What is Online trading?
Online Trading is the act of buying and selling or placing orders for financial securities and/or currencies with the use of a brokerage’s internet-based proprietary trading platforms.
Online trading generally requires an online trading platform offered by most online brokers for order execution who also offer free demo accounts allowing anyone who is connected to the Internet the possibility of virtual trading. The use of online trading increased dramatically in the mid- to late-’90s with the introduction of affordable high-speed computers and internet connections.
Benefits of Online trading
The use of online trades has increased the number of discount brokerages because internet trading allows many brokers to further cut costs and part of the savings can be passed on to customers in the form of lower commissions.
Another benefit of online trading is the improvement in the speed of which transactions can be executed and settled, because there is no need for paper-based documents to be copied, filed and entered into an electronic format.
TYPES OF TRADING STYLES
There are several types of trading styles that persons seeking to profit from market movements may wish to use. Here is a brief description of the most widely used short term trading styles.
Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always square off all of those stocks before the close of each day. The day trader does not own any positions at the close of any day therefore immune to overnight risks. The objective of day trading is to quickly get in and out of any particular stock for a profit on an intra-day basis.
Day trading can be further subdivided into a number of styles, including:
Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk.
Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.
The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock’s price. However, swing traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to move or to capture additional momentum in the stock’s price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days.
Swing trading has the capability of providing higher returns than day trading. However, unlike day traders who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some significant risks in carrying positions overnight. For example news events and earnings warnings announced after the closing bell can result in large, unexpected and possibly adverse changes to a stock’s price.
This is similar to swing trading, but with a longer time horizon. Position traders hold stocks for a time period anywhere from one day to several weeks or months. These traders seek to identify stocks where the technical trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months.
Types of Online Trading Firms
There are numerous types of online trading firms including discount brokerage firms, commodities trading firms, and forex or currency trading firms. Each of the online trading firms has one thing in common — it has put a greater amount of personal responsibility in the hands of investors. It is now possible for a person to buy and sell stocks, futures, options, commodities and a wide variety of other types of investments directly from his own home. While this allows for greater personal freedom, it also creates greater risk.
Discount Brokerage Firm
A vast majority of people are most familiar with this type of online trading firm. These firms permit the buying and selling of stocks, mutual funds and various options contracts. They generally charge a small commission — much lower than would be charged if a trade was made through a full-service broker — and allow for a surprising amount of functional trading tools, including the ability to sell puts and calls and to place trailing stops or limits on orders so a stock can sell automatically. It is important to note that many of these firms will freeze an investor’s account if they become “pattern day traders” by making too many trades on a daily basis.
Commodities Trading Firms
These allow for the trade of ownership of physical commodities, such as oil contracts or wheat contracts. Futures may also be bought and sold through such trading firms. Commodities trading and especially futures trading tend to be very risky and carry with them a large potential for loss. Investors engaged in this type of trading must be fully educated about all purchases being made and the risks involved.
Forex online trading firms.
These trading firms allow an investor to buy and sell foreign currency. Like commodities trading, forex can be a riskier investment than standard stocks, bonds or mutual funds, so investors must again ensure that they are fully educated and knowledgeable about all investment decisions. In addition, investors should be aware that passive forex trading is not generally a good investment decision since regular monitoring of the markets is required.
GOLDEN RULES FOR TRADING
Divide your capital into few equal parts (preferably 10), never risk more than one part of your capital on any one trade.
Trade only in active & high volume stocks/ futures.
Always use stop-losses and never over-trade and stick to your risk management rules.
Never let profit turn into a loss. Use trailing stops to protect and lock your profits.
Never get into the market because you are anxious from waiting, and never get out of the market just because you have lost your patience.
Do not guess where the top and bottom of the market is, but let the market signal its top and bottom.
Never average a loosing trade, also avoid taking small profits and big losses.
Only trade with genuine risk capital, and be aware of the risk of losing.
Always trade within your capabilities, financial and otherwise.
Never let greed or fear take control over your winning positions.
Avoid Tips & Rumors. This are spread by people with vested interests.
COMMON MISTAKES IN TRADING
Trading for excitement & thrill and trading with a high ego.
Trading with money that can’t afford to loose & being too emotional about money.
No trading plan and lack of record keeping.
Not cutting losses and not letting profits run.
Letting small losses turn into large losses.
Not sticking to plans & changing strategies.
Bottom fishing/catching falling knives.
Fighting the trend – shorting bulls and buying bears.