Do you want to start trading on the financial markets and build a solid method to earn real additional income? First and foremost, you need to discern the difference between investing in the short term and long term. The short term usually refers to daily trading and may have advantages compared to the long term strategy. By comparing them, you will get the big picture of what investing and trading really comprises. So, here is a brief trading guide for starting your trading journey.
Long term investment vs. short term investment
1. Long-term trading
Long-term trading is often defined by open positions of a few months to several years.
You don’t need to watch the market all day. And you can use stop orders or options to protect yourself.
Besides, the psychological pressure on the market is lower since you are not in the heat of the moment and can cut yourself off from everything around you. Trading costs are lower because you place fewer buy and sell orders while holding your positions for much longer.
You only need to close one or two great trades for your entire year to be profitable, no matter all the other small losses.
The disadvantages of long-term trading
You can get sheared off by intraday market movements every day and can have big capital movements with just one position. Also, you will need a lot of money to invest if you want to trade large liquid futures markets, for example. If you miss a good opportunity, it can turn a potentially good year into a really bad one.
2. Short-term trading
Short-term trading refers to opening positions of a few days to a few weeks (swing trading) or even a few minutes to a few hours (scalping strategy).
As a day trader, you have many opportunities available to you every day, every hour. And you don’t have to wait days before you reap the profit. This type of trading is very exciting and stimulating.
Transaction costs with brokers, regardless of the market, have fallen so much that they are no longer of bigger concern. However, your transaction costs can still be high and end up accumulating little by little. They can sometimes erode up to 20% of your starting capital, or even more even if your starting capital is quite low or if you make a lot of transactions.
If your choice is currency trading, you will see that every Forex broker offers quite similar but also different rules of the game. Choose the broker that fits your trading plan and expectations regarding spreads, types of trading accounts, and minimum deposits.
The importance of trading plan
Having a plan and calculating the risks and profits ratio is advisable before you start the trading process. Online trading platforms offer profit calculators, which are great for this purpose. Trading plans and trading guides also include dedicated time into trading education. It includes practicing on a demo account before entrusting the real money to the broker.
To increase your confidence and chances for success, mentally train yourself to understand that any market activity that is not in line with your trading plan will be of use to other traders, but not to you. This type of mental restraint will help you trade according to your plan without pursuing moves that don’t match it. Once your trading is done, you will be able to analyze your trades to improve and refine your plan without endangering your current trade.
Psychological aspects of daily trading
The psychological pressures are intense when you are in the heat of the moment. Your emotions tend to take over rationality, especially with the “important” news that constantly falls around you and contradictory signals that intervene all the time.
There is a need for high availability every day to manage your positions in real-time. So you can hardly allow you to trade in the short term if you have a full-time job at the same time.