Learn How to Trade the Markets

Online trading can be an exciting and lucrative activity if you learn how to do it right. With our in-depth guide, you can kick-start your trading career in any financial market. You’ll learn:

  • What financial markets are, and how they work
  • Which market you should choose, based on your budget and skill levels
  • What steps you must take to succeed in the market

What are Financial Markets?

Before you learn how to trade, it’s important to understand which financial markets you can access. Whilst you may think you know what you want to trade, you may realize that one market is more suitable for you than another. Having an overview of all the financial markets is also beneficial, as they can all affect each other.

Financial markets are not too different from other markets, where you can buy or sell goods and products. Rather than exchanging vegetables and clothing, however, the financial markets focus on the buying and selling of financial assets. A financial asset can be a currency, a commodity, or a security like stocks.

There are many types of financial markets, and they vary in size, liquidity, and accessibility. For traders, however, the three most popular markets are:

  • The Stock Market – Stock markets are where individuals and institutions can buy, sell, and issue shares in a publicly traded company. A stock is a financial security that represents a share of a corporation. The stock market affects the value of companies. If a certain stock is in demand, the company’s net worth will increase. If investors sell a company’s stocks en masse, the company’s net worth will plummet. Stock exchanges exist as electronic marketplaces, which is why they are so popular with traders. You can access the stock market easily with an online broker.
    Learn more about how to trade stocks here
  • The Forex Market – The forex market is a global marketplace for buying and selling currencies. It is decentralized, which means no single country or authority controls it. This market affects exchange rates and the value of currencies. The demand and supply of a nation’s currency affect the exchange rates, as does the nation’s economic and financial situation. Like the stock market, the forex market is electronic. However, unlike other markets, you can trade forex 24 hours a day, five days a week. This unique characteristic makes it very appealing.  
    Learn more about how to trade forex here
  • The Derivatives Market – A derivative is a contract between two or more parties. As the name suggests, these contracts derive their value from the performance of an underlying asset, although neither party owns the asset itself. For instance, a stock derivative contract would base its value on whether a specific stock falls or rises in price. Most online brokers offer access to the derivatives market and allow you to trade popular financial instruments like CFDs (Contracts for Difference), options, and futures.
    Learn more about how to trade CFDs here

How to Choose Which Financial Market to Trade

If you’re a beginner trader, we don’t recommend learning how to trade more than one market at once. Doing so splits your attention and your capital, which can make trading riskier. Instead, you need to choose the market which is best suited to you.

Whilst all markets offer great chances to profit, they all require a certain amount of capital too. Therefore, like most things in life, choosing a market often comes down to how much money you have to spend.

How Much Money Do You Need to Trade?

To make choosing a market as easy as possible, our experts calculated the starting capital for each. Use the summaries below to discover which markets you can afford to trade now, or how much money you need to save to enter your preferred market in the future.

  • Forex – The average minimum deposit to register with a forex broker is around $50 to $200. Our experts, however, recommend starting with at least $500. The general rule in forex is to never risk over 1% of your capital in a single trade. With just $50, you can only risk $0.50, yet with $500 you can risk up to $5 per trade. Whilst both minimum deposit limits result in small trades, with $500 you have the flexibility to place a few trades at once. This allows you to spread your risks and gives you a buffer against unexpected losses.
  • Derivatives – With derivatives, the capital requirement depends on which underlying assets and financial instruments you want to learn how to trade. For instance, as you trade options in 100 share blocks, a $1 option costs $100, plus commissions. To trade several at a time then, we recommend a starting deposit of no less than $1000. If you wish to trade on margin, which is a popular way of maximizing profit potential, you will need at least $2,000 in your account to meet FINRA requirements.
  • Stocks – A decent starting capital for learning how to trade stocks would be around $1,000. This considers the average price of a single stock, all the commission costs, and the expenses of portfolio diversification. If you want to become a day trader, however, the Financial Industry Regulatory Authority (FINRA) in the US requires you to maintain a minimum account balance of $25,000. A day trader is anyone who opens and closes four or more stock positions on the same day, within five days.

Top 3 Things to Consider When Choosing a Market

If you’re not restricted by capital, there are other factors you must consider when choosing a financial market.

  • Familiarity – Always play to your strengths and trade what you know. If you work in technology, for example, trading tech stocks is a smart move. You’re familiar with competing brands and know when new products may disrupt the market. On the other hand, if you work in finance and know an important economic announcement is coming, you can open a relevant currency trading position.
  • Resources – If you’re not familiar with any markets, consider the availability of resources. Does the market you’re interested in publish trading data, or can you turn to news outlets for market updates? Many beginner traders choose the stock market, as publicly traded companies must disclose financial reports that highlight their strengths, weaknesses, opportunities, and threats.
  • Liquidity – Liquidity describes how quickly you can buy and sell an asset quickly, at stable prices. This depends on how many buyers and sellers are in the market. It is crucial to consider a market’s liquidity when learning how to trade, as the speed at which you open and close trades can influence fees and commissions. Forex is the most liquid market in the world, as so many governments, banks, and individuals trade currencies daily. Conversely, stock market liquidity depends on which stocks you want to trade. ‘Large-cap stocks’ (stocks from companies with huge market capitalization amounts) are highly liquid as more people trade them.  
  • Diversity – Even if you know exactly how to trade a particular market, there’s always a risk you may lose your money. To avoid that, you need to diversify your portfolio. Diversification means choosing a range of assets that have different characteristics. Some financial markets are more diverse than others. For instance, the forex market allows you to choose both major and minor currency pairs. Similarly, you can choose small and large company shares within the stock market. The commodities market is less diverse, however, as you can only trade a handful of commodities easily online.

The Equipment and Software You Need to Trade Online

To learn how to trade in any financial market, you need a basic set of tools and software. Whilst you don’t need high-powered machines and super-expensive platforms for a successful trading career, you will need:

  • A Computer or Mobile Device and Internet Connection – Since you will trade the markets online, you need both a decent device and an internet connection. Your device should have enough memory and a quick enough processor to run a trading program without lagging, and your internet connection should be reliable. A slow computer or a dropped connection can cause missed trades or missed price points.
  • A Broker – Your broker will connect you with the markets and facilitate your trades. Brokers also provide you with leverage, risk management features, and tools to help you make more informed trades. Naturally, brokers charge fees for providing these services. To choose a trustworthy broker, you need to check its license, commission levels, and trading features.
  • A Trading Platform – Your broker will also equip you with a fully functional trading platform. Whether this is third-party software or a proprietary platform, it should feature an array of analytical charts, technical indicators, and fast execution speeds. Usually, you can use one platform to trade in a variety of financial markets. MetaTrader 5, for example, allows access to forex, stocks, and CFDs.

When to Trade Online

Maintaining a consistent trading schedule is no less important than trading knowledge or luck. To be profitable, you needn’t continuously trade, but you do need to know at which specific times you have the best chances for success.

Depending on which financial market you want to learn how to trade, here are the hours you should focus on:

  • Stocks – The best time to trade stocks is when the markets open and close. US stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) open at 9:30 a.m. and close at 4 p.m. EST. At the beginning of the trading day, between 9:30 and 11:30 a.m., traders are reacting to all the announcements and events that have occurred the previous night after the closing bell. As that happens, volatility surges, leading to big price move movements and increased profit potential. Volatility ramps up once again in the closing hours of the day as traders are trying to close their positions as quickly as possible.
  • Forex – The best time to trade forex is between 8 a.m. and 11 a.m. as this is when the European and North American trading sessions overlap. There are four main trading sessions (Australian, Asian, European, and North American), yet the European and North American sessions are the most intensive. This is because of the strength and importance of the USD, the GBP, and the EUR. During these periods, you can expect large price movements and high volatility. 
  • Derivatives – When choosing the best time to trade derivatives, keep track of the underlying assets and open new positions accordingly. For example, if you are trading forex CFDs, the most volatile times would be the overlapping trading sessions, while for stocks, it would be at the beginning or the end of the trading day.

How to Trade in 5 Simple Steps

Once you’ve chosen a financial market to learn how to trade, follow these five simple steps to get started:

  1. Open a Trading Account – Online brokers usually offer multiple types of trading accounts to suit all budgets and styles. No matter which financial market you choose, consider the commission/spread levels, the variety of financial instruments, and the platforms/trading tools that come with the account. To register, you will need to provide your name, address, date of birth, employment details, and social security number.
  2. Do Your Homework – Before beginning to trade, learn more about your chosen market. Regardless of whether you’re trading currencies or stocks, you need to know about what drives market prices, what causes high volatility rates, and why market liquidity can change. There’s a wealth of information at your fingertips, whether that’s online or offline, books, articles, videos, or courses. Taking advantage of these materials will help you trade more confidently.
  3. Learn How to Analyze the Markets – Learning how to trade using technical and fundamental analysis is also essential. Both techniques allow you to examine historical price data and predict future movements. Technical analysis uses a set of indicators and charts. Become familiar with them all via your trading platform. Fundamental analysis focuses on macroeconomic and political developments. To get to grips with this, look at how past news articles and company spreadsheets affected asset prices.
  4. Practice Trading – Once you gather sufficient knowledge about market forces and how to conduct your research, it’s time to put this into practice. Most brokers offer flexible demo accounts, which are great for testing your new trading knowledge and see how it works. Once you know how to trade profitably with your demo account, you can start trading with real money.
  5. Trade for Real – To trade for real, you must first deposit with your broker and download a trading platform. Depending on the financial market, once you open a position you need to monitor it carefully and decide when to close it. This set of tasks is only relevant for forex and stock traders, as brokers close futures and options contracts automatically. 

Frequently Asked Questions (FAQs)

When learning how to trade the markets, investing in huge companies like Apple or Microsoft, or trading major currencies like the EUR/USD, can be a safer option than investing in small-time companies or trading exotic currencies. This is because these markets relatively stable and familiar. The more popular the market, the more liquid it will be too. This decreases trading fees and spreads.

To start trading, you must first determine which financial market is best for you. To do this, look at how much capital you need, what times you can trade, and the characteristics of each market. Once you choose a market, you must find a reliable brokerage and set up an account. Focus on demo trading to polish your skills and then, when you’re making frequent profits, switch to live trading.

The short answer is yes, you can open a brokerage account with $100 and place your first trade. That said, we do not recommend doing this as you could wipe out your account in a single trade if the markets move against you. In addition, FINRA regulations require you to have at least $2,000 in your account to trade on margin, and at least $25,000 if you wish to day trade.

To learn how to trade successfully, you first need to become familiar with the financial markets. Read news articles and e-books or take part in webinars and online courses. Once you have some basic knowledge, start learning about trading strategy and analysis. When you feel comfortable, use a demo account to put your knowledge into practice.

Yes, you can teach yourself how to trade through practicing with a demo account. If you don’t have any existing knowledge, however, this is a lengthy and difficult process. To get off to a better start, join an online trading course. These are relatively cheap and save you both time and money in the long run.

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