How to trade safely
Starting something new is exciting, whether it’s a career, a hobby or developing a different skill. But it is also a challenge. We can all feel a little bit apprehensive as we try out something for the first time.
So, before we embark on anything new, it’s a good idea to do some research. Obviously, we already have an interest in what we’re looking to engage in, but will it be suitable for us? If we decide that it is, we can then put some effort into making our experience as enjoyable and beneficial as possible.
It’s no different when you start out trading. Time spent researching and building up an understanding of the challenges ahead does, without doubt, increase the likelihood of success. But as with everything, we can’t expect to suddenly become an expert in every financial market, so we shouldn’t even try. Just like choosing to learn a new language, pick the one that’s of most interest to you and put your effort into mastering that.
When you begin your trading journey it’s important to adopt the same approach. Think about the markets you’re most interested in. This could be a stock index like the S&P 500, a currency pair like the British pound against the US dollar or maybe the price of oil. What are you going to enjoy reading about and studying? And most importantly, what’s your attitude to taking a risk?
That last point is vital to consider. Financial markets aren’t all the same. Some are more volatile than others. If you’re unaware of how quickly some of these markets can, and do, move, you are putting yourself at great risk of losing money!
Trading a market that could move 500 points in a very short period sounds exciting. The thoughts of the potential profit you could make if you do the right trade is very appealing. But would you be prepared to accept a sudden loss if things go wrong?
So where to start? Think about the type of market you’re most interested in. Foreign exchange, stock indices, and commodities are the most popular with non-professional traders. They are also the most actively traded around the world. This means there is a huge volume of news about them, together with guidance from experts about how to trade them. Don’t become too concerned about which method of trading to use. We all learn new skills in different ways and choose tools that are most suitable for us. There is no right or wrong answer here and there most definitely isn’t a foolproof trading system. The right way to trade is what is right for you, not for someone else.
Once you’ve decided which type of market interests you most, drill down further. What are the specific markets that you’d like to trade? If you’re looking at Foreign Exchange, go further with your research. Do you want to trade the US dollar against other major currencies like the British pound, euro or Japanese yen, or are you looking at something more exotic? If stock indices are for you, is it US indices like the Dow, S&P 500 or NASDAQ that interests you, or the German DAX, UK FTSE100 or Japanese Nikkei?
Find the market that is right for you and really immerse yourself in it. Work to understand every element, from the basics of when the market is open to the historic volatility. Also, what are the economic and political news releases that could affect the price and how does this market correlate with other ones? For instance, consider how moves in the US dollar relate to the price of gold.
Work to fully understand, appreciate and respect the market you’re interested in. Only then should you be willing to risk your own money and begin trading it.