What is the difference between trading and investing?
Trading and investing are activities that are often used to save money and to increase personal income. Both trading and investing suit work on the financial market. The profitability depends on the assets and the correct approach of the investor or trader. Investing is obtaining the asset with the purpose of making money on its increasing value.
Trading is the buying and selling of a certain asset within a short period. Both types of work have a common feature, they both used to save and multiply the already existing funds. However, there are several differences between these two approaches.
Differences between trading and investing
- Time period. Investing works in the long term. The investor buys a certain asset and expects that its value will rise over time. As for the trading, the trader buys or sells equity within a short period and makes money on the movement of the price.
- Capital growth. The profit of a trader’s transaction may vary within a broad range. Some options may be highly profitable, and some not. As for investing, the capital grows gradually year after year.
- The level of risk. Trading involves higher risk and higher potential returns as the price might go high or low in a short while. Investing is characterized by lower risks and lower returns.
- Skills. The trading demands the understanding of the technical and fundamental analysis as the trader needs to make money during every trading session. Investing, in contrast, demands only the ability to select the most profitable equity.
- The one who does. In the trading is the trader who does all the work (technical analysis, following the signals, selecting the trading instruments). As for investing, all work is done by the investment fund or company.
What is investing?
Investing is the act of obtaining the asset with the purpose of making money on its increasing value. Investors analyze the prices on the different assets (stocks of the most profitable companies, precious metals, bonds) and select the most profitable ones. They address financial analytics, follow the market tendencies and the economic conditions in a certain country. Investors play the long game that’s why the ability to forecast future trends is crucial for them.
Investments are an important part of the economy and an important part of personal finance. For individual investors, investments can allow you to grow your wealth over different periods.
One of the most important parts of investments is compounding. Compounding is a term for how your investments increase in value over time.
To get a better understanding, here’s an example: Let’s say you have $1 000 and invest it in a stock market index fund that earns 10% over the first two years. While quick math might say you would earn $100 per year, you would actually earn more with compounding.
After the first year, your $1 000 investment would be worth $1 100. But after another year growing at 10%, your original $1 000 grows by 10%, and the $100 you earned last year grows at 10%. By the end of the second year, your $1 100 investment would grow to $1 210. The extra $10 you earned is from the compound growth of your investment. If you leave that investment alone and it continues to grow at the same 10% rate, you would have $17 449 after 30 years.
Of course, you can’t plan on earning 10% every year forever. There are some good years and some bad years. You may come out, in the end, making 5% or 50%, or more or less, depending on the investments you choose and the timing of your purchase and sale. Some investments may even lose money, which is why it’s important to understand what you’re investing in and why.
When you decide to invest, it’s important to only work with reputable investment companies that follow investment regulations and work to protect your best interests. Investment is a strongly regulated activity. There are many laws and organizations the control and monitor the investors and protect them from fraudulent activity. The most well-known are the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). That’s why before start investing it is better to check the local regulations.
Types of investment
- Stocks. The stock is a security that represents the ownership of a share in a certain company. When the investor buys a stock, he acquires the stake in the publicly-traded company. If the company states that it is publicly traded, that means any person can acquire its stocks. Investors obtain the stocks of the most profitable companies like Google or Apple hoping that their price will rise up and investors can receive the profit. After that, the investor should follow the development of the stocks he owns. If the capitalization of the company decreases, the investor should sell the stocks.
- Bonds. A bond is a loan the inventors make to a company or government. The companies issue corporate bonds, and the governments have municipal bonds. When an investor acquires a bond, he allows the bond issuer to borrow the money and pay it back with interest. The main risk of investors is that the issuer could default. The less risky the bond, the lower is its interest rate.
- Mutual funds. A mutual fund is the amount of many investors’ money that is invested in a number of companies. They can be managed passively or actively. An actively managed fund has a special fund manager who selects securities in which to put money of the investors. A passively managed fund (index fund) just tracks major stock market indices like S&P 500 the Dow Jones.
- Exchange-traded funds. An exchange-traded fund or ETF is a collection of investments that tracks a market index. ETFs are bought and sold on the stock markets. This type of investment may seem familiar to mutual funds. However, there is a difference. The price of ETFs changes throughout the trading day and the price of mutual funds stay the same.
- Certificate of deposit. A certificate of deposit (CD) is a product offered by banks and credit unions that gives an interest rate premium in exchange for the client agreeing to leave a deposit untouched for a specified period. When this period is over, the investor gets the principal back together with a predetermined amount of interest. The longer the loan period, the higher the interest rate.
- Commodities. A commodity is a good that has a certain value and that can be invested in. The most well-known commodities are precious metals (gold, silver), sources of energy (oil, gas), agricultural products, livestock. Investing ins a commodity that can be very profitable if the investors select the products whose prices are rising.
- Digital money. Digital money or cryptocurrencies are digital currencies not backed by real assets. They are traded between consenting parties with no broker and tracked on digital ledgers. This technology is called a blockchain. The most well-known cryptocurrencies are bitcoin, litecoin, and etherium. Investing in digital money is highly profitable because the cost of one cryptocurrency is often equal to the cost of several thousand dollars.
- Retirement plan. A retirement plan is a financial strategy for saving money to sustaining oneself during retirement. In most cases, the individuals use the non-state pension funds for this purpose. However, they also may diversify their savings among various equities.
- Annuities. An annuity is a contract issued and distributed by financial institutions where the funds are invested. The main goal of an annuity is to pay the fixed income later. The annuities may last for a certain period or during the whole life of an investor. In most cases, the annuities are acquired by persons who seek stable income during retirement.
What are the basics of investing?
The shorter the time horizon, the higher is the probability to lose the money invested. That’s why the financial experts advise investing money into the account if the trader needs to access it within 3 years. If the investor wants to receive the profit through a long period, he should select the asset to trade very attentively.
Another important thing is the diversification of risks. The investor should distribute the funds between the several assets. There is a good proverb: don’t put all eggs in one basket. When the price of one asset will fall down, the investor won’t lose money because he had secured his fund beforehand.
And the third factor is risk tolerance. The investor should analyze the dynamics of growth for different assets and define the level of risk he’s ready to accept. The price of different assets grows with the different speeds. Some assets suit conservative investing with slow growth and stability. The other assets are more unstable, but they can give more profit. The investor should define which level of risk he is ready to accept and how much he’s ready to lose if the price for the certain asset will fall down.
How to start the investment
Before start investing you should take several steps. Investing is a serious long-term activity that requires education and a consistent approach. You don’t need to have a Ph.D. in economics to invest. However, there are several important steps you should take before investing.
- Set an investing budget.
Calculate which sum you can put in for investment. Remember that this sum shouldn’t be critical for your daily budget. You may start from 5-10%. To define the necessary sum you may use an investment calculator. Most investment agencies or firms have such calculators. Also, you may follow the special investment programs.
- Invest regularly a little bit at a time.
The key factor of a successful investment is regularity. Invest a small sum every month. When your investing account regularly there is always a sum that grows year by year. Within several years, a small amount of initial capital can increase significantly.
- Accept some risk.
Even the most profitable company or fund may be affected by economical events of the fall of the market. That’s why you should understand which percent of risk you ready to take. If you prefer the conservative investment with a small but stable amount of annual profits, pay attention to precious metals, or programs for retirement. If you like more risky but profitable investments, pay attention to cryptocurrencies or stocks.
- Get started as early as possible.
When people are young, they rarely think about the future. However, the earlier you put by the certain amount of money, the bigger sum you will get in the end. It happens because when you invest a certain some early, this sum has more time for growing. Of course, it is normal to wait for the moment when you have a stable job a possibility to spend a certain sum on the investing. So, you can wait until you become a highly qualified specialist. Also, you may check the special investment program for young adults who just start their careers.
- Keep a long-term perspective.
Remember, that when you invest you won’t see the results immediately. Investing requires months and years to bear the fruits. That’s why you should pay serious attention to the state of the program or company you want to invest in. Check the portfolio of this company, the percentage of annual profitability, the way this company ruled.
- Learn about the mechanism of investing.
If you just start to invest, you need to understand how it happens and how to identify the most stable profitable ways to trade. You may pay attention to the special resources for investors on the internet and look for educational materials. Also, you may read the reviews of the independent experts concerning certain companies and investing methods.
What is trading?
Trading is the act of buying and selling a certain stock within a short time period. While investors typically measure their time horizon in years, traders think in terms of days, or even minutes. There are several types of trading:
- Day trading. The buying and selling stocks in a single day. Individuals hold stocks for a few minutes or hours. A trader involved in such trade needs to close the transactions prior to the market closure.
- Swing trading. The earning gains from stock within a few days of purchasing it; ideally one to seven days. A swing trading position is typically held longer than a day trading position.
- Scalping. Scalping is reaping small profits repeatedly ranging from a dozen to a hundred profits in a single market day. Scalping requires high concentration and quick decisions.
- Momentum trading. The trader exploits a stock’s momentum, i.e. a substantial value movement of stock, either upwards or downwards. Momentum traders will seek to identify how strong the trend is in a given direction, then open a position to take advantage of the expected price change and close the position when the trend starts to lose its strength.
- Position trading. Holding a position with a long term (weeks or months). As a result, a position trader is less concerned with short-term market fluctuations, and usually holds a position for weeks, months, or years.
Which is better: investing or trading?
First of all, it is necessary to admit that there is no right or wrong way to save the funds. Both types of activities have their advantages and disadvantages, it is you who decides which one is better. If you want to save money for the future or create some sort of rainy-day fund, investing is the best thing for you. Also, investing suits those who don’t have the possibility to monitor the market or to speculate on the stock exchange regularly.
If you want to receive the profit within a short time period or you consider trading as your future career, investing won’t suit you. The trading will be much better because it will allow you to get the profit right here and right now.
You also occupy both of these activities. You may invest some of your funds for the future and to trade different assets at the same time. Also, select the different equities for the different types of activities. For example, you may trade the forex and binary options because the price for these assets is very volatile: today they are highly profitable, and tomorrow everything changes. As for investing, pay attention to the commodities and the stocks of the stable companies because the prices for these assets usually change more slowly, and you will have the time to monitor them.
How do I learn about trading and investing?
Both activities require practice and studying. Learn about the asset you want to work with and monitor the level of its profitability. Also, read the forecasts of the financial analytics to understand which assets are losing their value and whether it is better to sell or buy them.
If you want to learn about investing, read the articles about the most profitable activities. You can pay attention to the opinions of financial experts and blogs about investing. Monitor regularly the prices of the equities you plan to invest in. Compare the investment funds and choose the most stable one. Also, read about inflation and its influence on the economics and values of certain assets.
If you want to learn to trade you should open the demo account on a good trading platform and practice. Read about the different indicators, trading strategies, and market psychology. Practice regularly and try to work with different assets. When you will be confident enough to work with real money, open a paid account. However, don’t make the big transaction, increase the amount of your trades step by step.
What are the basics of day trading?
Day trading is the buying and selling of assets within a trading day. The day trader opens the short-term options and makes the small sums during these transactions. Day trading is very popular among those who consider trading as a full-time job. Day trading requires an understanding of the mechanism of the market volatility and the skills to work with trading indicators. Also, the day trader needs to be calm, collected, and know how to make quick decisions.
To make the right decision, day traders constantly monitor the market news and pay attention to the jumps in the exchange rates. To make money day traders apply various intraday strategies.
Types of intraday strategies
Scalping. Trader makes money on the small transaction during the small price changes.
High-frequency trading (HFT). Traders use the special trading robots to analyze input data and to make a decision.
Range trading. Trader uses the support and resistance level to determine when it is better to sell or buy.
News-based trading. Trader constantly monitors the market news and make decisions based on this information.
Day Trading Rate of Return
The day trading rate of return may vary. The amount of profit depends on the market volatility, type of asset, and the skills of the trader. Some traders consider this practice very controversial as there are many fraudsters that promise a quick and simple income and make the inexperienced traders lose money. Others consider day trading unprofitable because the amount of the standard transaction is rather small.
However, you don’t need to underestimate day trading. This type of trading will allow you to see the result of your transactions immediately. The success in day trading is to open the number of options you can monitor. To identify which number of transactions you are able to monitor, open the demo account and start your training.
Day trading is not for everyone and it is a very risky style of trading. It requires a high level of self-control. But, as a result, the trader receives the opportunity to make and withdraw the money after every win. He doesn’t need to wait all day even more while the option expires. If you are a novice trader, make your first steps in day trading on the demo account. Test several intraday strategies and decide if this method of trading works for you.
Day trading markets
The day trader may choose among the numerous markets for his daily work. Usually, the day trading markets are opened on business days and closed for the weekends and holidays. However, some markets are opened 24/7. Before starting the work the trader should study the different types of markets and decide which one is more convenient for him. Each type of market has its own special features.
During the several years, the cryptocurrencies were considered as some sort of “soap bubble”. But in time crypto markets became popular together with the growth of transactions in digital money. In contrast with the traditional currencies, digital money exists only as a shared digital record of ownership, remaining deposited on a blockchain. A blockchain is a digital register of recorded data. The process of adding and verifying digital money into the blockchain is called mining. All new tokens are usually created during the mining process.
In contrast with the standard markets, the cryptocurrency markets are decentralized. This means that they are not issued or backed by a central bank or governmental body. They run across a computer network. However, digital money can be bought, and stored in electronic wallets.
Crypto markets submit to the laws of supply and demand. But in contrast with the standard markets, they are not affected by economical and political events. However, the users need powerful and modern computers to mine cryptocurrencies. Moreover, the law concerning cryptocurrencies and crypto trading vary in different countries from legality to total banning.
That’s why you should check your local regulations concerning digital money if you want to become a crypto trader.
Read more about cryptocurrency trading in our cryptocurrency trading article
Binary options trading is a popular way to make money for those who don’t have the possibility to speculate on the major exchanges. Primarily, the binary options used to be an Over-the-Counter tool that was traded only by financial institutions. But at the beginning of the 2000th, the Securities and Exchange Commission opened this market for all.
The binary option is the option with two possible outcomes — a fixed sum of money or nothing. That’s why the options are called binary. The main task of the options trader is to make the right forecast: will the price for the certain asset be above or below a certain price in a certain time. A binary options trader should completely understand how the options work, how to use the technical instruments and how to create a working trading strategy. To do this they study technical and fundamental analysis.
Using the binary options the trader can work with any type of assets: forex, stocks, futures, even cryptocurrencies. All that he needs is a reliable broker, professional trading software, and a working trading strategy.
Forex (FX) Trading
The forex or foreign exchange market is the largest in the world. It is made up of financial companies, banks, hedge funds, investors, and forex brokers. FX is a global network of computers from all over the world. It consists of the over-the-counter market and the interbank market. The interbank market is a global network used by financial institutions to trade currencies and derivatives between themselves. Here the banks trade for the balance sheet adjustments, hedging, and on behalf of clients. The OTC market is the place where traders operate via brokers and online trading platforms.
The forex market was founded after the Second World War. Up to the 20th century, currencies were related to precious metals, but when this system collapsed the international organizations were created to simplify the global financial activity. There was a General Agreement on Tariffs and Trade, the International Monetary Fund, and the International Bank of Reconstruction and Development.
Now the value of the curtain currency is determined by the laws of demand and supply. Traders and organizations can exchange foreign currencies according to their actual rate. The rate changes every day, its rises and falls are influenced by economical and political events or global crises. That’s why the traders prefer to work with stable currencies such as American Dollar, Euro, British Pound, Japanese Yen.
Trading platform, tools
Trading platforms and trading instruments are crucial for profitable work. It doesn’t matter which asset you trade. If you don’t have a professional instrument, you won’t succeed. Pay attention to the reviews of professional trading experts and other traders while you choose the working instruments. Use only the instruments whose work you clearly understand. Remember that any instrument should be tested in the demo account with several strategies.
What is the trading platform?
The trading platform is the software that gives the possibility to open and close the trades via the intermediary (broker). The trading platforms are often pegged with different financial instruments such as online charts, economic calendars, and real-time signals. A good trading platform allows working with various assets: forex, stocks, binary options, digital money.
There are two types of trading platforms — prop platforms and commercial platforms. Prop (abbreviated from “proprietary trading”) platforms are developed by the major brokerages to comply with their requirements. Commercial platforms are created for retailer investors and traders. These platforms offer various trading instruments and educational materials.
How to choose a broker?
A broker is an intermediary who arranges transactions of a trader during his work. The quality of the broker is a crucial thing for the trader. This is necessary to pay attention to the reputation of the broker. A good broker has many positive reviews from the traders and trading experts, numerous assistant tools, accurate signals, and qualitative and client-friendly technical support.
There are many brokers on the market nowadays and it is not easy to find reliable ones. If you want to know how to identify a good broker, read this article.
What trading tools are needed?
For the successful and convenient work trader needs numerous assistant tools. The main working instrument is the trading signal. A signal is an alert that appears when something changes on the market. The trading signal submits to the programmed algorithm (trend or reversal) and includes all information the trader needs: type of signal, power, expiration, asset, time of signal’s appearance.
Remember that the signal it’s just a recommendation and not the call to action. For successful trading, you should follow your trading strategy and act with a cold head.
If you want to know more about the trading signals, read this article.
How do I start trading?
It is not easy to become a good trader. You should educate yourself and follow the rule of three P’s: persistence, patience, practice. These are the necessary qualities you need for success. That means you should be calm, collected, and practice regularly. Follow these simple steps and you will see the positive result after some time.
- When you make the first steps in the trading, work on the demo account. It will allow you to trade safely without financial risks.
- Choose a reliable broker with a good reputation. Pay attention to the comments of the other trader and reviews of the trading experts.
- Create a trading strategy. Your actions should be circumspect and logical.
- Educate yourself. Read the educational materials, watch the video tutorials about the different strategies and trading indicators.
- Control your negative emotions. If you have losses, don’t give up on trading. It is better to analyze your mistakes.
- Learn about money management and risk diversification. It will help you to save the funds when you move to the Professional account.
If you want to know more about how to be a successful trader, read this article.
Where to start as a beginner?
When you are a novice trader you should define what do you want to receive from trading? Do you consider trading as a future career, a part-time job or you just want to try a new activity? Remember that trading is not the magical way to make money without effort. It requires practice, time, patience, and some kind of talent. Answer the following question do understand yourself and make your expectation more realistic.
- Is trading suits you?
The most important question you will ever ask yourself before you get into something is “is this thing that I need?”. Because if it’s not, then you will be wasting your time if you go for it. For some, the answer to this question will be a “ YES”.For others, it might be more difficult to answer. And of course, you’ll never know until you try. Ask yourself, what is the primary reason that you want to be a trader? Be honest with yourself. Is it money it’s just an interest? Do you like solving complex riddles? Can you work with numbers? If you are only interested in trading because you want to be rich and have a high-prestige job, then you might think twice before starting. Not to say that you won’t make it, but chances are, you will probably quit it sooner rather than later if you don’t truly enjoy doing it. Finally, successful traders usually have such qualities as patience, a calm mind, discipline, ability to concentrate. If you are really impatient, hot-tempered, this path might not be for you. Or you will need to learn to discipline yourself in the long run if you want to make it work.
- How much risk you can take?
If you have decided that trading is for you, the next question to ask yourself is “ how much risk can you take”? Do losses hurt more in general than you enjoy wins? This is important since it can help decide what type of trading is for you. For instance, if you are very risk-averse, it might make sense for you to be an investor or position trader. Whereas if you tolerate risk very well, you might be better suited for daily stocks/futures/options trading. In general, the more risk-tolerant you are, the shorter the period you can trade. Also, the more aggressive strategies you can use, and the more risky investments you can select. Not to say that you can’t trade any of those if you are very cautious, but you may simply lose control and not enjoy the trading process. However, you may not know your risk tolerance until you start trading.
- How much time you have for trading?
Another important question you should be asking yourself is “how much time do I have?”. It’s a very important one because it will dictate your investment strategy. For example, if you have quite a few hours left off of your main responsibilities for trading, then you could easily be trading and watching the markets on a daily basis. However, if you only have an hour at best, then you might be better off investing long term, in an index or a fund. If trading is your part-time activity remember that it should hinder your daily job or you may lose both sources of money. Also, don’t forget about your family, hobbies, and other favorite activities. If you will that you are losing something when you spend the time on trading, you should correct your trading schedule and trade in another time.
You have answered all three questions and you understand that trading is that what you really need. In this case, you should take the following steps to enter the tradign world. They are quite simple but effective, especially for novice traders.
Steps for novice traders
- Read your current legislation concerning the trading. Remember that in some countries there different restrictions on binary options or cryptocurrency trading.
- Choose a good trustworthy broker with a good reputation and various assets. Pay attention to the review of other traders and broker ratings. Also, check if the broker is available in your country and which withdrawal method he offers. Don’t forget to check the amount of the minimum deposit. Read the service agreement carefully. if something in the service agreement bothers you, ask the support service of the broker to clarify this point.
- Choose the professional trading software. Good trading software should be easy to use and compatible with all types of operating systems.
- Select the simple strategy that suits the trading on small timeframes. When you learn to trade the multiple stages will be too difficult for you.
- Choose the strategies with the classic trading indicators because you can find them in any trading terminal. You need the time to understand how the instruments work to make an accurate forecast.
- Don’t place too many indicators on the chart, because they may confuse and mislead you. Two indicators and trading signals will be enough for you.
- Always compare the data of the indicators with the data of the signal. Your trading idea should be confirmed by three indicators.
Beginner Day Trading Strategies
Here are examples of the simple trading strategies that you may utilize. Firstly, follow the strategy step by step. When you become more experienced, you can modify it as you need. If have any difficulties contact the trading community because these strategies are popular and someone probably has applied them before you.
This strategy uses three indicators. Don’t apply this strategy during the flat period.
Simple (SMA) moving average with a period of 10. The trend indicator, which will determine the general direction of the scalping trend.
RSI with a period of 14 and an additional level of 50. An oscillator that will confirm the time to open the option.
Standard MACD (12,26,9). This indicator functions both as the trend and oscillator, it will give the final signal to open the option.
To open a transaction, the following conditions are necessary:
- RSI line 50 level crossing upwards.
- MACD also crosses its zero lines from the bottom top or its histogram turns up after a new local minimum (signal of medium strength).
- Price moves above the moving average.
Look to steer a middle course: too short (1-2 minutes) and too long (10-15 minutes) option life is considered dangerous. In the first case, the price risks «not having time» to go in the right direction - we get a loss. In the second, the market will have time to turn around, which again gives a negative result. Do not forget that the strategy is scalping, so try not to go beyond the range of 5-7 minutes. After strong trends, RSI, like any other overbought/oversold oscillator, can trample for a long time in critical zones or around level 50, without crossing it. At the same time, MACD and SMA can give strong signals to open options. To take such signals to work or not, everyone should decide for himself, but still, it is better for beginners to wait for a completely formed entry point, according to which the “Trinity” strategy gives about 70-75% of successful transactions.
This strategy works great for scalping, but it is not intended to be used during the period of flat. It uses three trading indicators.
Two Simple (SMA) and one exponential (EMA) Moving Averages. This combination will determine the direction of the scalping trend.
Standard MACD (12,26,9). This indicator functions both as the trend and oscillator, it will show the moment to open the transaction.
Rise (CALL) Option: The Fast Moving Average crosses from down up both slow-moving averages with confirmation by the MACD indicator (one or more bars have to be above the zero lines).
Fall (PUT) Option: The Fast Moving Average crosses from top to down both slow-moving averages with obligatory confirmation on the histogram of MACD (one or more bars have to be below the central line).
Open a trade on the next candle after binary signals. The time of expiration of options has to be not less than 5-7 minutes even if as a working timeframe it is chosen of a minute. The time of expiration can be increased up to 5-7 minutes if a steady trend is observed. Also, during such periods, it is possible to open several options with different validity periods. Intraday strategy “Woodcutter” represents a reliable system of conservative scalping for trade in the stable market. Parameters of trade tools can be changed according to the current volatility. The most profitable binary options signals will only be on trend areas, during the flat periods stay out of the market. The strategy is quite well automated, but as with any scalping system on a minute timeframe, it is better to trade manually. This will help to effectively adjust the strategy to MACD reversal signals, rebound from moving averages and get a stable profit every day.
This simple strategy works perfectly on the intraday trends. It includes three technical indicators.
Three exponential (EMA) averages with periods of 10, 20, and 30. These indicators will show the direction of the short and medium-term trends.
Two MACD (12,26,9) and (50,75,9). MACDs work both as the trend indicator and as the oscillator, and they will show the moment to open the option.
Rise (CALL) Option: The Fast Moving Average crosses from down up both Slow Moving Averages with confirmation by two MACD indicators (one or more bars have to be above the zero lines).
Fall (PUT) Option: The Fast Moving Average crosses from top to down both Slow Moving Averages with obligatory confirmation on the histogram of MACD (one or more bars have to be below the central line).
Open a trade on the next candle after binary signals. The time of expiration of options has to be not less than 5-7 minutes even if as a working timeframe it is chosen of a minute. If possible, close the current transaction 15-20 minutes before publication of the market news. After strong trends, RSI, like any other overbought/oversold oscillator, can trample for a long time in critical zones or around level 50, without crossing it. At the same time, EMA can give strong signals to open options. To take such signals to work or, not everyone should decide for himself, but still, it is better for novice traders to wait for a fully formed entry point, according to which the “Scooter” strategy gives about 70-75% of successful binary options signals.
Rules For Successful Trading
The rules of successful trading are quite simple, but every trader should follow them. Remember that you want to succeed in trading you should take this activity seriously. It requires time, effort, and education but in the end, you will be rewarding. Trading is not easy but a journey of thousand miles begins with a single step!
- Test your news ideas on the demo account. It is better to waste some time than to lose the money.
- Self-education is necessary. Improve your skills constantly and learn about the news strategies and indicators.
- Be disciplined and trade at the same time during the same amount of time. Trading is a skill and every skill requires practice to be sharpened.
- Before open, the option, confirm your idea with three trading indicators. Different indicators identify the different things.
- Be calm and collected. When you become nervous you can make the wrong decision, miss the moment to close an option or leave the market too early.
- Mistakes and losses are the normal part of the trading process. Don’t let them bring you down especially when you are learning.
- If the strategy doesn’t work, try it with another asset or check yourself. Maybe you made the mistake.
- There is no perfect strategy that will give you profit all the time. The key to successful trading is the trader himself.
Risk & money management
Risk and money management are two important things that every trader should learn. First, let’s clarify the difference between these two terms. Risk management is the actions taken to reduce or remove the risks. Money management is the actions taken to save money during the trading process.
We start the risk management. Apply these rules when you move to the professional account and begin to work with real money.
Recommendations for the risk management
- Diversify your risks. Even the most stable currency may be impacted by economical events and lose profitability. Open the several options with a for several assets. For example, you may open one option for the currency pair GBP/USD, another for the EUR/JPY, and the third for the EUR/USD.
- Don’t spend all your deposit. The market may be volatile and unpredictable. Always save a sum trade further and compensate for the losses.
- Don’t open the transactions in an amount bigger than 5% of the actual deposit. Open positions on several timespans but within the sum of the guaranteed provision.
- Don’t forget about the stop-losses. They will help you to leave the market with a small profit when the situation is critical.
Now let’s start with money management. These recommendations are rather simple but reasonable. Apply them during your daily work.
Recommendations for the money management
- Set the acceptable amount for one trade. Don’t open the big transaction when the market is highly volatile.
- Calculate the acceptable amount of potential losses. If you see that you lose too much during the trading session chose the asset or the trading strategy.
- Follow the market news. They appear at the same time and display important information about the rates for different assets. To follow the market news regularly, use the economic calendar.
- Control the number of your opened trades. If you open to many options, you can’t monitor all of them. Remember that quality is more important than quantity.
Trading Psychology Definition
It doesn’t matter at what stage you are in your trading career. Even if you’re a beginner just learning the ropes or an expert trader managing multiple trade positions, one’s trading performance and overall well-being could benefit from trading psychology tips. Trading psychology is another key aspect of successful trading. The possibility to control the nerves is important as the trading strategy and analytical instruments.
Trading psychology is the mental and psychological state of a trader that determines the success or failure of his work.
Trading psychology refers to the trading personality, his mental and emotional state, and his mood that may impact the final result of the trading. Also, trading psychology describes the trader’s possibility to take risks and be disciplined during the work and training. The main emotions that can hinder the trader are fear of loss, greed, fear of failure, impatience, lack of concentration.
Trading psychology states that the trader’s decisions can be influenced by both the cold mind and emotions. Moreover, often the influence of emotions may prevail. When the trader ignores or submits, he makes the mistake and loses the money. The solution in this situation is the following: to recognize and analyze the negative emotions, to understand where do they come from, and to reduce their negative influence. Understanding the trading psychology helps the trader to control himself and to avoid unexpected losses.
Trading psychology allows you to stay focused even in the middle of a long losing streak and gives you the confidence to bounce back from a large drawdown. It enables you to keep a clear head and manage your expectations when you’re having a good run. This is what separates seasoned trading pros from beginners, as proper trading psychology makes you focus on the process and not the profits.
As with professional athletes that also have a sports psychology mentor that helps them keep their head in the game, traders also need guidance when it comes to having the right frame of mind, especially during ever-changing market situations. In a fast-paced trading environment, one can easily get distracted or stressed in trying to make money, but trading psychology ensures that one is focused on staying disciplined or keeping a level head.
With the right trading psychology, one can be able to step back and take a look at the bigger picture of one’s trading endeavor instead of zooming in to winners or losers. Too often, a losing trade can dampen one’s confidence and destroy one’s focus for the next trade setups. Similarly, a winning streak can lead to overconfidence and also ruin one’s focus moving forward.
What’s interesting about trading psychology is that it is a constant learning experience. While mastery of basic forex techniques such as market analysis or building on winning positions is possible, trading psychology takes a long time to master and even the best traders out there do need a little guidance every now and then.
Importance of Trading Psychology
Trading psychology is important because we are humans and our decisions are influenced by emotions as by consciousness. The impatience, bad mood, and the fear to lose everything may distract the trader from the strategy especially when it comes to day and swing traders. They work on small timespans and don’t have too much time to think.
When the trader is anxious and depressed he may take the wrong steps and lose everything or miss the opportunity to make money. That’s why it is necessary for a trader to contact the trading community. Here the trader can find advice in difficult situations or share negative emotions. Also, he may see that he is not alone with his problems.
To find a supportive trading community read the different forums and groups in social media. If you see that you are not welcomed in some forums or you don’t like the quality of communication, leave this forum. Subscribe to the group where the participants are polite and friendly. Ask the questions and give the recommendations in return especially to the beginners. Remember, that trading community is big and it develops every day.
Steps to manage your trading psychology
- Improve your knowledge.
Your confidence depends on your knowledge and the level of your skills. Constantly educate yourself and read about the new strategies. Your knowledge and your skills will make you prepared for the different outcomes and difficult situations. Watch the videos where the professional traders investigate different “cases”, i.e еру the situation that the trader may face. A strong foundation of knowledge is always a good thing, and it’ll help you make more informed decisions as a trader.
- Practice constantly.
When you practice constantly you gain the experience to solve the different situations. If you know that you have already faced a certain situation before, you will be sure that you will solve a certain problem in the future. Practice is also the best and most reliable way to gain the mental strength it takes to trade and to improve your mindset. You’re rarely good at something the first time you do it. But when you constantly improving yourself step by step your mind will be stable.
- Learn the rules of money management.
The right money management will allow you to avoid the situation when the deposit disappears. Plus, money management is necessary to identify the moment when it is better to leave the market for saving the deposit. You can read about money management in educational blogs, tutorials of practicing traders, or professional literature.
Recommendations for the novice traders
- Remember that you will lose exactly as much as you bet. That’s why it is necessary to set the acceptable amount for the option you want to open. Don’t open too big trade when the market is highly volatile or when you just began to work with real money.
- Calculate the amount of money you are able to lose. There is no perfect strategy and even the professionals lose the funds. But it is necessary to identify the moment to stop and to say “enough”.
- Analyze the potential risks and benefits before opening the trade. That means you should trade with a cold head. Don’t open the option when you see that only one indicator shows the advantageous signs. Check your suggestion on three indicators and open the option even all three instruments confirm it.
- Follow the market news. If you see that the fall of a certain currency is expected it is better to choose another asset or to monitor the signals for this currency. The professional traders recommend staying away from the market 30 minutes before and after the publication of the fundamental news. This is the time when the market restructures. To follow the market news use the economic calendars.
- Create a plan for the situation of loss.
The main human fear is uncertainty, especially when it comes to the loss of money. Moreover, the trading process is rather unpredictable and no trading strategy can give you a 100% winning result. That’s why you need to create “a worst-case scenario”, the sequence of actions in the situation of loss. This plan reduces the level of uncertainty when something goes wrong.
There may be several escape routes. First of all, make stop-losses. Stop-losses will allow you to leave the market when the situation is getting out of control. There are several patterns that used to choose the place for the stop-loss.
- Horizontal levels. The traders place the stop-losses several points below the level of support and above the level of resistance.
- Trending lines. Trader creates the trending line and places stop-loss near the local maximum or minimum.
- Signal candlestick. The trader places the stop-loss near the candlestick. This method suits the traders working with the Japanese candles.
- Moving Average. The traders use the Moving Average as the trending line and place the stop-loss at the moving level.
- Parabolic SAR. The trader places the stop-loss higher or lower than the point of this indicator.
Another way is to create a trading strategy for working with the small deposit. There are several strategies developed for the work with a small sum for novice traders. Plus, you may apply the scalping and “speed” strategies because they allow increasing the small deposit very fast. When you have a plan B for the difficult situation, you will become more confident.
- Give yourself time to recover your mental resources.
If something doesn’t work, find a time to restore your mind and to calm yourself. We all have a but days. But if you work too much you won’t have the time to restore your mental state. To avoid overworking create some kind of work and rest schedule. Trade at the same time and spend the same number of hours for trading. When you have a rest try to distract yourself from the trading or remember the positive moment related to it. These breaks will allow you to think outside the box and to find unexpected solutions for difficult situations.
- Compare your results with yourself and not with others.
The psychologies often say that comparing yourself with the “former you” is much more productive than comparing yourself with others. To monitor yourself you may create some kind of “diary” (electronic or paper), where you should fix your wins and losses. Also, there is necessary to fix the strategies or situation that provokes the difficulties, the questions you have, and skills you need to improve. Such a diary will help you to monitor your development, see your weak and strong points, and remind you about the things you need to learn. With a trading diary, you can see how fast you progress and how you improved yourself.
- Inspire yourself with the stories of other traders.
When traders face certain difficulties they think they the only ones who have to deal with such a situation. But of course, it is not true. And the inspiring stories of other traders help the traders to see that their problems are often common and widespread. When you read the stories of the traders that could manage certain difficulties you may take something from their experience for you. Of course, every case is unique and the experience of others is not always applicable. But studying the experience of other traders will allow you to profit from the mistakes of other traders.