Forex vs Stocks vs Options Steps To Get Started
Forex, stocks, and options all have their advantages and disadvantages. Why you want to trade one instead of the other depend on your personality and trading style. The difference between how you trade forex and stocks is most often very small.
Now let’s look at a few steps you can take to get started trading.
The foreign exchange market is the venue for transacting different currencies. Each country has its own currency and it is the role of the forex market to provide the venue for trading. For example, a businessperson in the United States of America needs to import a particular product from France. He needs to exchange his US dollars to euros to be able to pay the French supplier. If an American wants to travel to the United Kingdom, he needs to convert his US dollars to UK pounds at the present exchange rate.
The forex market is the most liquid and the largest financial market because individuals and companies need to exchange currencies. However, there is no central forex market for foreign currency trading. Usually, trading occurs over-the-counter electronically. The forex market is open daily for five and a half days in a week. The market is in major financial centers like New York, London, Zurich, Tokyo, Hong Kong, Frankfurt, Paris, Sydney, and Singapore.
Step 1. Learn How to Trade Forex
A currency trader must understand some important terms like forex quote, pips, and spread. A forex quote of EUR/USD 1.0325 BUY /1.0315 SELL means that it is a trade involving US dollar for Euro. A “1.0325 BUY” means that a trader can buy 1.0325 US dollars for a euro while a “1.0315 SELL” means that he can sell 1.0315 US dollars for 1 euro.
A “pip” is a unit of profit. It is the smallest increment of a currency pair. For example, the EUR/USD pair has a “pip” of 1/10,000th, which applies to all other pairs except those pairs involving the Japanese yen. The “pip” for the yen is 1/100th. The spread, on the other hand, is the difference between the buying price and the selling price. The forex broker can change the spread so that he can make a profit. The wider the spread, the more profit a broker has. For a forex trader, he has to ensure that he recovers the spread so that his trade becomes profitable.
Impulsivity has no place in forex trading. You have to make your own research before you make trading decisions. You must understand technical analysis because the market is a very technical one. You must keep track of international news because events affect the price of currencies. You have to ensure that you have a solid foundation in currencies trading by reading daily technical and fundamental developments in the market. You can take advantage of various research websites that pertain to foreign currencies.
A good forex trader knows how to sort out trading signals and systems, which generally fall into three categories, namely, fundamental, trend, or range. A fundamental system is rare. More often than not, large banks and hedge funds use it for long term currency trading. For an individual trader, he can use either range or trend system.
Step 2. Practice Forex Trading
In forex trading, it is important for the new trader to practice. There are online forex brokers who offer practice accounts. You can try trading foreign currencies using this account without fear of losing your hard-earned money. You can practice your trading strategies for a few days before opening another practice account. However, before using it, you must first know some basic trading strategies so that you can make the most out of the practice account.
Step 3. Start Small
In forex trading, it is important to start small. New forex traders can lose a lot of money if they are not careful. After practicing for months, a new trader must choose among the trading strategies that he tried. He must choose the one that he knows best so that he can avoid losing a lot of money.
A wise tip is to invest only the amount of money that you can afford to lose. You need to choose the best broker by checking reputable review sites or making a comparison list. You can open a micro account and ensure that you stick to a particular trading strategy. You must know yourself to avoid succumbing to fear or greed when trading.
Choosing a good broker is important because you have to make sure that your money is safe if the broker declares bankruptcy. You must search for a market maker that is present in at least two major countries and regulated by government authorities. In addition, the forex broker must make available more resources. His trading servers and platforms must be stable and will not crash any time. This market maker must employ many employees so that you can easily avail of customer service as needed.
These are essential steps you should begin with when you are a newbie trader. The reason why you trade should be to make money, and achieve financial freedom, wich should be in everybody’s interest.
What Is Stock Trading?
Stock trading often occurs on an exchange, which is a venue for buyers and sellers to transact a particular stock at an agreed price. A stock exchange can either be in a physical or virtual location. A physical stock exchange has a trading floor where stock trading occurs. There is a lot of waving, signaling and yelling to each trader on the floor. A virtual stock exchange is a computer network where stock trading occurs electronically.
The stock market facilitates the security transactions between buyers and sellers. It reduces investing risks because each stock trader does not need to search around the neighborhood for a particular stock he can buy. A stock market links both parties to transact a certain stock. A primary stock market is the venue where an initial public offering (IPO) offers the stock for the first time. A secondary stock market is the venue where investors can buy or sell stocks freely after the IPO.
Step 1. Exercise Due Diligence In Selecting Stocks
You need to understand fundamental analysis, which is a technique that you can use to analyze the company’s financial performance. By checking the public statements and financial reports of a business, you can easily make trading decisions. You need to understand financial reports like income statements and balance sheets. You also need to follow news reports about the company and the general economy as well. You can easily find information online.
You also need to understand technical analysis, which is a process of recognizing patterns in order to predict the future movement of a stock price. You can use the information to make either buying or selling decisions. A wise trader will use fundamental analysis in identifying a possible stock investment and technical analysis in deciding the timing of stock purchase.
You also need to make a thorough research on the company. You have to learn about its management and competition. This way, you can easily evaluate if the company is stable or not. You will know if your investment will generate money over the long term.
Step 2. Select A Good Broker
You must find a good broker to help you become successful in stock trading. You can interview online brokers so that you do not have to rely on unverified tips. You can ask about pricing details and other profitable investment alternatives. You have to make sure that the brokerage firm provides good customer service and educational resources for your research. Lastly, you have to learn about the security features of the online trading platform.
If you are a new trader, you must learn about brokerage tools that you can use in trading stocks. Since you are still new to the investment, you may require more services from your broker. You may seek personal trading advice. However, you have to pay a higher fee for additional services. The fee is worth it because you need to learn about stock trading. Some brokerage firms also offer tools and advice free of charge. However, you can expect that such help is not as extensive as a paid advice.
Once you have acquired trading experience, you can shift to a discount service, which is a broker service that does not offer advice. You can make your own research and trading decision. Actually, even if you are still a new trader, if you have the aptitude to learn by yourself, you can avail of the services of a discount broker, which is cheaper than the other types of broker.
Step 3. Learn How To Trade Stocks
Before you can trade stocks in real time, you can avail of an online stock simulator, which most stock brokers offer. You can practice your trading strategies and learn more about stocks without losing real money.
In trading stocks, you need to determine how much money you want to invest. You can start with a low amount then build up your capital as you gain more experience in trading. One rule in stock trading: Invest only what you can afford to lose. You can reinvest your profits so that your portfolio will grow significantly over time.
You must also learn to diversify your investments because stock trading is not a reliable source of income. It is possible to earn money today yet lose more money the following day. Thus, by learning to diversify the portfolio, you can spread out your risk among the various types of investment products. Furthermore, you need to learn to invest in various industries so that a gain in one industry can offset the loss in another.
Trading stocks is like a job. You need to allot time for research. You must update yourself with the latest financial news. If you do not have time for research, you can invest your money in exchange-traded funds instead. You can also pay for the services of a professional broker.
A good stock trader has a trading plan. It is important to have solid trading strategies and make an effort to make good decisions. You should know how to time your buying decisions and keep a limit on the amount of your exposure. You know how to use the various trading strategies at the right time.
You also have to know when to buy a stock. You should use technical analysis to check if there is an ensuing pattern in the price movement. You should try to buy a stock at its lowest price. Because you have a trading plan, you do not need to sell the stock at the first sign of a price plunge. You have to trust your judgment based on the research that you have conducted. Invest in financially sound businesses and keep in mind that the stocks prices will eventually go up over time. It is not good to sell a stock when the price is on a down turn because you will just lose more unrealized profits when the stock recovers.
Most investors today have different investments in their portfolios. Some of them have investments in options. An option is popular among sophisticated investors because it is versatile. An investor can easily adjust or adapt his trade according to a current situation. However, options are not for a conservative investor because option trading is highly speculative. This means that you can do various things to protect your trade from a decline.
Options trading is extremely risky. Thus, it is necessary to inform you that it is not for everyone. You can lose a significant amount of money if you make a wrong trading decision. However, it is not good to be ignorant of it because it places you in a weak position. Even if you are a conservative investor, it still pays to study options trading.
Step 1. Prepare to Trade Options
If you are still a new options trader, you must first open a brokerage account with a reliable broker. Because of technology, it is now possible to open an online account. Prior to signing up with a particular broker, it is important to understand what a brokerage account is. A brokerage firm charges commissions for every transaction and the commission rate varies per broker. In fact, some brokers do not charge commissions. In selecting an options broker, it is important to make your own research about the various brokerage firms. You can read online reviews about them so that you will know what to expect from these companies.
Before you can start trading options, your broker must first approve your trade. This is because each broker has limits based on your account balance and experience. If you don’t meet the broker’s requirements, you can only write covered calls or sell a right to sell to other traders your stock anytime. If the option sells, you receive cash.
To prepare you in options trading, there is a booklet named “Characteristics and Risks of Standardized Options” that you can read to know about options types, terminologies, risks, tax considerations, and exercising and settling options. Some common terminologies include call, put, holder, writer, strike price, expiration date, in the money, and out of the money.
A call is a right to buy an underlying asset at an agreed price within a certain period. The buyer buys the call at a particular price, for example a stock at $50 strike price. He predicts that the price of the stock will go up to $55, for example. However, because of the call option, he can buy the stock at $50. On the other hand, a put is the right to sell an underlying asset at a particular price within a specified period. This means that a buyer of the put option can force the put option writer to buy the underlying asset at the specified price. A put option is profitable for the buyer when he predicts that there will be a decrease in the price of the asset within the period.
A holder is the buyer of the option while a writer is the option seller. A strike price is the transaction price for the underlying asset. If it is a call option, the strike price is the buying price. If it is a put option, the strike price is the selling price of the underlying asset. The expiration date is the date when the both parties agree to transact the underlying asset at an agreed price.
“In the money” means that the asset’s market price is higher than the strike price of the call option. In the case of put options, “in the money” means that the market price is lower than the strike price. “Out of the money” means that the underlying asset’s market price is lower than the strike price of the call option. On the other hand, it means that the market price is higher than the strike price for a put option.
If you want to be an option trader, you must know technical analysis for you to earn money. Option trading is for short-term investing only; thus, it is important to be knowledgeable about the underlying asset’s price movements in the near future. You must be capable of predicting the movement of the asset price. You can only do so if you understand technical analysis.
If you want to try options trading, you should also know about resistance and support levels. A support level is that point at which the price of the underlying asset rarely falls below. A resistance level, on the other hand, is that point that the asset’s price rarely rises above. You can buy options near the support level. On the other hand, you can also sell options near the resistance level.
It is also important to understand what volume is. If the volume of transaction is high when the price of an underlying asset moves to a particular direction, this means that there is a strong trend. It may be possible to earn more money from it. Furthermore, you must know chart patterns because you can use them to predict how the price of the underlying asset will move within a given period. The moving averages, on the other hand, signify a continuation of the price movement towards a particular direction.
Step 2. Begin Trading Options
To avoid losing a lot of money even if you are still a new options trader, you have to start trading using a practice account first. You can make real trades without using real money. If you are ready to trade in real time, you can open a broker account.
You also have to know how to use limit orders. You can set price limits for each transaction so that you can maximize your gains. In addition, you must review your trading portfolio regularly to determine if you can still improve your returns.
Also, make sure that you have a balanced portfolio. It would be impossible for you to purchase call options all the time because you may lose a lot of money if the market makes a significant downturn. You have to ensure that you trade both call and put options. You can limit your exposure by transacting both options at the same expiration date and strike price.
Step 3. Learn About Advanced Options Trading
If you are still new in this venture, you can learn from other traders in an online forum. You can learn more about strategies from fellow traders. In addition, you can also learn about complex strategies through research. However, you have to try them first in a practice account to avoid losing a lot of money.
Lastly, you must learn about the “Greeks”, which are metrics to maximize gains from options trading. A delta is the amount of change in an option price per $1 change in the asset’s price. A gamma is the rate of change of delta based on the $1 change of the price of the underlying asset. A theta is the option price’s “time decay”. It is a measure of the deterioration of the price as the options nears its expiration date. Lastly, a Vega is the amount of change of the option price based on the asset’s volatility.