How does trading work?
Trading involves buying and selling an asset of your choice – be it indices, stocks, currencies or commodities – without ever owning it. Trader is therefore equivalent to speculating on price variations, upwards or downwards, on one of these assets, also called “underlying asset”.
To trade, traders use so-called CFDs (contracts for difference). Within trading there are two main positions:
- the buyer: the one who estimates that the price of the underlying will increase;
- the seller: the one who believes that the price of the underlying will fall.
When the trader’s prediction is correct, he earns a profit. On the contrary, when he is wrong, he suffers a loss.
Know the risks associated with trading and know how to manage them
Before starting to trade, it is important to understand the risks and take the necessary measures to limit them, or at worst, know how to manage them.
What are the risks of trading?
CFDs are what are known as leveraged financial products: when you bet on an asset, you pay only a fraction of its real cost. On the other hand, when suffering a loss, the latter is based on the position obtained and can greatly exceed the initial deposit amount. In the event of a bad estimate, the financial losses can therefore be colossal.
Risk management tools
Today, to limit the risks associated with starting trading, many individuals register on a trading platform that has a support option or even a trading robot that is able to measure the risks of each operation. These platforms usually have risk management tools. There are three primary ones:
- stop-loss orders: which automatically close the trader’s position when the market does not move in his favor;
- guaranteed stops: which provide total protection and allow the trader to close his position at the indicated price regardless of the market situation;
- price alerts: which allow the trader to follow market activities in real time through notifications or emails.
Trading platforms and training opportunities
In recent years, online trading platforms have proliferated on the Internet. These offer a range of tools and resources to new and experienced traders so they can trade easily 24/7, wherever they are. They provide access to various charts, technical indicators, news feeds, webinars, etc., to learn how to trade or to strengthen your skills.
Most trading platforms also offer the opportunity to practice via a free “demo” account, to test your trading skills without taking any risk. They allow you to familiarize yourself with the environment and its tools using virtual means and gain enough confidence to really get started.
Trading can be a rewarding experience provided you have a solid background and are aware of the risks involved. Before starting, it is important to do thorough research, learn from experienced people and start with modest investments. Therefore, it may be worth it to enter the trade.