hold in Microsoft. Very Simple.

When you get into trading derivatives, the underlying method of trading is essentially the same. You will pick trades in the same way, exit trades in a very similar way, however, there is one major point that you must understand, and that is of leverage. Essentially, with a derivative product, you can control a much larger position size with the same amount of money. That being said, when a position goes in your favor, you make more money, however, when a position goes against you, you also lose more money. This is where money management rules become paramount. I will post an article giving examples of leverage at a later date.

Now that you understand a little about the types of products out there, how do you choose which one to trade. I cant offer you specific advice on that, but I can give you a little guidance.

I started off trading stocks in my home country, Australia. I feel that when you trade local stocks, you have a better connection with them. So if you are from the United States, go with the local markets. Likewise with anybody from any other country.

Initially, I believe you just have to get a feel for how the stock markets work. With a little experience in placing trades, you will get a feel for how volatile your local markets are, what the potential returns are, how frequent do trading opportunities come along and so on. Over time, you will better understand your preference for risk and your style of trading.

I would describe my style of trading as momentum trading. I dont try to pick highs and pick lows, as I believe that that is a very difficult thing to do. My trades range from a few days to a few months long. Trading is my full time job and I trade from home.

I have met many people who get started in trading but have unrealistic expectations to begin with, and lack the discipline to execute their particular trading plan.

My honest belief is that ALL trading systems work, provided they have been proven and tested. The only thing in the way is the human element. More on this topic in future articles.

Still confused? Still dont know where to start? Well, post a comment and I will do my best to steer you in the right direction!

By Peter Yin, http://www.TradingNewbies.com