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The old saying “measure twice, cut once” couldn’t be more applicable. It takes one bad trade to liquidate an account, and one good trade to rule them all.
Top 7 tips for new investors
Our top 7 tips for new investors are:
1. Don’t invest money you cannot afford to lose
2. Define what type of investor you are
3. Choose an investment strategy based on your type
4. Choose the right broker for you
5. Educate yourself and understand the investment environment
6. Don’t be afraid to start small
7. Adapt
Investing Vs Trading
Although similar, and although someone can be both trader and investor, there are fundamental differences between the two. Similar with the word “meat”, that describes both beef and pork. Also “pasta” that describes both spaghetti and tagliatelle. Or “fruit” that describes both apples and pears. They are all inherently different from one another, and so is trading from investing.
Investors buy and hold with long term time frames, they have low risk tolerance, they follow fundamentals since they are looking into the businesses rather than performance, they are passive traders and don’t try to outperform the market. Traders are the exact opposite, since they are in and out quick, they have high risk tolerance, they follow technical indicators, do a lot of work on their analysis and are constantly active.
What is day trading?
Day trading aims to open and close all positions within a day. No positions are to be left open overnight. Daily trading sessions are full of opportunities to enter/exit, and day traders must be well equipped to handle what comes with it.
Day traders use technical analysis, which they consider more important than the fundamentals of the economy (or an individual company), because in their view “markets discount everything”. This means that all fundamentals are already priced in the fluctuations, so the technical indicators can give them all the information they need.
What is risk management?
Losses are an inevitable part of a trader’s life, and how significant they get, can be a deciding factor for staying or quitting. Before taking on any responsibility, one must evaluate the environment, its opportunities as well as threats that come with the task.
Risk management refers to rules and actions taken by traders, and can be separated in two categories. The first is to manage your risk by understanding what investing/trading is all about (types of brokers, the technology, regulation, the level of risk of products offered, the assets themselves and how to analyze them). The second is more technical, and it involves managing your risk by setting up tools in the trading system, to limit potential losses (for example stop-loss).
What is volatility?
Volatility occurs when there is uncertainty in the markets. Most important factors that trigger volatility are economic, political/geopolitical events, fear, greed and any changes in investor’s expectations.
Volatility is mostly measured by standard deviation. This is the standard range prices can deviate from their average price within a year. The higher the standard deviation, the riskier the asset.
Volatility can be measured and tracked by the price beta, the implied volatility and the VIX Index.
What is fundamental analysis?
The study of important financial and economic indicators, both at a company as well as overall economy level. These indicators and financial statements are released to show the health of organizations and economies from various angles.
The goal of fundamental analysis is to find a security’s intrinsic value. This value is the “real value” of the security, that is expected to make a profit from its sale in the future.
What is technical analysis?
Technical analysis is a set of mathematical formulas, that are used to identify trends, momentum, volatility and volume at any given time period.
These mathematical formulas are called Technical Indicators. They are applied to charts (graphical representations of prices), that show the price history of any asset, in periods of a few minutes to many years in the past.
What do charts do?
Charts are a graphical representation of a security’s price. Prices fluctuate with every second and charts record these changes and present them on a graph, for a more visual look.
Technical analysts use these historical prices and the periods to apply technical indicators, spot trends, recognize patterns, and find entry/exit points based on their trading strategy.
What is a demo account?
Demo accounts are replicas of the exact trading platform (software) used to trade the markets. These replicas are loaded with virtual money (just numbers in the balance with no real effect), and traders can use these to test their strategies, the system, the broker’s execution, or if trading really is something they can pursue.
Its important for every trader to use demo accounts, no matter the experience level to test their broker. Think of them like a warmup before a big task (like running a large distance). It will trigger questions for the broker prior to real trading and set the pace for what comes next.
Demo accounts weren’t always around, so since they are available and free of charge, traders should take advantage of them to practice and learn as much as possible.
What is CFD trading?
The acronym CFD stands for Contracts for Difference. CFDs are derivative products, in the sense that they derive their value from an underlying asset.
CFDs are contractual agreements between buyers/sellers and their brokers, to settle the difference between the buying and selling price of the asset, but without owning the actual asset. For example, if a stock is bought at 2 dollars and is sold at 3, the 1 dollar difference is credited in the trader’s account (minus applicable fees). In the opposite scenario, the difference stays with the broker.
CFDs are very risky products due to their use of leverage. The risk of account liquidation due to sudden moves is high, and although there is regulation by authorities in certain jurisdictions, CFDs are offered unregulated in many others. Read more below on how to choose a broker.
What is leverage?
Leverage is the multiplier number, that allows a trader (or an investor) to place larger trades than the funds held in the account. A 1:100 leverage, would mean that for every 1 dollar in the account, the investor can open a 100 dollar trade.
From the example above, the trader is now risking only 1 dollar, but trading with 100. The effect of the position therefore on profits/losses is also multiplied 100 times. So with sudden price fluctuations, the account can get liquidated very quick.
Leveraged products are highly risky/complex instruments and require experience and attention
* We must all be investors who understand that trading involves the risk of loss
“How to trade” guides
Start with the most popular, forex & gold
How to trade forex
How to trade gold
Traders back-test their strategies
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