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Trading for a Living – the Ultimate Guide

Trading for a Living -The Ultimate Guide

 

 

Overview

The world of online trading is vast and there are almost endless opportunities that allow for traders to become their own boss, set their work hours, work from home or anywhere in the world and make a substantial amount of profit without having to worry about the artificial cap which is placed on wages and salaries.

 

 

However, beginner traders often struggle in understanding how financial markets work due to the information overload and the inability to separate useful information from the massive load of information that they do not need.

It is a daunting field, but it takes a small step and starts with a fundamental understanding of what trading is, what the options are, and then proceeding with that option, to start trading, and to become a consistent and profitable trader. It may not be easy, but it is doable.

There have been numerous advances in technology in the financial industry that have made entry into it a lot easier. With the entry barrier on trading lowered, anyone can now start making profits from the markets backed with a fundamental understanding of how it works, some capital, and the right trading tools.

 

 

There are numerous tools such as trading bots, trading algorithms, research and education tools, and more, that have made it easier for traders to enter the market and start their journey to becoming professional traders.

 

What kinds of online trading are available?

Before starting on the fundamental basics of trading, it is important to look at the types of trading options that are available and exploring each a bit further to allow beginners to identify which they would like to pursue.

There are numerous types of trading and investment available today, but for this article, the focus is placed on two of the largest types namely Stocks and Forex. These are two of the largest financial markets in the world that see a substantial amount of trading and investing volume.

 

Stock trading

This involves the art of buying, holding, and selling stocks and securities which are listed on public stock exchanges including NASDAQ, NYSE, AMEX, JSE, and numerous others.

 

Forex Trading

This involves the buying and selling of currencies to make profits on the differences in the value of these currencies in a global economic landscape.

 

The basics of Stock Trading

Where investing is concerned, there are four primary asset classes within which securities fall namely equity, debt, cash and cash equivalents, and real estate and commodities.

Stocks form part of equity securities which represent ownership. When an investor purchases the shares of a company, they become a part-owner of that company. Depending on the type of stocks bought, some investors even have the right to vote on members of the board of directors and other important matters relating to business.

 

Types of stocks

Stocks can be divided into two types namely common or preferred stocks. Common stocks represent the majority of stock which is held by the public and it provides owners thereof with voting rights in addition to the right to receive dividend pay-outs.

However, there is one drawback where common stocks are concerned, should the company be forced to liquidate or it goes bankrupt, the shareholders who hold common stocks are at the bottom where pay-outs are concerned.

Those who buy preferred stocks are paid out first, and in full, before common shareholders can receive their payments. Investors who purchase preferred stocks do not have as many rights as those who hold common stocks except where dividends are concerned.

Companies who offer preferred stocks usually make adequate provisions for the paying of dividends which means that holders of such stocks have president over common stockholders.

Investors often buy preferred stocks for the current income derived from dividends as it is another source of income and profits.

 

Dividends

The earnings per share of a company also referred to as EPS, is the profits divided by the number of outstanding common shares that the company has. It is crucial to look at this measurement before deciding to buy shares in a company.

Should a company make US Dollar 1 million in profits and have 100,000 outstanding common shares, the EPS for that company is, therefore, US Dollar 10. This means that the company may decide to reinvest US Dollar 7 back into the company, which means that US Dollar 3 is the pay-out that investors will receive in the form of dividends.

Dividends are paid out every financial quarter and they represent the pay-out that the company makes to its shareholders which serves as an extra incentive and encouragement to invest in particular companies.

When analyzing the EPS of a company, it is crucial to compare it with that of other companies that operate within the same sector to gain more perspective.

 

Advantages and Disadvantages of stock investment

One of the main advantages of investing in stocks is that it offers the potential for high returns. Even when considering that the prices on stocks fluctuate daily, over time, they show a consistent increase in value in addition to stable returns.

However, an investor’s portfolio should not only consist of stocks but do provide some diversification which will ensure that the investor can take advantage where there are increases present in the market without falling victim to changes or market collapses.

Investment, regardless of the type, comes with an element of risk, and stocks may present the most risks due to the factors that exist outside of the investor’s control with such factors influencing the price and performance of stocks.

Should an investor focus too much on stocks in their portfolio, a market decline may be the difference between a comfortable retirement and having to put extra work into making up for the losses experienced.

 

The basics of Forex Trading

Foreign Exchange Trading, or more commonly referred to as either Forex or FX trading can simply be defined as the buying and selling of one currency in exchange for another.

The Forex market, amidst numerous other markets, is the largest and most traded market in the world as people, businesses, and countries across the world participate in it. It is also the market that is the easiest accessible without a large amount of capital.

People often form a part of the Forex market without realizing it and something as simple as exchanging US dollars s for Euro when going on holiday or a business trip to London means participation in the Forex market.

The demand for a certain currency can push the value thereof up or down in value relative to numerous other currencies, and understanding factors such as these will make it easier for those who want to trade in Forex for a living.

 

Currency Pairs

Before entering into a trade, it is important to learn about various currency pairs and what they signify. Currencies are always traded in pairs, hence the reference to ‘Forex pairs’ or ‘Currency Pairs’.

It involves the quotation of two different currencies with the value on one being quoted against another. The first currency in the pair is the base currency while the second is the quote currency.

Currency pairs can also be further divided into various classifications such as Major, Minor, and Exotic pairs. Major Forex Pairs are the most popular and traded pairs which include the US Dollar – as it is the strongest currency in the world – such as EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, and USD/CAD.

The currency pairs which are not associated with the US Dollar are known as minor currencies or crosses. These pairs are not traded as often and are therefore not as liquid and may involve higher transaction fees due to their lack of liquidity.

Before starting to trade Forex, traders require a substantial amount of education before they can proceed to demo trading followed by trading in a live trading environment. The first starting point in Forex is to learn common terminology, including:

  • Exchange rate – which is the value of one currency which is expressed in terms of another
  • Pip – which is the smallest increment that prices can move.
  • Leverage – which is the ability to gear the account of the trader into a greater position than the total margin of the account.
  • Margin – is the deposit that is required at the start of a trade which will act as collateral.
  • Spread – is the difference between the bid and the asking price, or the sell quote and the buy quote.
  • Bid price – is the price at which the market, or the broker, will buy a certain currency pair from the trader.
  • Ask price – is the price at which the market, or the broker, will sell a certain currency to the trader.

 

Market Pricing – a quick overview

When learning about Forex involves getting to know about the prices involved with currency pairs. Once the trader has some understanding of prices and how they move in the market, and how profit can be calculated, traders are one step closer to their first trade.

Numerous currency pairs move between 50 to 100 pips per day although, it may be more or less than this depending on the overall conditions present in the market, in addition to taking into consideration what the driving forces are behind the movements.

A pip is the smallest increment with which the price in a currency pair can move and it indicates the fourth decimal place in a currency pair or the second where JPY is in a currency pair.

For instance, when the price on EUR/USD moves from 1.0000 to 1.0050, it is a 50-pip move, and should the trader have bought EUR/USD at 1.0000 and it is subsequently sold at 1.0050, it means that the trader made a 50-pip profit.

The profit which is made in the example above will depend on how much of the currency pair the trader purchased. Should the trader have purchased 1,000 units or a micro lot, each pip is worth US Dollar 0.10, so the trader can therefore calculate their profits as 50 pips times US Dollar 0.10 which is US Dollar 5 for a 50-pip gain.

 

What are the key drivers for the Forex Market?

  • Central Bank Interest rates
  • Central Bank Intervention
  • Options
  • Fear and Greed
  • News
  • Economic circumstances and situations in various countries

 

Trading strategies

There is one crucial difference that sets trading and investment apart and that is that a trader actively seeks certain market movements for profit whereas an investor typically waits to profits from price movements over a long-term in the assets which they have in their portfolio.

A trader will make a great number of trades within a week while the investor is happy with buying and holding their asset for months to years. Traders cannot afford to underestimate the importance which is associated with a solid trading strategy and therefore the first step in creating one is to ensure that a solid trading plan is in place.

A trading plan can be compared to a business plan when entering an entrepreneurial pursuit or venture. It helps the trader make logical decisions during times when the market moves rapidly, and emotions may lead the trader to make harsh decisions.

The trading strategy of the trader must include a market ideology, which is the goal that the trader has which acts as a motivational factor to seek their fortune in the market. The trading strategy must also include the allocation of assets and moves of diversification.

As a beginner trader, it is important to note that traders must not have more than 1, or at most 2% of their trading capital on a single trade and that the reward risk ratio is 2:1 or 3:1 where the reward is twice, or thrice, that of the risk that they are taking.

The trading strategy that the trader uses must include a mix of both fundamental analysis and technical analysis where fundamental analysis includes information on global events, economic, news, and more, and the technical analysis includes trading rules which are based on price and volume transformations.

This information should be used to determine the entry points into trades, where potential profits can be made, and where to exit the trade when the prices start moving in the opposite direction.

Traders are encouraged to develop the discipline to make great use of risk management tools such as stop/limit loss orders and take profit orders in every trade that they place.

 

Making use of technology to beat the learning curve involved with trading

With advancements in technology, more beginner traders can enter into the world of trading as there are numerous helpful tools available that make it possible to become a better trader in the shortest possible time.

Although, they do not take away from the fact that traders still need to spend time learning about the different markets, and all that there is to learn about trading.

 

Stock Screening

For those who are trading or investing in stocks, it may be quite a difficult task to find the best stocks, simply because there are so many to choose from.

Many beginners tend to follow the herd mentality involved, which means that they only trade larger name brands that make numerous headlines, while there are many other, albeit quieter, stocks that provide traders with consistent gains.

For traders and investors who opt for the stocks that make news headlines all the time, some large gains may be missed as professional traders and investors often get in, or even out, of such trades before the headlines even appear.

This is where a stock screener can be of great help as opposed to sieving through thousands of stocks listed so that traders and investors can quickly narrow down potential winners before they make their big break.

Through using such tools, traders can identify the top gainers and the losers, stocks that are on turbo momentum, and those that are about to break out above the resistance levels or break down below support lines.

There is a variety of software and mobile applications that offer this such as MarketWatch, Google, FinViz, and numerous others.

 

Trading Bots

This is not a new concept, albeit one that has not been thoroughly explored, but traders can automate their trading through the use of a trading bot. Trading bots are computer programs that have set instructions to execute trades on behalf of the trader.

They work according to predetermined rules, or market indicators and parameters. These systems can be used to trade a variety of financial instruments such as stocks, options, futures, Forex, and more.

The parameters according to which they work determine when they enter a trade, when they exit, how much capital they invest, and more.

They offer traders the option of time away from a trading terminal and they also increase the chances that beginners may have at bridging the gap which exists between inexperience and events in the market and allow for sound trading decisions to be made.

It also means that trading bots can reduce direct involvement in the market so that there is an eye kept on the trader’s portfolio while they are either at work, traveling, or sleeping. The bot will work 24/7 to identify opportunities in the market and act when an opportunity arises.

The trading bots bring a logical side to them, especially to beginner traders who are not yet sure how to control their emotions and who may not have learned discipline in trading yet. These bots act on facts and data provided and are not affected by emotions or sudden changes in the market that may delay action.

Besides, these bots also serve to reduce risks and possible losses.

 

Trading algorithms

Traders, especially beginners, may confuse trading bots with algorithmic trading, which are two vastly different concepts. Algorithmic trading is a tool that is designed to aid traders in executing orders automatically based on trading instructions that have been pre-programmed including price, volume, and timing.

Algorithmic trading also allows traders to break large orders down that the trader’s trading platform will not be able to execute in one single trade.

The primary function that algorithmic trading has is to help traders manage their costs and minimize the risks that they are exposed to. When using algorithmic trading when dealing with large orders can help institutional and individual investors avoid causing fluctuations in the market, even though the markets have the ability to correct themselves.

 

Social Trading

This is another option that traders can consider helping them reduce the learning curve associated with trading. Social trading involves traders relying on user-generated financial content that has been collated from various networks to make trading decisions.

It also provides traders with the perfect platform where they can become part of a community of successful traders who gladly share their experience and wisdom, all so that better trading decisions can be made and traders can advance in their journey to trading professionally or for a living.

Social trading can be done in a variety of financial instruments such as Forex, stocks, commodities, and more. Social trading is closely related to copy trading although, with copy trading, traders can copy the trades of others to make, and improve trading decisions.

 

Common trading mistakes to avoid

  1. A lack of preparation – a lot of beginner traders do not educate or familiarize themselves with the basics and they do not adequately prepare before they trade.
  2. They do not formulate a trading plan and they do not follow their trading plan; thus, they do not make informed and disciplined trading decisions.
  3. Not using risk management tools such as stop losses – which can lead to substantial losses where the trader’s account can be cleaned out. Using a ‘mental’ stop instead of an actual stop-loss can be detrimental as prices can move within a split second.
  4. Trading with poor risk to reward and trading with too much capital on a single trade.
  5. Not exercising enough patience when trading as a lot of beginners have the misconception that trading is a get-rich-quick-scheme.
  6. Not using proper position sizing when trading.
  7. Micro-managing trades by adjusting stop-loss and take profit levels, and more.
  8. Not having realistic profit goals.
  9. Not keeping a trading journal and noting down trades, whether they are losing or winning trades.
  10. Not making use of a demo account to practice trading and to test and backtest strategies before applying them.
  11. Taking profits too early and not cutting losses in the hope that the prices will move in a more favorable direction.
  12. Trying to use too many trading strategies instead of learning one and mastering it before moving on to another.

 

Tips on how to become a profitable trader

It may seem a very daunting and intimidating venture in pursuing the journey to become a professional trader and only doing that for a living. It may seem unrealistic to a great number of people; however, it is possible.

Numerous problems keep traders from taking the next step into starting the journey into trading for a living, including:

  • A lack of structure – where most traders do not choose one approach and keep to it, they jump from one trading strategy to the next, one timeframe to another, they continuously change indicators, chase prices, and so on.
  • They lack vision as their results vary and everything they try does not seem to work. Their systems are not consistent, and they take on a ‘gambling’ mentality.
  • There is no accountability – traders tend to blame conditions and situations in the market for their losses instead of having a closer look at their approaches, strategies, and other mistakes they may be making.
  • They distance themselves – trading for a living does not mean a life of isolation. Traders tend to hole themselves up and lose contact with the world instead of maintaining contact with friends and family that give them support and connecting to other traders who can share in their journey and offer support.

 

Here are some of the best steps and tips that traders can follow which will help them improve their trading:

  1. Find a trading style and strategy that suits you depending on the time that you have, and the resources at your disposal, to trade.
  2. Do not ride the learning curve by only making use of tools such as trading bots, algorithmic trading, social trading, copy trading, or others but form a fundamental understanding of trading, and learn all that there is to know.
  3. Formulate a trading plan and stay true to it.
  4. Active improvement is the key – by identifying problems in your trade, taking responsibility, and acting accordingly, you can improve your trading. In addition to this, adopt a process-orientated way of thinking.
  5. Set realistic goals in what you want to achieve through trading, not only to do with profits.
  6. Do not focus too much on the when and the how much, rather focus on the trading journey one step at a time. Solve problems as they occur and move on.
  7. Make use of demo trading, but do not rely on it too much like real experience in trading comes from trading in a live trading environment.
  8. Practice patience.
  9. Adopt realistic expectations and stay away from purely monetary goals.
  10. Understand your motives and become more self-aware with how you perform the best while you work to achieve your life goals.
  11. Be honest with yourself and be open to adaption in your trading approaches and strategies so that you can improve.

 

Choosing a broker

One of the greatest factors involved with becoming a professional trader is the broker as the facilitator of trades. In becoming a profitable trader, traders need to make use of a broker that is aligned with the trader’s goals, educational needs, and style of trading.

  1. Traders must know their needs such as educational, research, and trading tools, among others.
  2. Regulation – this is one of the most crucial points as traders are trusting the broker with their initial funds, their profits, and the honest safekeeping thereof.
  3. The fees involved are concerned with both trading and non-trading fees from actual trading and investing to the service fees that the broker charges, the deposits, withdrawals, inactivity, currency conversions, and more.
  4. The trading platform that the broker offers and whether it can be accessed over an array of devices.
  5. The account types and the features that the broker offers.
  6. Educational materials and research tools and resources, additional trading tools, and more.
  7. Deposit and withdrawal options and the ease with which funds can be deposited to and withdrawn from the account.
  8. Customer support – the avenues through which traders can contact the broker, the times that support is available, the promptness in response, and more.

 

Final Thoughts

For many beginner traders the financial markets and the process involved with participating in trading, regardless of the financial instrument that they are trading, may be an intimidating and daunting venture.

However, it is important to consider that all professional traders had to start somewhere as well and they, too, had an overwhelming feeling when faced with all the information that beginners are faced with today.

These professionals did not jump from the first step in starting to trade to where they are now. And although it may have taken years to get to where they are in trading for a living, a lot of them, if not all, will affirm that the journey was worth it in the end.

A lot of beginners may be discouraged from trading as they enter into the industry thinking that they will obtain a substantial amount of profits overnight with minimal effort and this is also one of the main reasons why so many traders fail before they even see their first profits.

By following the guides, tutorials, and other educational information available, and by putting in the work, which is required, anyone can start paving the way for a profession in trading.

 

 

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

Table of Contents

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