What To Consider When You Begin Trading For An Extra Source of Income
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Anyone welcomes an extra source of income. Some are prepared to give time and work extra hard, others look out for what can be learned to keep giving an eternal source of income. As trading can be learnt and you can trade using a small account, many choose trading as a second income.
One of the basic differences you have to clear with is the difference between investing and trading. The major difference is the time the financial instrument is kept. Investment is long term, trading is far shorter term. To explain it clearly, let us look at gold. If you feel gold has value and would increase in price in the next 5 or 10 years, you can buy gold, if you feel it is of no value, you can sell gold. Trading is totally different. If the price has been falling for the past 3 days and you think that it is still dropping you can sell gold and buy it back when the trade starts showing a profit. It is just going with the flow.
In trading, you do not take possession of the physical commodity, whatever you buy – commodity, currency, or indices. You have to open an account with a reliable broker and deposit a small amount of money ($ 500 to $ 5000) initially. The broker gives a leverage of 50 times or even 100 times. It is best to choose a broker you trust. If the local monetary authority regulates the broker it is better.
Other thing to note in the choice of the broker is the spread, the difference between the buy and sell. The spread is the cost of ‘doing business’, cost of doing the trade. The spread would vary at different times, so if you are comparing brokers, you should compare at the same time. If you have a bigger trading volume, you should consider having accounts with more than one broker.
Other things that can be learnt only through experience is the speed of an order getting filled, the ease of using the site, amount of education they provide and customer service. The charting packages that the brokers give ‘free’ can also be a major consideration. You should also look into the fact if the broker is charging for ‘inactivity’ – some brokers have a very small monthly fee if the trading volume is nil or less than a certain number of trades. This will look very insignificant, but when you take a break from trading or from that specific broker for a few years, a $120 deduction from your account every year is irritating, When you open the account, $10 per month, inactivity fee looks petty.
CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. This is the standard disclaimer that the brokers give. What does this mean?
Leverage is a ‘double edged sword’.
Eg : A Stock ABC is at 121.92 USD today,
100 shares would cost you 12,192 USD, but you do not need so much
most brokers will let you buy CFD for Stock ABC at 20% of the actual amount, (or even 10 %.)
If they give it at 20 %, 100 shares would cost you only USD 2438
If you had USD 2438 in your account you could buy 100 ABC shares.
If the price went up 2 dollars to 123.92 USD, your profit would be
12392 – 12192 = 200 USD,
profit on USD 2438 would be 200 USD
200 / 2438 X 100 = 8.2 percent profit. The change of 2 to 3 USD is common for this stock ABC. This can happen within a day or two.
Are you happy with the fluctuations in your account? Though you can be happy when things happen to your favor, you should anticipate the adverse to happen.
The way a person reacts to this differentiates a winner and a loser.
The price never travels in a straight line, it goes up and down. When we say a stock has gone up $ 2 dollars yesterday, it might be that it fell 0.20 and went up 0.40 and the went down 0.02 and then, ultimately, the end the net gain is USD 2. You should know what is the movement or vibration in the time you are looking and anticipate it and not panic and exit each time it fluctuates.
Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. For this example, the ATR will be based on daily data. Because there must be a beginning, the first TR value is simply the High minus the Low, and the last14-day ATR is the average of the daily TR values for the last 14 days. This would give an indication of how much the price is moving, though some events can make the price move far more.
Though you trade mainly based on technical analysis, you should look out for major news. If you trade currencies or indices, Forex Factory would give hint as to major scheduled news. The other main news that you should look out for is the announcement of interest rate hikes, Non-Farm Payroll data and employment news. There is no hard and fast rule to the direction and the size of data. A loss that is less than expected loss is good news. When you trade stocks, quarterly earnings are major news. There are some who would ‘play’ the news and some who would come out of the trade during news that affects the trade.
The Chart shows clearly how the Dow Jones has moved this year. In this chart each candle is the price movement of one day. From 12th February, we can see that the Dow has gone up in value until 20th April. Then it was going sideways until June 23rd, June 24th 2016, you can notice the big fall in price. That was the BREXIT referendum date. You have to look out for major news when you are trading, as it will affect your trading profits. It is easy to say now that you could have made a ton of money because of that dip. You probably knew that there would be a big movement. But you did not know the direction.
In the chart you could also see the commonly used indicators that are used to analyze the trend of the financial instrument, the Dow Jones Index ( in this example). A couple of moving averages and PSAR are in the chart. You can see that when the moving averages are sloping down and are above the price, the price is falling. When the price starts to go higher , the price goes above the moving averages and the MA ( moving average) starts sloping upwards. When the moving averages twirl together and are practically horizontal and the price keeps going above it and below it, the market is not trending. This is the most difficult time to trade, it is better if the trader takes a holiday.
So if you decide to ‘Learn To Trade’, you have to first understand that trading is easy to learn at any age. Next is that you can open an account easily with most brokers. Selection of a trusted broker is very important. Next is use a demo trade and trade for a while using play-money until you get the hang of it. There are lots of people who stopped trading because they lost their money as they started to trade before learning. There are many who would advise you not to do demo trade for various reasons. Once you can have a winning ratio of more than 50% in your demo trade, please start trading with real money
Wish You Happy Trading!!!