Online trading attracts many users for its accessibility and eventual profits, which most beginner traders dream about. Moreover, this is an opportunity for market participants to make a fortune and conduct their own business without being employed anywhere. While the latter is quite a long path, most traders treat trading as their part-time job and as an additional source of earning money. By reading this article, you will learn more about the basics of online trading, the most common terms, types of trading instruments, and assets, as well as some secrets on how to become a successful trader. To start online trading, join Binolla now.

What Is Online Trading in Simple Words?

Online trading is a financial operation that involves buying/selling various assets with the aim of profiting from their price differences. The easiest example is when you buy an AAPL stock, for instance, at $200 and sell it later when its price surges and hits $205. While $5 is quite a small profit, you can invest more money or use leverage to increase your eventual trading income.

Online trading provides you with access to dozens of exchanges and thousands of international markets where you can choose currencies, stocks, indices, cryptocurrencies, commodities, and many other types of assets. With this huge variety of instruments, you will also be able to find one or even several to trade or add to your portfolio.

A Bit of History

Online trading is a relatively new form of financial market activity. If you delve deeper into centuries, you will see Munehisa Homma (the famous inventor of Japanese candlesticks) drawing his candlesticks on washi, traditional rice paper. According to the legend, he established a network of signalers who transferred information about minor price changes on the Tokyo exchange using flags. Once a new quote reached Homma, he drew a new candlestick or changed the current one to update the chart.

We don’t know exactly whether this legend was true or not, but what we know exactly is that before the computer and internet eras, trading was offline. Traders’ and investors’ workplaces were in huge halls of exchange. Other investors used land-based phones to place orders.

With the emergence of cutting-edge technologies and the appearance of online trading platforms, you don’t need to draw candlesticks or call your broker to buy or sell a stock, currency, or other asset. Nowadays, the only thing you need to do is create an account at a brokerage firm, log in to the platform, and use it to place orders. Moreover, online trading platforms have a lot more options, allowing you to analyze markets using a lot of various technical analysis tools.

The Most Commonly-Used Online Trading Definitions

When conducting online trading activities, you will definitely stumble upon the following words and definitions:

• Trading platform. This is a special online software that is used by traders to perform trades as well as conduct market analysis. Nowadays, trading platforms can be desktop or mobile. The latter allows you to conduct trading activities from anywhere if you have a stable internet connection;
• Technical analysis. To become a successful trader, you need to try to predict the price movement direction as well as find entry points for your next trade. To do that, you can use technical analysis that works directly with price charts and offers both technical indicators and drawing tools;
• Fundamental analysis. With this type of market analysis, you can gain insight into what is driving the price. Fundamental analysis can be applied to all types of assets, but it requires at least basic knowledge and understanding of how economics is interconnected with financial markets;
• Going long/short. These are commonly used words that are interpreted as buying/selling an underlying asset. If you say that you are going long on EUR/USD, for instance, this means that you are buying the currency pair;
• Pip. The minimum price step is in both directions. If the EUR/USD price changed from 1.1000 to 1.1001, for instance, they say that the EUR/USD price changed for one pip;
• Price trend. The idea of analyzing charts is to define the price movement direction, which means finding the current price trend. There are two types of trends: uptrends and downtrends. The first means that the price is growing, while the second refers to a situation when the price goes down;
• Trading instruments. The most popular trading instruments nowadays are CFDs and digital options. Those are contracts that allow you to buy underlying assets of various types in the financial markets.

Types of Online Trading

With the emergency of financial markets, you have more than one option nowadays. While traders used to work with shares or commodities directly in the past, which took a lot of time, today you can buy them both directly or using special derivatives like CFDs or digital options.

CFD or Contract for Difference

With this type of financial instrument that is available for online trading, you purchase a special contract that allows you, as its name suggests, to profit from the price difference. By buying it, you do not buy the asset itself, but a contract that can be sold at any moment in the future. Therefore, if you buy EUR/USD, for instance, you don’t purchase the currency pair directly. You buy a contract that you can quickly sell at any given point.

One of the advantages of CFDs is that you don’t buy real assets. If you want to buy gold and make money on the growing price of this asset, you don’t necessarily need to go to metal exchanges, purchase gold there, or transfer it to some place and store it. You simply buy a contract, and once you think the price has reached your goals, you simply sell this asset.

Another example to demonstrate the benefits of CFD online trading on the platform is when you want to make money on the crude oil price difference. Imagine that you purchase it on any of the existing exchanges. You will have to think about logistics first, as physical oil should be transferred to the place where you will store it. 

Moreover, storage is another headache that you will face. When dealing with CFDs, you don’t buy physical oil but a contract for a certain amount instead. Therefore, you don’t need to think about logistics or buy storage facilities. The only thing that is required in this case from you is to predict the price.

Last but not least, with CFDs, you can both buy and sell even if you don’t have an asset in your portfolio yet. 

Digital Options Online Trading

This is another derivative that is believed to be one of the best ways for beginners to get familiar with the financial markets. Similar to CFDs, you don’t buy an asset directly. However, unlike contracts for difference, you can’t sell digital options. You choose the direction instead.

Assume that you want to make money on the EUR/USD price difference. If you think that the currency pair’s price is likely to surge, you buy a Higher contract, while when you expect the quotes to go down, you purchase a Lower contract. That is. Another difference between CFDs and digital options is that the latter have fixed payouts. This means that you can skip a huge part of setting online trading goals. 

When you trade CFDs, you need to think about where to set your trading goals or how many pips the currency pair (or any other asset) is going to cover. In digital options, your main trading goal is to be right in defining the price direction. Moreover, your risk management planning requires less effort as compared to CFDs.

Another feature of this type of financial contract is that your trade is limited in time. You can choose from a variety of expirations depending on your strategy or market perception. For instance, you can buy a Higher EUR/USD digital option for 5 minutes, which means that your contract will be closed in five minutes and the payout will be calculated according to the results at the very expiration moment.

Direct Stocks Buying

While both previous derivatives are good for trading, direct stock buying is good for those who are looking for long-term investments. Unlike both previous examples, here you buy “physical” stocks, which means that you become the owner of shares with the opportunity to earn dividends and the possibility to profit from the price difference in the future.

The advantage of using this method is the possibility of earning dividends that some companies pay to their stakeholders. Those payments are defined as a percentage of the stock price. Dividends are part of passive income, which means that you don’t need to conduct any activities to earn them. 

How to Predict Market Prices

There are two main ways to make market forecasts. You can use the technical approach, which refers to studying charts and revealing current and future market tendencies based on history or research fundamentals, in order to understand the basic price drivers.

Technical analysis is one of the simplest ways to make market predictions, as it assumes finding patterns directly on price charts. You can use dozens of tools to understand that current price trend and try to reveal its future direction. Moreover, technical analysis is universal and can be applied to all types of assets, be it Forex currencies, stocks, cryptocurrencies, commodities, indices, etc. 

When it comes to fundamental analysis, it is a more complex approach that requires at least basic knowledge of economics and the processes that may have an impact on prices. The idea of this type of research is to understand how fundamentals may affect prices and whether they are going to be new trend makers.

The ideal approach is to combine both methods, as this confluence will allow you to confirm your technical analysis signals with fundamentals and vice versa. 

Online Trading for Beginners: What to Consider

Now that you know more about the main types of online trading instruments, it is time to see how to place your first trade. First, you should do some preparational work and create an account on the platform. Moreover, to be able to trade for real money, you will also need to top up your balance.

Think about the Trend Direction and Entry Points

To trade successfully, you need to define the current market trend and find entry points. There are plenty of ways to do it. In the example above, we use a simple RSI momentum indicator that is good at finding market reversals. The idea behind this simple strategy is to buy a currency pair or a Higher contract when the indicator’s line goes above 30, or sell a currency pair/buy a Lower contract when the RSI goes below 70 from above.

With this simple example, you have an idea of how things work in the financial markets. When you have a clear signal to buy a Lower contract or sell a currency pair, your next move is to define how much to invest. 

Focus on the Money Management Rules

Trading strategies are important, but they aren’t the key to successful online trading if you do not know how to manage your risks and trading balance. Before even placing a trade, you should focus on how much you can spend per trade and use only this amount to open your online trading positions. 

Whatever type of asset you buy or sell, be it stocks, Forex pairs, cryptocurrencies, or commodities, you should set the amount you can put at risk in advance. This approach allows you to systematize your trading routine and not go beyond your financial capabilities. 

Moreover, the money and risk management approach allows you to calculate in advance your probable risks and eventual profits, which allows you to plan your income even for a distant future. One of the simplest money management rules is to put at risk no more than 1-5% of your trading balance in each trade. By doing this, you will have funds in reserve to place more trades in the future as well as to benefit from many other opportunities that may arise during your trading journey.

After you decide how much to invest, you need to make a trade and wait for the results. If you are trading CFDs, you still need to look at charts from time to time or set stop-losses/take-profits to automate closing your actual market positions.

Some Other Recommendations

Trading is not an easy way to make money. Thus, there are plenty of things to consider apart from finding entry points and planning your budget in advance. One of the most common mistakes that many traders make is to let emotions dominate and control their trading decisions. Here are some tips on how to curb your emotions and not let them ruin your trading career:

• Always stay in control of the process. Do not let your emotions guide you through trading. Stay coldblooded when making any trading decisions;
• Avoid trading after serious emotional turmoil. This may lead to situations when you can’t control yourself and it is better to stay off the market at these times;
• Do not try to win back. One of the most common mistakes that many beginners make in the financial markets is that they try to win back what they have lost in the previous trade. 

Conclusion

Online trading with modern platforms is an opportunity for market participants to make money on the price difference. You can either make online trading your main source of income or make money in the financial markets from time to time to improve your financial situation. Anyway, online trading is accessible, and everyone can try it. 

FAQ

What Is Online Trading?

This is a financial market activity where you need to buy or sell various assets to profit from their price differences. 

What Are the Benefits of Online Trading?

One of the greatest advantages of online trading is that you can use special platforms and try to make money while staying at your place. 

What Is the Best Form of Trading for Beginners?

Digital options are considered the best financial derivatives for beginners because of their simplified nature. When trading those contracts, you don’t need to think about the trading goals for each particular buy or sell order as well, and you don’t need to limit your per-trade risks.

Can I Make Online Trading for a Living?

Yes, you can. However, you should keep in mind that this is a hard way, and it is recommended to treat online trading as an additional source of income for some time until you are strong enough and have enough financial reserves to make more money.