Are you interested in trading as a way to make money? In this article we go through trading, which important factors you must know if you want to trade and how to get started.
Further in this article you can read more about trading and what you have to think about if you want to actively trade financial securities.
What is trading?
A trader is a person who buys and sells financial securities more frequently than 'traditional' investors, who in turn often have a 'buy & hold' strategy. A traditional investor sits on a stock for years, while a trader likes to jump in and out of positions numerous times in a matter of days, hours or even minutes.
Whether it is actually possible to call other types of investors "traditional" is debatable. Because trading is not a new thing.
Trading has history all the way back to the 19th century, and one of the most famous traders in history is Jesse Livermore.
Livermore was an American trader and investor who built himself up from nothing, and was at one time one of the world's richest men. He later lost everything, got it back, and lost the money again. Drenched in debt, Livermore took his own life in 1940 in a Manhattan hotel room.
Jesse Livermore is considered by many to be the best trader ever, but he also stands as a warning for what can happen if you go too far with leverage and seek massive returns over steady and 'less exciting' strategies.
As you can see from Livermore's history, trading is therefore a very volatile and risky form of investment. You need to have good knowledge, make well-considered decisions and have a cool and analytical head to succeed.
Want to read more about Jesse Livermore? I recommend checking out the book Reminiscences of a Stock Operator from 2017, which is about his life, successes and tragedies.
Day trade VS swing trade
There are different strategies out there. If you want to trade several times a day during opening hours, this falls under the category day trade. If you buy and sell at longer intervals - for example, you sell after a couple of days (or weeks) - this is a swing trade.
How to make money as a trader
Go short
You think the market is moving down, and open a short position. Here you earn money if the price falls.
Go long
You think the market will go up, and make money if you buy at a low price and sell at a higher price.
Leverage
One way many traders increase the size of the return is by leverage, as such leverage reinforces an already positive return. The downside is that gearing also magnifies your losses.
Who is trading suitable for?
Frequent buying and selling of stocks can be a profitable career or sideline for those who are able to understand and navigate the markets effectively, but it is also a risky and challenging activity.
If you are considering trading, it is important to understand that it may not be for everyone. Trading can be well suited for people who have a strong understanding of financial markets, enjoy analyzing data and making decisions, and are able to handle the risk and volatility inherent in trading.
It is also important for a trader to have:
- Discipline
- Patience
- Ability to keep a cool head
- Solid understanding of the markets in which they trade
If, in addition to the points above, you have a natural aptitude for mathematics, statistics and economics, and if you like to constantly learn and keep up to date with market developments, trading could be a good match for you.
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Before diving into trading, it is crucial to educate yourself about the various financial instruments and markets, as well as the risks and potential gains associated with trading.
This may involve taking a course or possibly training in finance or a related area, as well as gaining practical experience through internships or entry-level positions in the financial industry.
It is also important to have realistic expectations and to understand that there is no guarantee of success in the markets.
When it comes to analyzing financial markets, there are many different strategies and approaches that traders can use.
Two of the most commonly used approaches are technical analysis and fundamental analysis.
Technical analysis
Technical analysis involves studying charts and other market data to identify patterns and trends that may indicate buying or selling opportunities.
Those who use technical analysis believe that market movements are mainly driven by supply and demand dynamics, and that past price movements can be used to predict future price activity.
In technical analysis, it is common to study charts using tools such as trend lines, moving averages and oscillators to help them identify potential trading signals.
Fundamental analysis
Fundamental analysis involves assessing the underlying economic and financial factors that may affect the value of a stock or other asset.
Here, you look at things like the company's financial statements, management team, industry conditions and macroeconomic factors to determine whether a stock is undervalued or overvalued.
Fundamental analysts can use ratios such as price-to-earnings (P/E) or price-to-book (P/B) to help them make informed decisions about the value of a stock.
Interested in learning more fundamental analysis?
Then you should download my free checklist on how to find quality companies here.
Read also: shares for beginners: a great guide to investing in shares and fund
Use of both methods in trading
Both technical and fundamental analysis can be useful in trading, and some traders prefer one method over the other.
Technical analysis can provide a systematic and objective way of analyzing the markets, but it is important to understand that it is not a perfect science and that past performance does not necessarily equal good future performance.
Fundamental analysis can provide insight into the company or industry's long-term outlook, but it can also be subjective and different analysts can reach different conclusions based on the same set of data.
Some traders may find that a hybrid approach that combines elements of both technical and fundamental analysis works best for them.
For example, a trader may use technical analysis to identify potential trades, and then use fundamental analysis to confirm or disprove those opportunities.
Several factors you need to think about
It is important that you as a trader carefully consider which approach suits you best and your personality, risk tolerance and goals.
In addition to technical and fundamental analysis, there are many other factors that traders should consider when making decisions on a trade. These could be, for example, risk management, market conditions, economic data and geopolitical events.
Another important factor that traders should consider is their own psyche. Trading can be a high-stress activity and it is important for traders to have the ability to manage stress and to avoid letting emotions such as fear, greed and panic affect buying or selling decisions.
It is also important for traders to be able to learn from their mistakes and to continuously improve themselves.
How to get started with trading
Once you have decided to start trading, it is important to choose a reliable broker. I recommend that you create account with Nordnet, which has low fees and good terms for active traders.
You should also set up a trading plan. A trading plan should include goals for what you want to achieve, a strategy for how to achieve your goals, and a plan for how to manage risk and losses.
It is also important to set up stop-loss orders, which can help you limit losses when trading.
Trading can be an exciting and profitable activity for those who have the necessary knowledge, skills and discipline. But it is also important to remember that there will always be some risk involved, and that you can lose money when you trade.
It is therefore important to always act responsibly and to have realistic expectations.
Read also: Best share app: Top 8 apps for smart investors
Disclaimer
The content of this article is NOT intended to be taken as investment advice or recommendations, but only to provide information on various forms of investment. Trading financial securities involves risk. Always do your own research before investing time and money.
