How to start trading

Introduction to trading

Trading involves buying and selling financial instruments to benefit from price changes, with a focus on frequent transactions rather than long-term holding. This approach appeals to both beginner and experienced traders because it provides access to a broader range of markets and financial instruments, with the potential for quick returns. Financial derivatives, such as CFDs, allow traders to speculate on short-term price movements without owning the underlying assets. By using margin and leverage, traders can take larger positions with minimal capital, increasing potential gains but also carrying higher risks.

Anyone wanting to get started with trading must first build a strong understanding of market fundamentals, analysis, and research. But like learning to drive a car, all knowledge gained in trading must be supported by extensive practice.

Types of trading markets

There are several primary markets where traders can participate. Each market offers different types of financial instruments and requires different approaches to analysis, trading strategy, and risk management:

• Stock market: This involves trading shares or equities of publicly listed companies. Stocks represent ownership in a company, and prices fluctuate based on performance, market sentiment, and economic factors.
• Foreign exchange (Forex) market:Forex trading sees traders speculating on the value of one currency against another (e.g., USD/EUR). The forex market is the largest financial market globally and operates 24 hours a day during the week. Currency prices are influenced by several factors, including interest rates, inflation, and geopolitical events.
• Commodities market: This includes trading physical goods like gold, oil, and agricultural products. Commodity prices are sensitive to supply and demand factors, including weather events, global economic health, and natural resource availability.
• Indices and bonds markets: Indices are collections of stocks that represent a specific market or industry, like the FTSE 100 or the S&P 500. Traders can buy into these indices without selecting individual stocks. Bonds are fixed-income securities issued by governments or corporations, offering a steadier, lower-risk alternative to stocks and commodities, often used to diversify portfolios.

Trading CFDs enables someone to have exposure to all these markets, while trading goals, risk tolerance, and trading style influence which markets and financial instruments traders focus on.

How to start trading CFDs

Anyone learning how to trade CFDs online needs to follow several key steps to establish a secure and reliable setup; well before any trading happens.

The first of these is selecting a reputable CFD broker. A broker acts as the intermediary providing access to different markets and facilitating the buying and selling of instruments. Rather than a random choice, there are several factors traders need to consider when assessing different brokers:

• Market access: Some brokers limit access to one or two markets, while others provide access to multiple markets. Traders should first look at which markets a broker supports.
• Fees and spreads: Different brokers charge various fees, including spreads (the difference between buying and selling prices), commissions, and overnight fees.
• Regulation and safety: Traders should confirm if a broker is regulated by a reputable authority, as this provides a measure of security for traders' funds. Regulated brokers adhere to strict guidelines that ensure transparency and accountability.
• Trading platform: The broker should offer a user-friendly and reliable platform, with tools for chart analysis, real-time price tracking, and order execution.

After selecting a broker, the next step is opening a trading account, which brokers tailor to various experience levels and trading needs:

1. Demo Account:Demo accounts allow users to practise trading without risking real capital. This is ideal for beginners to learn market dynamics and test strategies in a simulated environment. It can also benefit experienced traders who want to experiment with new strategies or to learn a new platform after switching brokers.
2. Standard Account: A standard account is a live account that most traders will use for actual trades. It will include access to all platforms and trading tools provided by a broker.
3. Premium or Pro Accounts: Designed for more experienced traders, Pro accounts usually offer lower spreads, access to exclusive features, and potentially higher leverage options.

Some brokers may offer several accounts that are like a standard account, with lot sizes, spreads, and commission varying between each.

Steps to open a CFD trading account

Setting up a trading account is similar across brokers and typically involves these steps:

• Registration: Begin by completing an online application with personal information, including name, address, contact details, and password.
• Suitability Test: Some brokers include a suitability test in the account application process. This test is meant to assess a trader's suitability for trading derivative instruments.
• Verification: Regulated brokers must verify the identity of traders; this is typically through submission of government-issued identification and proof of address documentation.
• Funding the Account: Once an application is approved, traders can log in and add funds to the account. Many brokers have minimum deposit requirements and offer different methods for funding an account.
• Exploring the Platform: Traders should work through the resources provided by the broker to become familiar with the platform and available features. This should include order placement, chart analysis tools, and real-time market data.

For anyone exploring how to start trading, starting with a demo account is ideal. Opening a demo account often only requires traders to provide a name, address, contact details, and password.

Market research and strategy

Part of learning how to trade involves developing a clear understanding of trading basics as a foundation. Learning trading terminology is essential, along with market research and understanding key strategies for market analysis.

Technical analysis

This approach focuses on studying historical price data and chart patterns to predict future price movements. Traders using technical analysis look at trends, support and resistance levels, and indicators such as moving averages, the Relative Strength Index (RSI), and Bollinger Bands. Technical analysis is based on the idea that price movements often follow patterns, allowing traders to make predictions based on past behaviour. This method is popular among short-term traders and those in markets like forex, where price patterns can be highly influential.

Fundamental analysis

This approach looks at the underlying economic and financial factors that affect an asset’s value. For stocks, this might include company earnings reports, revenue growth, or market share. In forex trading, economic indicators such as GDP growth rates, central bank interest rates, and inflation are key drivers. Fundamental analysis is favoured by those who prefer a long-term approach, as it provides insights into an asset’s underlying value rather than short-term fluctuations.

Traders can combine both methods for a balanced perspective. Traders could use fundamental analysis to identify undervalued assets using economic data, with technical analysis identifying ideal entry and exit points.

A well-structured trading strategy includes criteria for asset selection, trade timeframes, and the conditions for exiting positions. Each of these requirements can be identified using the above research methods.

Trading terminology essentials

Trading CFDs involves a lot of unique terminology that anyone learning how to start trading must know. Some core terms include:

1. Bid and Ask: The bid is the highest price a buyer offers; the ask is the lowest price a seller accepts.
2. Spread: The difference between the bid and ask prices, seen as a cost or charge of a trade.
3. Leverage: Used to control a larger position relative to a trader's available capital, amplifying potential gains and losses.
4. Margin: The deposit required to open and maintain a leveraged position.
5. Pip: The smallest price movement in trading, usually the fourth decimal place in currency pairs.
6. Lot: A standard unit size in trading, with one lot typically equalling 100,000 units in forex. Mini, micro, and nano lots are better suited to beginner and intermediate traders.
7. Stop-Loss Order: A predetermined price level set by a trader to sell an asset to limit losses.
8. Liquidity: The ability to buy or sell an asset quickly without affecting its price significantly. Assets in high demand have high liquidity since it is easier to find buyers or sellers.
9. Volatility: The likelihood of price changes in an asset, indicating the level of risk or activity. Less volatile assets tend to have steadier prices and lower risk.
10. Risk-to-Reward Ratio: A measure comparing the potential reward of a trade to its possible risk.

Risk management essentials

Successful trading requires proactive risk management, as research and analysis can reduce but not eliminate risk. The potential for significant losses persists, but risk management can help limit losses, especially when gains are driven by market fluctuations. Essential risk management techniques include:

Using stop-loss orders

Stop-loss orders automatically close trades when prices hit set levels, preventing unexpected, large losses.

Position sizing

Position sizing limits the amount of capital used per trade. For instance, traders might limit each trade to 2% of the account balance to protect capital.

Diversification

Traders can spread risk by diversifying trades across different asset classes, companies, or sectors, of which CFDs offer exposure. This approach can sometimes see losses in one market being offset by gains or stability in another, reducing overall exposure to market volatility.

Setting realistic goals

Setting realistic, achievable goals is a basic tenet of trading that supports consistent progress. Traders can avoid pressure—and impulsive decisions—with smaller, long-term targets.

Avoiding emotional trading

High expectations—or greed—and fear can lead to emotion-driven decisions that disrupt trading strategies and increase risk. Daily trade limits, entry and exit criteria, and other predefined rules ensure disciplined trading with minimal emotional influences.

It is impossible to eliminate risk entirely. But with a firm trading strategy and disciplined risk management, traders can maintain stability and protect capital even in volatile markets.

Trading tools for success

There is an abundance of tools and resources that support both beginner and experienced traders. These tools cover the basics of trading and help traders track trends, manage trades, and make informed decisions. Some essential tools include:

1. Trading platforms

The buying and selling of financial instruments through CFDs happens via a trading platform. Most brokers offer access to multiple trading platforms, including their own and third-party options like TradingView, MetaTrader 4, and MetaTrader 5. Some features overlap across platforms, while others may offer unique tools.

Key features of a trading platform:

• Order Execution: Support for different order types, such as limit orders and stop orders, and real-time execution of orders.
• Charting and Analysis Tools: Support for technical analysis with various chart types, indicators, and drawing tools.
• Market Data: Access to live market prices, along with integration of key news feeds.
• Automated Trading: Allows for automated trading using pre-built or self-coded algorithms.

2. Economic calendars

An economic calendar lists events, like interest rate decisions, that can impact markets and help traders adjust strategies.

3. Technical analysis tools

Technical analysis tools help traders interpret historical price movements and identify patterns for future trends. Some widely used tools include:

• Relative Strength Index (RSI): Helps identify overbought or oversold conditions, which might indicate potential trend reversals.
• Moving Averages: Smooth out price data to reveal trend directions and filter out short-term fluctuations.
• Fibonacci Retracement Levels: Used to identify potential support and resistance levels based on specific retracement levels.

Most trading platforms integrate these tools, allowing traders to customise charts and apply various indicators to gain insights into market movements.

4. Educational Resources

Continuous learning is vital, not only in terms of trading for beginners, but also as traders become more adept. Most brokers offer educational resources, from beginner tutorials to advanced strategy sessions, to help traders build skills and adapt to market changes.

Practice before live trading

Practising with demo accounts helps traders build confidence and refine strategies without the risk of actual losses.

1. Benefits of Demo Accounts

Demo accounts offer a safe space to apply trading concepts using virtual funds, making them ideal for beginners to test different markets and techniques.

Using a demo account provides several advantages:

• Risk-Free Testing: With no real money at stake, traders can experiment freely.
• Platform Familiarisation: Practising on a demo account helps traders navigate and customise their trading platform, improving efficiency before switching to a live account.
• Strategy Development: Traders can test and refine strategies, identifying strengths and weaknesses.

2. Simulated trading strategies

Testing strategies like scalping or swing trading in a demo environment helps traders understand different timeframes and market conditions. This simulation prepares traders to handle live trades under varying scenarios.

3. Transitioning from demo to live trading

After building consistency in demo trading, gradually transitioning to live trades builds confidence. Starting small eases the shift to live trading, helping traders manage emotions and apply discipline developed in demos.

Learning how to trade begins with understanding the basics of trading. From there, traders can move on to choosing a broker and setting up a demo account. This will help novice traders to practise trading, develop a trading plan, and learn effective risk management. While none of this eliminates the risks inherent to trading, it can help novice traders become confident traders in any chosen market.