Trading For Beginners Explained
Keen to start trading but don’t know how? Confused about the lingo and don’t know where to start? In this guide, we’ll give you all the information you need to know to learn how to trade.
In a rush? Here are your key takeaways on learning how to trade:
👉 Trading is different to investing
👉 You can trade in different ways on different markets
👉 Risk management is vital
👉 Know how to minimise your losses
👉 There are tons of great online trading platforms.
What Is Trading & How Does It Compare To Investing?
Trading is the process of buying and selling assets, such as stocks, bonds, currencies, and commodities, in the expectation of making a profit from short-term price moves, and trends in those assets. Traders typically use technical analysis or other indicators and data to identify trends and patterns in the market, they then make trades based on their predictions and the perceived likelihood of success, also known as the risk-reward ratio.
Trading and investing are two different approaches to the financial markets.
Traders typically focus on short-term profits and is high risk, while investors focus on long-term growth and is generally considered to be lower risk.
Traders often look at charts and study price action to identify trends and patterns in the market, while investors are more likely to use fundamental analysis to evaluate the financial health and economic prospects of a stock or other instrument.
⚠️Think trading is too risky and want to invest instead? Compare investing accounts here.
Why Learn How To Trade?
Trading is one of the riskiest types of investing because it involves taking large risks for large rewards. As such, and as you will see on risk warnings that are required by the FCA to be published on all trading platforms and trading advertising, up to 80% of those that try trading lose money.
So, it’s important to learn how trading works before risking any money, then start small and not trade with anymore than you can afford to lose. We have a dedicated guide to where you can learn to trade from respected and regulated providers.
1. Going Long And Short With Leveraged Trading
Long/short, leveraged trading is a strategy that involves taking either long or short positions in the market.
- Long positions are effectively bets that the market will go up, trades go long or buy assets in the belief that the price of those assets will rise above their purchase price creating a trading profit.
- Short positions are bets that the market will go down. Short selling is the practice of selling an asset you don’t own, in the hopes of buying it back at a lower price, at some point in the future, to make a trading profit.
- Leverage or gearing can be thought of as using money borrowed from your broker or an exchange, with which to make larger trades.
Long/short, leveraged trading can be a very risky strategy, if you don’t recognise and manage those risks. However, it can also be very profitable for traders if those risk are managed and the strategy is executed correctly.
Related guides: Short-selling tips and best short-selling platforms
2. Types Of Trading Accounts To Access The Markets
When you trade you are always trading the same underlying markets, but there are a few different ways to trade which are:
➡️CFDs (Contracts For Differences)
Contracts for Differences are a type of derivative contract that allows you to speculate on the price movement of an underlying asset, without actually owning the asset. CFDs are traded on margin, which means that you only need to put up a small amount of money (the margin) to control a larger position. This can magnify your profits, but it can also magnify your losses.
➡️Spread Betting
Spread Betting is another form of leveraged speculation. However Spread Betting deals are structured as a wager rather than a financial contract, such as a CFD. Which means that profits made through spread betting are free of capital gains and income taxes, under current UK legislation. Though you must be an individual UK taxpayer to benefit from that exemption. However, losses made through Spread Betting cannot be offset against capital gains made elsewhere.
➡️Futures
Futures are a type of derivative contract that allows you to buy or sell a known amount of an asset at a predetermined price, on a future date. Futures trade in standardized contract sizes for a fixed expiry or delivery date. Futures are often used to hedge against risk or to speculate on future price movements in either direction.
Futures are exchange-traded instruments, futures traders pledge margin against their open positions at their broker, who in turn pledges that to the clearinghouse /central counterparty which underwrites futures trading by acting as the buyer to every seller and the seller to every buyer.
➡️ Options
Options are a type of derivative contract that confers the right, but not the obligation, on an options purchaser, to be able to buy or sell an asset at a predetermined price, on or before a specified expiry date. Option sellers on the other hand are obligated to deliver or take delivery of the underlying asset that the options contract is over. That distinction creates a very asymmetric risk profile for the two groups.
Note that some options are deliverable whilst others are settled in cash, most options trade on exchange with margins or deposits pledged to a clearing house, central counterparty. However, Spread Bets and CFDs over options contracts are traded OTC or off-exchange, between counterparties (the client and their broker), as are many FX options.
Options are often used to protect against risk or to try and make speculative profits from price movements. However, they are complex instruments and therefore are not for the uninitiated.
Spot FX and Metals FX and precious metals, such as gold are also often traded off-exchange between counterparties, in what is known as OTC or over-the-counter trading. They are traded in spot markets – effectively a cash market for the price of an instrument at a given moment in time.
Spot markets can be traded on margin and traders pay or receive funding based on interest rate differentials, borrow rates and the positions they hold. Typically long positions pay funding whilst short positions receive funding or rollover fees.
3. Different Financial Markets Come With Different Risks
➡️ Shares (Stocks)
➡️ Indices
➡️ Commodities
➡️ Forex
➡️ Bonds
➡️ ETFs
They are typically low-cost investments that can offer instant asset allocation and diversification, which can help to hedge or reduce risks. But they can also be used for speculative purposes. For example, if you believe that semiconductors are going to rise in value, you might take a long position in iShares Semiconductor Index ETF or SOXX.
➡️ Cryptocurrency
Cryptocurrency is a digital or virtual currency linked to a blockchain or immutable distributed ledger, that uses a cryptographic method to record and confirm transactions in and ownership of the cryptocurrency. Cryptocurrencies mostly exist outside of traditional financial markets and trading in them is largely unregulated.
There have been many high-profile hacks or thefts, as well as outright frauds in the crypto ecosystem. However, the lack of regulation and the decentralised nature of crypto trading, and issuance, has also been one of their biggest selling points.
Learn How To Trade Stocks
4. High-Risk Trading Means Potentially High Rewards
Trading in the financial markets can be a way to make money, but it is important to be aware of the risks involved. Here are some of the pros and cons of trading in the financial markets:
Pros:
- Potential for high returns: The financial markets can be volatile, meaning that prices can rise and fall quickly. That creates opportunities for high returns if you are able to make accurate predictions about the direction of the markets.
- Access to a wide range of assets: There are a wide variety of assets that can be traded in the financial markets. Many brokers offer access to more than 10,000 trading instruments so you should always be able to find trading opportunities.
- Liquidity: The financial markets can be very liquid, meaning that there are usually always buyers and sellers. That liquidity makes it easier to quickly trade in and out of your positions, so you can move quickly and take advantage of trading opportunities as you spot them.
Cons:
- High risk: The financial markets are risky, and there is always the potential to lose money. This is especially true if you are not experienced in trading, or if you make bad decisions and are led by your emotions.
- Volatility: The financial markets can be volatile, prices in them can fluctuate very quickly and sometimes randomly. This can make it difficult to make accurate predictions about the direction of the market and that can mean trading losses.
- Fees: There are fees associated with trading in the financial markets, such as commissions and spreads. These fees can eat into your profits and your capital, so it is important to understand what these fees are and to factor them into your trading decisions.
- Experience: Trading the financial markets is essentially a competition between you and other traders. These include experienced retail, professional and institutional traders all of whom are very happy to profit from your trading mistakes.
5. Risk Management And Protecting Your Downside
Understanding Leverage
Many of the instruments that traders use are geared or leveraged products. Leverage is a very powerful tool because it allows traders to control a much larger portion of an asset than the capital would otherwise allow.
If you are trading with a leverage of 10:1 then every £1000 you have in your trading account could control £10,000 worth of an underlying asset, say a stock index, a commodity like gold or an FX pair such as dollar yen.
Using leverage can magnify trading profits but is just as effective at magnifying trading losses and eating through hard-won capital.
Many novice or newbie traders lose money because they don’t understand the effect of leverage on their trading PnL and account balances.
Overtrading
Overtrading occurs when a trader takes on more risk than they and or their account can handle. This can happen when a trader is trying to make money too quickly, or when they fail to calculate and adequately manage their risk.
Overtrading can lead to losses, and excess costs and can even put a trader’s whole account at risk. Traders need to understand the risk in every trade they make, both individually and cumulatively.
This means knowing the size of each position, and the maximum downside on each trade. The margin requirements for each trade and the effect that pledging margin, both initial and variation will have on their account balances.
A trader should always be aware of these numbers, before they trade, as part of their risk management strategy. Which itself should form part of their overall trading plan.
That should include rules about the size of each trade, the amount of capital at risk per trade and the maximum number of trades they will have open at any one time.
6. Why Do Traders Lose Money? (And How To Avoid It Happening)
Losing money is part of trading even the best traders do not get it right all the time, you can have the right idea and the wrong timing and make a loss
However inexperienced traders often lose money because they don’t follow a defined trading plan or strategy. In many cases breaking or ignoring their own rules when they trade.
For example, by having too many trades open, or trading in a position size that’s too large for their account and ignoring stop loss levels.
When you combine inexperience with leverage, then you have a recipe for disaster.
It is possible to avoid these pitfalls. However, you need to be disciplined, follow your risk management rules, and use the trading tools and order types at your disposal. These include stop losses, trailing stop losses and limits.
7. Beware Of Trading Educators & Social Media Influencers
Trading the financial markets involves money and where there is money there are unfortunately people looking to take it from you. Often by selling those new to trading a dream that doesn’t exist.
Their methods range from posting glitzy lifestyle pictures on Instagram with claims that trading has funded their life of luxury- which you can have too- if you send them your money. Or promises that they have unlocked the secrets of the markets which they will be happy to sell to you, for a fee.
Don’t fall for these scams there are no get-rich-quick schemes in the market instead traders learn to become profitable through a process of education and trial and error.
Recognising and learning from their mistakes and correcting that behaviour the next time out.
Learning to trade with the help of a trading educator can help new traders understand the markets, why prices move the way they do and strategies that they can use to benefit from that.
There are good trading educators out there but you shouldn’t be paying thousands of pounds to take their courses, particularly when there are so many educational resources available online.
As to social media, new traders can learn a lot about the markets from far more experienced traders on platforms such as Twitter. But be wary of those that boast about how much money they are making, and instead look for those who offer rational comments and opinions backed up by facts.
8. Trading Signals Can Give You Ideas, But You Have To Make The Final Decision
Trading systems and signals are often pushed by social media influencers, and others, as a way to make profits without putting in the effort. Few if any of these services will work.
Think about it if you a had system that continuously made you money from trading, why would want to share that with anyone else?
And if you wanted to sell it what value would place on that golden goose?
Not all trading services are a scam but at best trading signals are tools that can highlight better risk-reward opportunities.
If you have the inclination or ability you can build your own trading signals using any number of resources on the internet.
For example, one popular trading signal is the Moving Average crossover. A moving average is simply the rolling average price of a stock, or other asset over, a set period for example 20 days. Moving averages are typically displayed as an indicator on a price chart.
If we use two moving averages of different periodicities then we can compare how these two lines are moving relative to each other and the price of the underlying security.
If we use a short-term MA and longer-term MA line then we can get an insight into changes in price momentum by for example noting when the short-term faster-moving MA line crosses over the slower moving, longer-term MA line.
A cross above the slower-moving line is typically seen as indicating upside price momentum while a cross to the downside is associated with downside price momentum.
In the chart below of Western Digital Corp (WDC), the price line is shown in blue with the 20 and 50-day MA or moving average lines drawn in orange and green respectively.
The red ellipses highlight MA cross-overs in both directions.
Other indicators that traders regularly use to create trading signals include RSI 14, Bollinger Bands and Stochastics.
9. Your Personality Will Determine What Sort Of Trader You Are Going To Be
As you move through your trading journey It’s important to try and identify what type of trader you are going be. Here are some examples and brief descriptions of trader types and styles.
- Scalper: A trader who buys and sells securities for small profits within seconds or minutes, taking advantage of price fluctuations and market inefficiencies.
- Day trader: A trader who opens and closes positions within the same trading day, the day traders leverages short-term market movements, while avoiding overnight risk.
- Swing trader: A trader who holds positions for a few days to a few weeks, aiming to identify and capture intermediate-term trends and price momentum in either direction.
- Technical trader: A trader who uses technical analysis -the study of historical and current price patterns and indicators on a chart, to analyse market movements and identify trading opportunities.
- Fundamental trader: A trader who bases trading decisions on the intrinsic value of securities, using economic data, financial statements, and news events to evaluate discrepancies between current prices in and the intrinsic value of securities.
- Trend trader: A trader who follows the direction of the dominant market trend, whether it is up, down, and tries to profit from that trend until it reverses course.
- Social/sentiment trader: A trader who uses social media platforms, online forums, and crowd-sourced opinions to gauge the mood and sentiment of the market and anticipate its behaviour. Social traders often also use copy trading services.
- Macro trader: A trader who takes positions based on the global economic and political landscape and data, focusing on factors such as interest rates, inflation, trade policies, and geopolitical events.
- Algo & API trader: A trader who uses computer programs and algorithms to execute trades automatically based on predefined rules and criteria, and who connects to trading platforms via application programming interfaces, or APIs to access market data and execute their trading algos.
10. Practice With A Demo Account (But Don’t Be Fooled By Initial Wins!)
The good news for would-be traders is that it’s possible to try before you buy, thanks to the availability of demo trading accounts.
Most brokers and trading platforms offer potential clients the chance to test the platform and their trading aptitude in a simulated trading environment, which behaves in a very similar way to the live markets.
This provides the perfect opportunity for you to get familiar with the way that markets move and how the trading platform operates.
However the demo environment can lull traders into a false sense of security because you are not trading with real money and that makes a big difference to your trading psychology.
There is a great line in the book Reminiscences of a Stock Operator, about why demo accounts are good for testing functionality, but they cannot prepare you for real live trading when your money is actually at risk. The story is about a man who was going to fight a duel the next day.
His second asked him, “Are you a good shot?” “Well,” said the duelist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest. “That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”
Overall it’s a good idea to spend time in the demo environment but you will need to migrate to the live markets to begin trading, and to do that, you will need to open a live brokerage account.
The best way to do that is to think about what you will want from your broker listing items such as the markets and instruments you want to trade, the size of trades and account opening balances, educational resources and support etc.
Once you have created your list of requirements you can use our trading account comparison tables to find a broker that will meet your needs.
Get Started Trading Today
By now you should be up to speed with the basics of how to trade. If you’re ready to make the next move to get started for real, head over to our best online trading accounts page.
There you’ll find out expert reviews and comparisons of the top trading platforms, including names you’ve probably heard of before like CMC Markets, City Index and Pepperstone.
We’ll talk you through the pros and cons of each – you can then make an informed choice and be up and running in no time.
How To Trade – Your FAQs
To begin trading you need to follow these steps:
- Open an account with a trading platform
- Deposit funds
- Choose a stock to trade
- Buy (go long) or sell (go short) the companies shares
The safest way to trade stocks if you are new to the market is to pay for them in full with a share dealing account. If you are ready to take on more risk with leverage you can use a stock trading platform.
Yes, you can make money day trading, but beware the short-term time-frame you try to profit when investing, the harder it is. For some expert tips read our guide on how to day trade successfully.
Yes, day trading in the UK is legal and regulated by the FCA (Financial Conduct Authority). For a list of regulated brokers for day trading see our trading account comparisons and reviews.
You do not have to pay tax on trading profits if you use a financial spread betting broker or invest through a tax efficient stocks and shares ISA. However, if you trade CFDs, or trade through a GIA, you will have to pay tax on profits.
Leverage lets you increase your exposure to the markets through margin. It is for experienced traders who want to take on more risk. There are many different types of leverage that include CFDs, futures, leveraged shares and ETFs.
With over 35 years of finance experience, Darren is a highly respected and knowledgeable industry expert. With an extensive career covering trading, sales, analytics and research, he has a vast knowledge covering every aspect of the financial markets.
During his career, Darren has acted for and advised major hedge funds and investment banks such as GLG, Thames River, Ruby Capital and CQS, Dresdner Kleinwort and HSBC.
In addition to the financial analysis and commentary he provides as an editor at GoodMoneyGuide.com, his work has been featured in publications including Fool.co.uk.
As well as extensive experience of writing financial commentary, he previously worked as a Market Research & Client Relationships Manager at Admiral Markets UK Ltd, before providing expert insights as a market analyst at Pepperstone.
Darren is an expert in areas like currency, CFDs, equities and derivatives and has authored over 260 guides on GoodMoneyGuide.com.
He has an aptitude for explaining trading concepts in a way that newcomers can understand, such as this guide to day trading Forex at Pepperstone.com
Darren has done interviews and analysis for companies like Queso, including an interview on technical trading levels.
A well known authority in the industry, he has provided interviews on Bloomberg (UK), CNBC (UK) Reuters (UK), Tiptv (UK), BNN (Canada) and Asharq Bloomberg Arabia.
You can contact Darren at darrensinden@goodmoneyguide.com
