A Beginner's Guide To Online Trading

10/11/2017 01:20 am ET Updated Oct 12, 2017

Gone are the days when investing and trading are left to financial experts and business moguls all around the world. Today, almost anyone with a good financial background, sufficient capital, and access to the internet can become a modern trader since online trading is now growing popularity.

Online trading refers to the act of placing your buy and sell orders for financial securities using a brokerage's internet-based established trading platforms. The use of online trading has increased dramatically in the mid- to late-'90s when affordable high-speed computers and internet access were introduced. Every trader who opens a brokerage account has the chance to trade equities, indices, currency pairs, and commodities across all of the major international markets.

Before you open your first brokerage account and work your way to become a successful trader, here are some important points to ponder.

How Online Trading Works

Trading is a more active way of participating in the wide range of financial markets, which aims to surpass the standard, laid-back “buy and hold” investing. As a trader, you buy and sell tradable financial instruments, like stocks, forex pairs, and CFDs in an attempt to profit from short-term fluctuations in the market value of that financial asset.

Long before the internet arrived, trading financial instruments were made through stock brokers in person or via phone. Brokers benefit from a commission for an order placed. The brokerage firm then entered the order in their system, which was linked to exchanges and trading floors. Traditional exchanges work like auctions on an actual trading floor.

Today, traders and investors can now access a full suite of trading products across global markets using their computers and buy and sell financial securities over an online brokerage firm. A trader who uses an online brokerage service is provided with an online trading platform, a computer software program through which traders can place orders for financial products.

Trading platforms act as the hub, enabling investors to buy and sell stocks, bonds, options, futures, CFDs, and currency (forex) pairs. Included in the platform are tools used to track and manage securities, indices, and portfolios as well as research tools, live streaming quotes, and updated news releases from multiple vendors, all of which are necessary for profitable trading.

Recognizing online trading risks and mistakes

Newbie online traders enter the market with high expectations and massive ideas only to realize that making money through online trading isn't a walk in the park. As a trader, you risk money as you speculate on the market value fluctuations. You deal with shorter holding periods which can result in both fundamental and technical analysis mistakes. These mistakes are powerful enough to wipe out your entire profit in an instant.

Some of the catastrophic trading mistakes you can make include:

  • Trading with little preparation and training.
  • Neglecting the importance of recordkeeping
  • Not calculating the risk-reward ratio
  • Anticipating quick, easy, and huge profits
  • Having a very poor timing
  • Failing to place stop-loss orders wisely
  • Getting too emotional and ending up with reckless decisions
  • You don't know when to stop
  • Partnering with a fraudulent online broker

Minimizing online trading risks

Trading smartly keeps you in the game while putting more money in your pockets. While online trading involves the probability of losing money, it also involves the promise of making more money. You just have to know how the market works and how to manage common risks.

1. Invest in the best equipment – If you're serious about your trading game, then you'll need to invest in high-quality tools like below:

  • A Fast Computer
  • Stable Internet Connection
  • Trading platforms & Tools

2. Choose the right online brokerage firmPicking the right broker is as important as picking what financial instruments to trade. Before partnering with a brokerage firm, make sure you investigate your options and ask the following questions:

  • Are they discount brokers or full-service brokers?
  • How good is their background?
  • How about their customer service, accessibility, and site speed?
  • What financial products can you trade with them?
  • Do they have perks and promos?
  • Do they have alternative trading options?
  • What are their perks and promos?
  • Do they have high-minimum balance requirements?
  • Do they charge hefty account fees?

3. Set a stop-loss order wisely – A stop-loss order is used to minimize a trader's loss on each trade in order to preserve capital. It is placed with a broker to sell a security when it reaches a particular price and is designed to reduce your loss on a position in a security when the trades don't go the way you expect.

4. Stick to a reasonable position size – If you're still beginning and uncertain, it's always a safe bet to start small. This works when you have a new trading plan wherein you don't risk a big position size without giving it time to prove itself under certain conditions.

5. Margin and leverage should be used prudently –Trading on a margin allows you to leverage the securities in your account which means you can pay less than the full price for a trade, and thus can enter larger positions. Apart from not betting money you can't afford to lose, you should also be cautious about using money that is not yours. While trading on margin can boost your returns, it's also possible to lose more than you originally invested.

6. Look at online trading as a businessTreating online trading as a serious business is a key to gaining success. You should have a smart strategic plan which specifically lays out what you'll trade, how you'll trade it, how much you expect to make, how much time you're willing to devote, and when to enter and exit a trade.

Before executing that plan, everything should be rigorously researched, tested on historical data and in a live market, and measured at regular intervals. It's also important to determine the right trading style which would best suit your time, expertise, and risk tolerance.

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