Trading on your mind?

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

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.

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.

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).

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.

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.

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.

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.

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.

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 and is sold at $3, the $1 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.

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 in the account, the investor can open a $100 trade.

From the example above, the trader is now risking only $1, 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

Every financial advisor will tell you to diversify your investments which is a complex matter because it requires a plan, and a good understanding of the characteristics of the market itself.

The plan takes into consideration the start-up capital, the time zone, the liquidity and volatility of the markets, costs/fees, and of course being open to explore more options.

Adaptability is key because one market that performs well today, might not perform tomorrow. Understanding the characteristics of each market as well as its correlation with other markets, is the founding stone on which you build your trading strategies.

A balanced portfolio, is one that meets the risk Vs reward ratio of the investor’s strategy.

An investor looking for high returns has a high-risk appetite and looks for growth rather than value, equities rather than bonds, active funds, some crypto exposure, while commodities are out of the question.

An investor looking for value, has a low risk appetite and is more passive, looks for value stocks, passive funds, income yielding instruments and buy/hold strategies.

A balanced portfolio is one that looks to reduce risk by decreasing volatility, while at the same time generating the acceptable returns the investor wants. To meet the above expectations, rebalancing a portfolio is a constant battle.

Absolutely. Regulation is a trader’s only weapon against fraud, manipulation and bad practices. Regulated brokers adhere to stringent rules that safeguard investors interests and penalize the ones who don’t.

The strongest the regulator, the more strict trading conditions become for a trader. It is therefore common practice for traders to look for brokers that are regulated in offshore jurisdictions in order to get the conditions required. Check our jurisdictions page for more information on licenses, as well as our list of regulators for each jurisdiction to find out who regulates in your region.

Caution must always prevail and if something seems to good to be true, it probably is. Our infographics on this page are a good starting point on what to look for in a broker

There are four main types of brokers. Its important to learn to differentiate them, so that your trading journey doesn’t come to an end for reasons other than bad trades.

The types are Market Maker (MM), Straight Through Process (STP), STP to an Electronic Communication Network (STP-ECN) and Direct Market Access (DMA). If not disclosed, a trader can ask the broker for more information on LPs, check the transaction speed through the journal (on any Metaquotes platform) or request the order book summary with details on transactions.

A Market Maker is a dealer in securities who is a trader’s constant counterpart (buys/sells at your requested prices) at all times. The operation model is known as DD or Dealing Desk model. A Market Maker’s profit is derived mainly from their Risk Management (how they offset their risk). A very aggressive market maker is therefore in conflict with the interest of the clients/traders, hence the needed regulation. Unregulated brokers as well as some offshore regulated brokers work with really aggressive models, so caution is always required.

An STP broker, operates a no-dealing-desk model (NDD), and directly connects a trader’s order with a liquidity provider (or more than one). The broker therefore acts only as broker (not as a counterpart) and profits from the spreads of the transactions. In many cases, one of the liquidity providers can be an investment firm that belongs to the same group, making the operation no different than a MM. Since trades are matched through various LPs rather than the open market, there can be inconsistent speed and processing.

An STP-ECN broker, also operates a no-dealing-desk model (NDD), but instead of connecting orders with liquidity providers, they connect them with the open market (also known as the Interbank Market). All trades are anonymous and pricing can get more expensive than MM and STP. Since the trades enter the open market, spreads can not be added to the Bid/Ask. Instead a commission is charged, that can add up significantly with high volumes of transactions.

A Direct Market Access (DMA) broker, is the third type of NDD broker. They also provide access to the Interbank Market but in a more limited manner. While ECN trades are anonymous, DMA trading is not. Depth of Market (DoM) is also not as detailed as with ECN. DMA is in between STP and ECN brokers in terms of characteristics.

1. The Day Trader – Trades intraday (see “What is day trading above”). Positions are opened and closed within a day’s session and no positions are to be left open overnight.

2. The Swing Trader – Trades over a few days or weeks. The goal is short-to-medium term gains by taking advantage of swings and ranges (usually between support and resistance levels). Technical analysis might not be enough, so a broader fundamental outlook is required for the bigger picture.

3. The Technical Trader, trades based on technical analysis of price charts. Extensive use of chart patterns like head and shoulders, ascending/ descending triangles, as well as technical indicators from hundreds available to define a strategy.

4. The Fundamental Trader – Long term trading associated with buy and hold rather than short term profit from multiple transactions. A broader look into the economy or a company’s fundamentals in the case of stock trading. The aim is to quantify and qualify through financial ratios and economic indicators.

5. The Long Term trader (or position investor) can place trades that last from a few weeks to many years (think Warren Buffet). They hold onto a position over an extended period of time after identifying a trend that will take a while to materialize into profits.

6. If we were to become very specific, we could identify other categories like fixed income traders, arbitrageurs, scalpers, momentum traders, price action traders, contrarians, algorithmic traders, and the list goes on.

A trader’s emotions run in cycles, just like anything else in life. Every trader has been caught up in losing trades – some bigger than others – and felt the despair that comes with it, the panic when a trade loses more, the optimism when it balances out, the hope that it will make more and the greed of wanting even more.

Keeping calm during trades but losing it after, puts the trader in psychological states that are unfit for the next transactions to be made. Trading is not to entertain one’s self. Not realizing it early, is a recipe for disaster.

Margin is the collateral required (locked) by the broker to open a transaction. Margin requirements are set in the Key Information Documents of any broker that set the parameters of every financial instrument offered by the broker. Leveraged products multiply the margin by the so called “leverage” that allows a trader to get in the market with a larger amount.

A margin call is a tool that notifies you that your account is reaching a critical threshold. Its imperative to take action immediately by liquidating some open positions to free some margin, or depositing additional funds to satisfy the margin requirements. In the event that no action is taken, the danger of forced liquidation (stop out) becomes a reality.

A stop out level, is the critical level mentioned above where a position (or more) are liquidated automatically by the system. When there is no more margin available to sustain the positions, the account is liquidated to avoid further loss.

Just like with the interest payment on rolling over a debt, same goes with an FX position that gets rolled over to the next day. An interest payment will be associated with it. The good news is that depending on the trade position, this payment can be paid or received.

A forex trade involves two currencies and their interest rates. Buying the currency with the lowest interest rate and selling the one with the highest, will result in a negative swap. And vice versa.

There are 4 major components to remember when looking at rollovers.
• The trade size
• The price we buy or sell
• The long interest rate
• The short interest rate

Rollover calculation
• (Trade size * long interest) / 365 days = long rate
• (Trade size * short interest) / 365 days = short rate
• Rollover fee = long and short rate differential

A Stop-Loss is a limit you place on your position, that lets the system know the maximum risk you’re willing to take. The system then automatically closes your trade.

With a trailing stop, we set our stop-loss at a fixed percentage or number of pips below the current price that we want our position to close. By trailing, it means that the Stop-Loss moves with the current price and recalculates the level at any given point.

A Take-Profit is a limit you place on your position, that lets the system know the maximum profit you’re ok to take and closes your trade automatically.

Pending orders are queued orders that only execute when the market reaches predetermined conditions.

Buy Limit: The current price level is higher than the value of the placed order. Orders of this type are usually placed in anticipation that the currency price, having fallen to a certain level, will increase.

Buy Stop: The current price level is lower than the value of the placed order. Orders of this type are usually placed in anticipation that the currency price, having reached a certain level, will keep on increasing;

Sell Limit: The current price level is lower than the value of the placed order. Orders of this type are usually placed in anticipation that the currency price, having increased to a certain level, will fall

Sell Stop: The current price level is higher than the value of the placed order. Orders of this type are usually placed in anticipation that the currency price, having reached a certain level, will keep on falling.