Definition of trading and how it works

Trading is an activity that more and more individuals are interested in, as they wish to invest in the markets independently. However, before you start this activity, you need to know what it really consists of and how to practice it in the best conditions. We therefore suggest that you discover here what trading is and how this type of investment works.  

77% of retail CFD accounts lose money. You should consider whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500
Definition of trading and how it works

Trading: definition and global functioning :

Trading is an investment activity in the financial markets aimed at buying assets such as stocks, indices, currencies or commodities or crypto-currencies, with the aim of selling them at a better price later and making a profit on the price difference.

Trading horizons vary depending on the trader's strategy and can be short, medium or long term. It is therefore possible to trade within a day, a week or several months.

Trading is therefore a high risk activity and will not be suitable for all investor profiles. This is why it is necessary to have a good understanding of the elements that concern the functioning of the stock and financial market such as :

 

What computer equipment is needed to trade?

Trading is an activity that actually requires very little equipment. You don't need a high-end, expensive computer to get started. All you need is a computer connected to the Internet with potentially a second monitor to have all the comfort you need to trade.

This basic equipment will be useful for carrying out analyses of the various assets in which you invest and for placing your orders on the market. Therefore, if you are not yet equipped with this material, a budget of 400 to 500 euros for the purchase of a powerful computer and about 200 euros for the second screen. Trading software works on all devices, even basic ones.

 

How do you get started in trading as a beginner?

In order to start a trading activity, it is also necessary to practice with a demo account first. Of course, this step comes after the theoretical training step that you need to take to make sure you understand how trading works.

This practice account will allow you to test your strategies and learn how to use an online trading platform. Remember that experience is the key to becoming an effective trader. You need to learn how to use trading software such as ProRealTime or Metatrader.

How long you can use the demo account before moving on to a live account will depend on what you have learned and how much time you spend training. Some traders manage to get to grips with the tested platform in a few weeks, while others require several months of training.

Depending on your strategy, aim for a goal that is achievable. This can be as little as 5% or as much as 10% or 20% and only move into real investment mode if you feel you can.

If you want to learn faster, you can also help yourself with online training courses that are offered by brokers and dealers in the market. Some of these courses are free and presented as tutorials or live, and others are paid and customised courses.

 

How much capital is needed for trading?

The capital you invest in trading will have a strong influence on your ability to become profitable. If your capital is too low, you may not be able to trade at all, as you will often suffer capital losses when placing your first orders. For example, with a capital of less than 1,000 euros, you will have little chance of succeeding in trading.

It is indeed useless to hope to double your starting capital by investing only a small sum such as a few hundred euros because it is unlikely, even if you are a very good trader, to succeed in generating a 100% gain.

Accept the fact that you will lose more than you win at the beginning and that even with small orders your capital, if it is too small, can melt away like snow in a few months.

Finally, even if you invest a minimum of 1,000 euros, you should apply good management of your capital by limiting the risks. The most experienced traders do not bet more than 1 to 2% of their capital per trade. This technique will allow you to sustain more losses in a row without your account going to zero.

 

Assets to trade in:

Trading is an activity that involves different asset ranges.

The most popular of these assets are currencies, or the exchange rates of currencies between them, which involves trading on Forex or trading stock indices such as the CAC 40 or DAX 30 which is done with derivatives such as CFDs.

Of course, you can also trade in a variety of other assets such as stocks, commodities and crypto-currencies.

The choice of assets to trade depends mainly on your investor profile and your risk tolerance. An investor who is looking for a large and fast return will choose the most volatile but also the riskiest assets. A more cautious investor will favour less volatile and less risky assets with a longer-term strategy. Stock market shares are often less volatile but their daily return will also be lower and will rarely exceed 2% per day.

 

Obtaining successful buy and sell signals in trading:

In order to trade intelligently and sensibly, it is necessary to look for bullish or bearish signals in the assets under consideration by conducting analysis.

The main analysis used in trading is technical and chart analysis. You need to know the main chart patterns and how to interpret them in order to try to find out how the price of the asset may move, how volatile the market is or how strong a trend is. Technical analysis is of course not an exact science and will not allow you to predict with certainty how the price of a security will move.

The second analysis that you can also use to obtain buy or sell signals is fundamental analysis. This analysis is based on the study of news and events that will have an influence on the share concerned. In the case of a stock market share, this may include earnings releases or significant news events.

It is also ideal to mix these two types of analysis in order to maximise the relevance of the signals obtained. But once again, remember that there is no such thing as zero risk and that the price of a stock can change at any time.

 

Strategies to be implemented in trading:

A good strategy is essential for successful trading. To find the right strategy you may need to test several strategies and look back on your mistakes to learn how not to repeat them.

In the same way, in order to try to make interesting gains, you should follow the times when the market is most volatile. If you don't want to take any risks, you should follow the times when the market is calmer.

An interesting method to implement is to keep a trading diary which will allow you to note your strategies, the results of these strategies as well as your areas of improvement and your money management.

 

Understanding the risks of trading:

Although exciting, trading is also known to be risky. That's why it's best not to bet a large amount of your capital on every trade.

Risk management is about preserving your capital as much as possible and limiting your exposure to risk. Professional traders never bet more than 1 to 2% of their capital on a trade.

It is also safer to focus on a long-term strategy with monthly, weekly or fortnightly earnings targets rather than more volatile strategies such as day trading.

To manage your risk, you should also use stop loss and stop loss orders. The latter will be triggered at the right moment to allow you to limit losses in the event of an inverse trend to that of your strategy. These are stop loss and take profit orders.

 

Choosing a broker for online trading:

Finally, if you want to start trading online, you will need to choose an intermediary or online broker. The choice of intermediary is crucial if you want to implement an effective strategy.

The first piece of advice is of course to choose a broker that is approved by the financial authorities. There are indeed unsavoury or fraudulent brokers.

Other things to look out for when choosing your broker include the fees or spreads charged by each one, as well as the assets offered. Some brokers specialise in a single type of asset, while others offer a wide variety of assets.

Other elements to consider are of course the trading platform offered and the various tools and features offered such as technical analysis tools, financial reviews or chart customisation.

Finally, take the time to check out user reviews of a particular platform and the different types of account you can open, the minimum deposit amounts as well as the withdrawal options and the currencies and payment methods accepted.

Frequently Asked Questions

Is trading a profitable business?

Trading can of course be a profitable activity if it is based on a solid strategy exercised with care and attention. It is indeed necessary to implement a long-term investment method based on accurate market analysis, deepening your knowledge as you go along and good money management. Most of the time, however, a trader who is just starting out is not very profitable and can lose part of his capital.

Can you make a living from trading?

Making a living from trading is still possible, but only a small proportion of individual traders do so. Indeed, to generate a stable monthly income from this activity, it is necessary to have a great deal of experience in investing in the markets. But that is not all. It is also necessary to have enough starting capital to generate a monthly income.

Is trading a legal activity?

Trading is of course a legal activity as it can be carried out by individuals from many countries. It is also a regulated activity and brokers must meet certain obligations in terms of security of funds invested and reliability of service. Depending on the country, certain trading practices may be prohibited or restricted, such as short selling or the use of excessive leverage, in order to limit risks.

77% of retail CFD accounts lose money. You should consider whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500