New traders should have no illusions—online trading involves risks and costs. Anyone looking to try online trading should be fully aware that it requires time dedicated to planning and analysis, and also plenty of thought about costs and risks of losing money.
Nearly all traders enter losing trades at one time or another, especially beginners. To make money, traders need to focus on avoiding losing trades and money, and then on maximising their wins and overall earnings. By doing so, one can sustain profitability in any forex, crypto or stock market.
Decide On A Strategy
There may be several strategies possible for making money in online trading, but traders should have a notion of which strategies they plan to implement before they begin. Much like knowing your route before you travel somewhere from your home, it's helpful for you to choose a route to reach your trading destination before you begin buying and selling securities or other assets.
Like any other profession, finding success in the financial markets requires hard work, focus and dedication. The questions below are a great place to begin selecting a viable strategy.
- Are you going to use a fundamental strategy, analysing economic indicators and news that will support your ideas about a price move?
- Or will you rely purely on technical analysis to get a notion of trends in market movements?
- What is the scope of your strategy? Is it designed for short-term trading or does it focus on long-term investments?
If you choose technical analysis, it's important to know which analytical tools to use and how they work. Another consideration is whether you will be trading intraday or long-term, and also if you will be following trends, or trading on swings within a range. Below are three strategies that many individuals implement to make a living in the markets.
Day trading is a strategy where new positions are opened and closed in the markets within a single session. A day trade's duration may last from minutes to hours, as long as the trading account is net flat at the session's close. Day traders may rely on fundamentals or technicals to craft decisions in the live market.
The day trading strategy is a popular way of trading forex, cryptocurrencies, futures or stocks because there are reduced margin requirements, frequent trade setups and limited exposure to systemic risk. However, intraday price action is often choppy, leading to periods of challenging trading conditions.
Scalping is an ultra short-term trading strategy. New positions are opened and closed with high frequency, often in a matter of seconds. A scalp's profit target and stop-loss are exceedingly tight, with the goal of repeatedly cashing in on a viable edge.
Many scalpers are classified as high frequency traders. HFT practitioners execute trades in milliseconds, capitalising on near-instant swings in price. For instance, a high frequency stock trader may buy shares of Amazon (AMZN) looking for a mere US$0.01 or US$0.02 return. If the AMZN stock price was active, such scalpers may look to place hundreds of trades in a single day to cash in.
Scalping is prevalent in crypto, forex, futures and stock trading. A few key benefits are low opportunity costs and negligible systemic risk exposure. Drawbacks include a greater impact of order slippage, wide spreads and higher commissions.
An investment strategy is designed for long-term capital appreciation. Local to the popular "buy-and-hold" approach of Warren Buffet, investing is most common to mutual funds, fixed income assets and equities.
Investing is a unique discipline in that it takes months, years, or even decades to see a palpable return. These extended horizons are not ideal for options and futures contracts, which have a fixed expiration date. Also, investing in forex pairs or CFD products can be problematic, as rollover costs can dramatically cut into profits.
Choosing A Market
There are online trading platforms for several different markets and asset classes, including equities, options, futures, commodities and foreign exchange. Regardless of which market, beginning traders may want to start with only one or a small number of assets to avoid becoming overwhelmed.
One thing to remember is that a vast majority of trade occurs remotely, online. Due to the electronic nature of the modern marketplace, it's important to work with robust software trading platforms and reputable online brokers.
A great way to get comfortable with a platform, broker or market is to open a demo account. With a demo account, you can trade without placing any real money in harm's way. By utilising a demo account, a trader can gain an understanding of order routing, trade execution and market behaviour before depositing a significant amount of money with a brokerage.
Money Management: How Much Risk Is Too Much Risk?
One of the key aspects of making money when trading online is discipline, which is especially important when deciding how much money to put into trading. This decision is commonly known as "money management."
One popular rule of thumb for traders is to limit their risk on trades at any given time to no more than 5% of their total account balance. Thus, if a trader has an account balance of US$10,000, they will want to hold their risk to no more than US$500.
This can mean:
- Up to 10 positions worth US$50 each
- Five positions worth US$100
- Two positions worth US$250
- One position worth US$500
The reason for this practice is that even if a trader enters one losing trade, or several losing trades, during a given session, they will still have funding left over in their account in subsequent sessions to make up for the loss and potentially turn a profit.
Practice With Simulation And Backtesting
It may seem obvious to some, but it's recommended that traders practice on a trading simulator before entering live trades. This allows for testing strategies, sharpening skills and avoiding losing money in the market on poorly developed trading ideas. Most brokerages offer trading simulators that can be used for free when opening an account. If possible, traders may want to seek simulators that use real-time market information so that they can test their strategies in real-life market conditions.
Another popular technique for practicing trading strategy is to use "backtesting." Backtesting is testing strategies with historical data to verify whether a particular strategy can be successful. The advantage of backtesting is that by using scenarios that have already occurred, you won't be forced to wait for several scenarios to play out in the live market to verify the consistency of your strategy.
Successful Trades—Or: "Cut Losses Short, Let Profits Run"
As it turns out, the words of famed late 18th century economist and trader David Ricardo—"Cut short your losses; let your profits run on"—have been particularly useful for traders over time, especially in forex markets.
In an FXCM study of 43 million trades, it was revealed that most traders made winning trades but nonetheless lost money when trading. The study showed that the key mistake made by traders was that they were taking the wrong approach to both their winning and losing trades. A majority of traders who lost money on trades consistently exited their winning trades too early for fear of suffering an unexpected negative reversal. They allowed their losing trades to remain open too long under the apparent idea that the market would sooner or later undergo a favourable reversal that would allow them to make up for their losses. Read the full guide.
Both actions are consistent with psychological studies that show that traders fear losses more than they appreciate gains. But from an objective point of view, traders have found more success by staying in the market when they are winning and getting out quickly when they are losing. One way to do this is to use stops and limits to assure a risk-reward ratio of greater than 1:1.
Enhancing Gains With Margin, Leverage
Once traders have a handle on basic trading strategies that can produce profits, they may want to aim to make use of a margin account through which they can amplify their gains. With a sufficient deposit of cash, most brokerages will extend traders margin loans that will give them leverage to multiply the value of their basic investment. Leverage can range from a ratio of 2:1 to up to 400:1 in some cases, meaning gains can be multiplied by those amounts. Traders who use margin need to be aware that losses can be multiplied by the same amounts.
Calculating Costs: Commissions
One of the not-so-hidden costs in trading is commissions. For equities, options and futures, traders may pay a flat fee per trade. In forex trading, commissions are often built straight into the bid-ask spread, so traders will be subject to varying costs with each trade depending on market conditions and the widening and narrowing of spreads.
Once traders have determined their trading strategies and figured out their costs, they will want to consider the impact that taxes could have on their earnings. Traders who can make money on a consistent basis in the market and have found they are dedicating themselves full time to the activity may be able to make use of available tax deductions by claiming trader tax status.
Additionally, they will want to make sure they are reporting their earnings on the correct IRS reporting forms to avoid unnecessary tax losses. The proper status and reporting methods could make a difference of thousands of dollars per year. And because the rules may change from year to year, it's important to discuss trading practices and tax rules with an accountant before going headlong into trading.
Where Can You Make Money Online?
The rise of the internet has greatly impacted the lives of people from around the globe. Social interaction, business and entertainment have all been revolutionised as a result of the advances in internet systems technology.
Perhaps the area that internet connectivity has had the greatest influence on is the financial markets. Not long ago the markets were largely off limits to the public, often existing as exclusive clubs. To become a participant was difficult, and engaging the markets meant overcoming considerable barriers to entry.
Now, the financial markets have been opened to the masses, becoming a premier venue for making money online. In fact, millions of people from all corners of the Earth generate revenue as being either a full-time or part-time market participant. Given the breadth of modern forex, futures and equities markets, active trading has gone from being a side gig to a popular way of pursuing one's financial goals.
The Forex Market
The largest marketplace in the world is the forex market. An exclusively electronic venue, the forex market is an over-the-counter (OTC) venue that specialises in the trade of foreign currencies. It is popular among participants of all experience levels, from novices to institutional traders and investors.
The following are a few reasons why the forex is attractive to aspiring participants:
- Business Hours: The forex is open for business 24 hours a day, 5 days a week. Extensive market hours give individuals with scheduling challenges the freedom to trade when they see fit.
- Liquidity: Efficient entry and exit from the market is possible due to the enormity of the forex. An unparalleled depth-of-market ensures the best possible price for trade execution.
- Availability of Leverage: High degrees of leverage are available to individuals wishing to increase exposure in the pursuit of enhanced rewards.
Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.
The global trade of currencies is a common pastime for millennials, professionals and retirees. Technology has made accessing the forex convenient and relatively simple. The ability to interact with the market online has made the once arduous task of trading currencies a preferred way of pursuing financial rewards.
Generally speaking, currency traders have at least one of the following objectives:
- Cash Flow: A portion of forex traders are looking to make extra money via the buying and selling of currency pairs. This is a common undertaking for beginners who want to take advantage of forex leverage to make money fast. While it's possible to make a quick buck in the global currency markets, the risks can be substantial.
- Earn A Salary: Many professional people view the forex market as a viable means of making a solid salary. To put it bluntly, this group wants to earn a lot of money as a full-time, fully-vested currency trader.
- Build For The Future: Investing in currencies is one way to achieve passive returns over the long-haul. Given the proper know-how, a person can execute longer-term strategies designed to capitalise on macro forex trends. However, within the forex investing realm, it's important to understand the influence of rollover costs and counterparty risks on decision-making.
No matter if your goal is to make some extra cash or a six-figure salary, taking an Introduction to Forex online course is a great place to begin your journey into the marketplace.
Led globally by the CME Globex and Eurex, futures trading is conducted almost entirely online. Futures products are known as derivatives, meaning they are valued in relation to an underlying asset class. Energies, metals, equities indices and debt instruments are all available for trade via the global futures markets.
Futures trading exhibits a few unique characteristics that make it conducive to profit:
- Volatility: Depending on the market in question, the pricing of futures products can move quickly and dramatically. Volatility bolsters both earning potential and risk.
- Variety: Futures products face a wide-variety of assets. From crude oil to corn, it's possible to benefit from fortunate pricing fluctuations in any number of particular markets.
- Cost Effective: Commissions and exchange fees pertaining to futures products are relatively reasonable. The rise of deep discount brokerage firms have greatly reduced the fee structure involved in the trade of futures contracts.
The futures markets are legendary for volatility. Price action is extremely active in some products, as robust participation often leads to swift, dramatic moves in asset pricing. At the crux of futures contract volatility are two factors:
- Perishable: Each futures contract listed for public trade has an expiration date. At expiry, it becomes untradable. So, there is an inherent urgency for futures participants to craft decisions as their trade and investment timelines are finite.
- Forward-Looking: One of the primary reasons for futures volatility is that they price an asset at some forthcoming point in time. Accordingly, a wide variety of market drivers can impact a contract's perceived value ahead of expiration.
The process of making money in futures is very similar to any other trading discipline. Profiting from an advantageous move in pricing (either up or down) is the name of the game. However, please be noted that futures trading may result in loss.
By far, the most traditional way to make money in the capital markets is to purchase and hold shares of corporate stock. Championed by the likes of Warren Buffett, "buy and hold" strategies are lauded by many as being sure-fire ways to preserve and increase wealth.
In contrast to forex and futures, the equities trade affords the individual several distinct advantages:
- No Time Constraints: When a stock is purchased, it is the property of the buyer. The buyer is free to hold it for as long as desired. There is no rollover or expiration to deal with in equities products.
- Vast Number of Options: Thousands of individual stocks are available for purchase on exchanges and the OTC markets.
- Value of Diversification: While a portfolio of currencies and futures may also be constructed, equities are much more flexible. Mutual funds, indices and sector-specific stocks may be combined with one another to minimise risk and maximise return.
Buying stocks online has never been easier. Gone are the days of needing access to a broker at the trading floor and absorbing huge transaction costs. Online discount equities brokerages offer exceptional service at low prices.
What You Need To Know About Trading Online
Online trading is not always easy and there are no guarantees of profits in all situations. One of the more obvious ways to find success on a more consistent basis is to organise trading activities beforehand and plan strategies for minimising trading losses and additional trading costs, while maximising potential gains.
This will include setting adequate risk-reward ratios through use of stops and limits. Traders will also want to minimise other costs paid, such as commissions, and plan ahead for tax preparation to assure that minimum tax amounts are paid on trading activities.
Over the past several decades, online trading has exploded in popularity. Participants from around the world trade everything from Bitcoin to exotic ETFs each day in the search for profit. While many succeed, many others fail.
To maximise your potential in the digital marketplace, you will need a comprehensive strategy, discipline, time, money and brokerage services.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.
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