Jun 12 , 2020
In December 2019, a novel virus was identified in the Chinese city of Wuhan, Hubei province, and started being exported to the rest of the world. On January 30, the World Health Organisation (WHO) declared it a Public Health Emergency of International Concern. On March 11, the body declared it a pandemic.
The virus has led to many countries instituting restricted movements and border controls. All sporting, religious, political, and cultural events were either cancelled or postponed. People were instructed to stay at home. In fact, by the first week of April, about half of the world’s population were staying at home.
Apart from its health implications, the pandemic also caused global economic disruption. Many small businesses closed. Companies started laying off and furloughing their workers. By the end of April in the U.S. alone, over 30 million had filed for unemployment claims.
The pandemic has generated more questions about the future of work. It has caused more people to work from home. Previously, only around 7% of the U.S. workforce had the option to regularly telework. Even, most of those workers who did tend to be the highest-paid.
Hence, to avoid the financial perils that can come with many life uncertainties, such as a disease outbreak on a communal level or a loss of job on a personal one, it is becoming more important than ever to have alternative ways of earning.
Better if those ways can be explored from home. In this regard, trading in financial markets makes a very viable choice.
Financial Trading
What is financial trading? Financial trading is like any other type of trading. It is the buying and selling of financial assets for the purpose of making profits. Those assets include bonds, stocks, derivatives, and currencies. Arguably, stocks and currencies are the most popular of them. Your goal as a financial trader is to buy low and sell high or buy low after selling high.
The Forex market is the financial marketplace where currencies are traded. In April 2019, it hit an average daily trading volume of a whopping $6.6 trillion, making it the largest and most liquid financial market. Forex traders seek to buy and sell currencies in order to profit from the fluctuations in their exchange rates.
Shares of companies are traded in the stock market. When you buy shares, you become a part-owner of a company. Your ownership entitles you to a portion of its earnings and assets. For example, if you own 100 shares of Company XYZ which has 1000 shares outstanding, you become entitled to 0.1% of the company's earnings and assets.
There are two approaches to analysing financial markets. They are fundamental analysis and technical analysis. Either of these approaches or both can serve as the core basis of your trading strategy and plan. While there are controversies about which one is more effective, the basic understanding you will get here will help you to decide the best for you.
Approaches for Analysing Financial Markets
Fundamental Analysis
Fundamental analysis is a method of analysing financial markets by considering certain financial and economic data. The specific data evaluated depends on the particular asset class being traded. For example, before you buy the shares of a company, you should want to take a look at financial ratios such as the Price-earnings (P/E) and debt-equity (D/E), among others.
If it is Forex, you look out for changes, whether positive or negative, in fundamental economic factors such as interest rate, inflation, unemployment rate, and GDP. Changes in these parameters influence the value of currencies and therefore their relative exchange rates.
Technical Analysis
Technical analysis is based on the idea that every information, from the changes in fundamental factors to the psychology of the market, is always already priced into financial assets. As a result, it works on three assumptions: the market discounts everything, price moves in trends, and market patterns tend to repeat themselves.
Technical analysts restrict themselves to the analysis of price movements. Thus, they aim to predict the price movements of financial assets, be it a currency pair or the stock of a company, and then trade in its direction.
Getting Started
As a beginner, getting started as a Forex or stock trader can really be intimidating. However, it does not have to be. The following is a step-by-step guide to help you get started right away.
Step 1: Get an Internet-enabled Device
To trade Forex and stocks, you need an internet-enabled device. This can be a desktop computer or a laptop, a mobile phone or a tablet. It does not matter whether the device's operating system is Windows or Android, Mac or iOs, you will be able to get compatible software for your trading.
Instead, what matters is that the device has a high running speed and substantial internal memory. The market is dynamic. You need to analyse and research. Also, you need your orders to be quickly executed. So, you need speed. Moreover, importantly, the device's design should make it comfortable to use.
Step 2: Choose a Broker
As an individual trader, you cannot access the market yourself. Instead, you need a broker that will serve as the intermediary between you and it. The broker will also help educate you on how trading works, provide research and analysis tools, and execute your trades on your behalf. You will be doing all your trading via your broker's platform so it is very important you make the right choice.
You have to consider factors such as the broker's regulatory status, deposit and withdrawal methods, trading conditions and costs, product coverage, and quality of customer support service. For example, if you are resident in the United States, check if the broker is registered with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA).
Importantly, also, you should seek to know if the broker has a customer support service and how quality it is.
Step 3: Open an Account
Once you have chosen a broker, the next step is to open an account. Most Forex and stock brokers offer different account types in order to meet users' differing needs. For example, a broker can provide multiple account packages that differ on factors such as:
- Required minimum account deposit
- Available trading tools and software
- Deposit and withdrawal timeline, etc.
That is, a broker can require different minimum amounts for its different account types to be opened. It can also make available different trading, research and analysis tools and software for those accounts. Similarly, it can take longer to withdraw with one account type than another.
Nevertheless, the important thing is to choose one that meets your needs.
Step 4: Develop a Strategy
No matter the asset you will be trading, whether stocks or Forex or both, trading, in whatever form, requires a strategy. That is, you need to have rules and conditions that have to be met before you enter the market at any time. A strategy will serve as the tool you use in approaching the market.
Having one will ensure that you are focused irrespective of the noise of the market or other traders. As long as the market does not meet your entry and exit conditions, you will always stay away from it. Your strategy can be based either on fundamental analysis or technical analysis or both. Just take your time to develop one.
Step 5: Make a Deposit
Next, you should fund your account. While many retail traders now require very little capital upfront, with many requiring as low as $10, you should not expect to be able to make huge gains with small deposits. Although starting with a small amount can help you manage trading-associated risks, it can also limit your profit potential.
Before you deposit, you might want to try out the broker's demo account first. This is a type of account that enables you to trade in a simulated environment based on actual market conditions. A demo account helps traders to gain the knowledge and experience they need to trade in real accounts with confidence.
When you finally deposit, the deposited amount will serve as the margin. It is this amount that will be increased based on whatever leverage ratio you choose. Brokers offer different deposit methods and leverage ratios. The important thing is that you choose the method and ratio that are most convenient for you.
Step 6: Start Trading!
Now, you can start trading. There are two main challenges you might face at this stage: making unnecessary mistakes and not knowing when to enter and exit the market. These challenges stem from unfamiliarity with trading platforms and lack of a trading plan. Hence, this is where your demo trading experience and trading strategy will come in to help.
However, know that no strategy works all the time. For example, technical analysis based strategies tend to be ineffective during economic data releases. At those times, the market is characterised by high volatility which can make it unpredictable to trade. In such circumstances, the best and simplest thing to do is to stay away from the market or just trade in the direction of the news.
cember 2019, a novel virus was identified in the Chinese city of Wuhan, Hubei province, and started being exported to the rest of the world. On January 30, the World Health Organisation (WHO) declared it a Public Health Emergency of International Concern. On March 11, the body declared it a pandemic.
The virus has led to many countries instituting restricted movements and border controls. All sporting, religious, political, and cultural events were either cancelled or postponed. People were instructed to stay at home. In fact, by the first week of April, about half of the world’s population were staying at home.
Apart from its health implications, the pandemic also caused global economic disruption. Many small businesses closed. Companies started laying off and furloughing their workers. By the end of April in the U.S. alone, over 30 million had filed for unemployment claims.
The pandemic has generated more questions about the future of work. It has caused more people to work from home. Previously, only around 7% of the U.S. workforce had the option to work from home. Even, most of those workers who did tend to be the highest-paid.
Hence, to avoid the financial perils that can come with many life uncertainties, such as a disease outbreak on a communal level or a loss of job on a personal one, it is becoming more important than ever to have alternative ways of earning.
Better if those ways can be explored from home. In this regard, trading in financial markets makes a very viable choice.
Financial Trading
What is financial trading? Financial trading is like any other type of trading. It is the buying and selling of financial assets for the purpose of making profits. Those assets include bonds, stocks, derivatives, and currencies. Arguably, stocks and currencies are the most popular of them. Your goal as a financial trader is to buy low and sell high or buy low after selling high.
The Forex market is the financial marketplace where currencies are traded. In April 2019, it hit an average daily trading volume of a whopping $6.6 trillion, making it the largest and most liquid financial market. Forex traders seek to buy and sell currencies in order to profit from the fluctuations in their exchange rates.
Shares of companies are traded in the stock market. When you buy shares, you become a part-owner of a company. Your ownership entitles you to a portion of its earnings and assets. For example, if you own 100 shares of Company XYZ which has 1000 shares outstanding, you become entitled to 0.1% of the company's earnings and assets.
There are two approaches to analyzing financial markets. They are fundamental analysis and technical analysis. Either of these approaches or both can serve as the core basis of your trading strategy and plan. While there are controversies about which one is more effective, the basic understanding you will get here will help you to decide the best for you.
Approaches for Analyzing Financial Markets
Fundamental Analysis
Fundamental analysis is a method of analyzing financial markets by considering certain financial and economic data. The specific data evaluated depends on the particular asset class being traded. For example, before you buy the shares of a company, you should want to take a look at financial ratios such as the Price-earnings (P/E) and debt-equity (D/E), among others.
If it is Forex, you look out for changes, whether positive or negative, in fundamental economic factors such as interest rate, inflation, unemployment rate, and GDP. Changes in these parameters influence the value of currencies and therefore their relative exchange rates.
Technical Analysis
Technical analysis is based on the idea that every information, from the changes in fundamental factors to the psychology of the market, is always already priced into financial assets. As a result, it works on three assumptions: the market discounts everything, price moves in trends, and market patterns tend to repeat themselves.
Technical analysts restrict themselves to the analysis of price movements. Thus, they aim to predict the price movements of financial assets, be it a currency pair or the stock of a company, and then trade in its direction.
Getting Started
As a beginner, getting started as a Forex or stock trader can really be intimidating. However, it does not have to be. The following is a step-by-step guide to help you get started right away.
Step 1: Get an Internet-enabled Device
To trade Forex and stocks, you need an internet-enabled device. This can be a desktop computer or a laptop, a mobile phone or a tablet. It does not matter whether the device's operating system is Windows or Android, Mac or iOS, you will be able to get compatible software for your trading.
Instead, what matters is that the device has a high running speed and substantial internal memory. The market is dynamic. You need to analyse and research. Also, you need your orders to be quickly executed. So, you need speed. Moreover, importantly, the device's design should make it comfortable to use.
Step 2: Choose a Broker
As an individual trader, you cannot access the market yourself. Instead, you need a broker that will serve as the intermediary between you and it. The broker will also help educate you on how trading works, provide research and analysis tools, and execute your trades on your behalf. You will be doing all your trading via your broker's platform so it is very important you make the right choice.
You have to consider factors such as the broker's regulatory status, deposit and withdrawal methods, trading conditions and costs, product coverage, and quality of customer support service. For example, if you are resident in the United States, check if the broker is registered with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association (NFA).
Importantly, also, you should seek to know if the broker has a customer support service and how quality it is.
Step 3: Open an Account
Once you have chosen a broker, the next step is to open an account. Most Forex and stock brokers offer different account types in order to meet users' differing needs. For example, a broker can provide multiple account packages that differ on factors such as:
- Required minimum account deposit
- Available trading tools and software
- Deposit and withdrawal timeline, etc.
That is, a broker can require different minimum amounts for its different account types to be opened. It can also make available different trading, research and analysis tools and software for those accounts. Similarly, it can take longer to withdraw with one account type than another.
Nevertheless, the important thing is to choose one that meets your needs.
Step 4: Develop a Strategy
No matter the asset you will be trading, whether stocks or Forex or both, trading, in whatever form, requires a strategy. That is, you need to have rules and conditions that have to be met before you enter the market at any time. A strategy will serve as the tool you use in approaching the market.
Having one will ensure that you are focused irrespective of the noise of the market or other traders. As long as the market does not meet your entry and exit conditions, you will always stay away from it. Your strategy can be based either on fundamental analysis or technical analysis or both. Just take your time to develop one.
Step 5: Make a Deposit
Next, you should fund your account. While many retail traders now require very little capital upfront, with many requiring as low as $10, you should not expect to be able to make huge gains with small deposits. Although starting with a small amount can help you manage trading-associated risks, it can also limit your profit potential.
Before you deposit, you might want to try out the broker's demo account first. This is a type of account that enables you to trade in a simulated environment based on actual market conditions. A demo account helps traders to gain the knowledge and experience they need to trade in real accounts with confidence.
When you finally deposit, the deposited amount will serve as the margin. It is this amount that will be increased based on whatever leverage ratio you choose. Brokers offer different deposit methods and leverage ratios. The important thing is that you choose the method and ratio that are most convenient for you.
Step 6: Start Trading!
Now, you can start trading. There are two main challenges you might face at this stage: making unnecessary mistakes and not knowing when to enter and exit the market. These challenges stem from unfamiliarity with trading platforms and lack of a trading plan. Hence, this is where your demo trading experience and trading strategy will come in to help.
However, know that no strategy works all the time. For example, technical analysis based strategies tend to be ineffective during economic data releases. At those times, the market is characterized by high volatility which can make it unpredictable to trade. In such circumstances, the best and simplest thing to do is to stay away from the market or just trade in the direction of the news.