When it comes to online trading, everyone wants to turn a profit. And yet, some do it more often than others. Here are five tips that might give you a better understanding of online trading.
Online trading is becoming increasingly popular as more and more people realize the relative simplicity of using social trading platforms for investing. While never an easy task, honing your skills as a day-trader is very possible, if you know what you’re doing and understand that there are simple rules you could follow to increase your chances of becoming a successful investor. We’ve gathered a few tips that can make you better at online trading:
1 – Stay informed
The global market is always changing, with stocks, commodities and indices constantly going up and down. In fact, there are so many moving parts, that it is impossible for one person to know all of the different factors that influence the market’s movement (if that were the case – we’d all be rich). However, there are ways to gain a better understanding of which stocks or currencies might go up or down, and one of the main ways is to follow the news.
Reading leading financial publications, dedicated forex and day-trading blogs, and signing up for newsletters are great ways to make sure you’re up to speed on relevant topics, trends, announcements and updates. The more information you have over time – the better your understanding and ability to predict changes in the global markets will be.
Announcements from official sources are particularly important, since they frequently have an effect on the market. Interest rates, job data, oil inventory reports and other stats are all great indicators for where the market is going. To stay posted, try following an economic calendar to make sure you don’t miss anything major.
2 – Determine your style
There are two main approaches to trading: Technical and Fundamental. Simply put: Technical investors follow charts and try to determine recurring trends and movements in the market, then invest accordingly, thinking that the past could be an indication of the future. Fundamental investors on the other hand, try to determine what will happen next by gathering current data on specific companies, markets and currencies.
For example, is we’re discussing the USD/EUR exchange rate, a technical investor would look at the history of the pairing, try to find patterns and see if any of the other factors that existed during a certain fluctuation point exist today. A fundamental investor would wait for an announcement from a central bank, a change in a certain index or any other real-time financial event that could indicate a change in rates.
3 – Manage your risks
There’s always risk when it comes to investing. No investment is foolproof and you should always take precautions to minimize risk. One good way to reduce the risk of losing too much of your funds is setting a stop-loss point. A stop-loss is an order that automatically stops an action you decided upon (buying or selling a stock for instance) if your losses hit a certain mark. This way, with each transaction, you can decide beforehand what’s the maximum amount you’re willing to risk and know that your losses will not amount to more than that.
The same mentality should be applied for gains, and there’s an order called “take-profit” for that. This order is for when you have a certain prediction for a transaction, such as a specific currency going up ten pips against another, but you’re not sure where it’ll go after. This way, the transaction will automatically end when you reach that mark. While it could be tempting to “let it ride” – the take profit order safeguards you from surprise reversals in trends, and should always be considered.
Combining both of the above as a predetermined strategy should be a decision you make with most transactions, and you should stick to your strategy. It is natural to try and cut your losses when you lose, or continue a certain transaction when you win – but the market is volatile. Which is why, if your trading decisions are based on solid information and smart analysis, you should always operate between these two margins, and not be tempted to change strategy mid-way.
The most important piece of advice when it comes to trading is this: Don’t be a gambler. Try not to be emotionally involved. Make your decisions based on calculations and strategy, rather than feelings. True, sometimes “gut feelings” pay off, but more often than not they don’t – which is why “the house always wins” when it comes to gambling.
4 – Diversify your portfolio
This point also has to do with risk management, but it is important enough to be given special attention. Regardless of whether you trade just one type of instrument (currencies, commodities, stocks or indices), you should never put all of your eggs in one basket. Diversity is the name of the game, and since there are numerous options for investments, it could be smart to spread your funds across several transactions.
The logic behind splitting your funds to a number of investments is quite simple. Let’s say that you’re a smart trader, and you only go for low-risk transactions for which you have a pretty solid idea of the outcome. However, low-risk is not “no risk” and when it comes to the global market, there are always surprises. Therefore, if for example you’ve made 10 presumably-good investments, and three or four fail due to unforeseen circumstances, you still have the safety of the other ones who went according to your prediction. Remember: Even the best traders win only about 60% of the time, but with a diverse portfolio, and stop-loss and take-profit orders in place – you could have a better chance of turning a profit.
5 – Copy successful investors
On social trading platforms, such as eToro, you have the option of attaching your funds to an experienced investor’s portfolio. Basically, you choose an investor whose investment style you like, and has a successful track record, and allocate a certain amount of your funds to follow their lead. This way you don’t have to constantly check the status of your transactions and can put your money in the hands of investors who have shown profit in the past. Of course, there are no guarantees in trading, and even the most successful traders have losing streaks – so even when copying an incredibly successful traders you should have a stop-loss in place, and spread-out your portfolio.
You could use eToro’s people discovery tool to find the right investor to copy, and to see other people’s portfolios, trading history and risk rating, and make your decision accordingly. You could also spread your funds over several investors, but always be sure to choose the ones with a lower risk rating. Additionally, you should thoroughly investigate each investor before copying them, paying attention to their style, strategy and make sure they match yours. Some traders go for short-term profits, while others focus on long-term returns, taking into consideration short-term losses in order to achieve long-term gains.
We hope these educational eToro tips are useful for you.
* All trading involves risk. Only risk capital you’re prepared to lose.
* Past performance does not guarantee future results. Trading history presented is less than 5 years and may not suffice as basis for investment decision
* This post is not investment advice.