Thanks to the internet era we are living in; you can now access all sorts of investment alternatives that you would prefer to venture into by a click of a button. Online trading has opened the financial markets to the masses and allowed everyone to have a level playing ground when it comes to trading on different asset classes including stocks, forex, bonds, indices and commodities. With internet connectivity and an online trading account hosted by a reliable online trading broker, you can be the best trader in town over a very short period of time. However, there are basic fundamental guidelines you will need to follow before you move from being a novice to a veteran online trader.
1. Online Trading Asset Classes
First you will need to understand the different online trading channels and different underlying assets that you can trade on. The underlying assets can range from derivatives of commodities such as gold, oil and soy beans, to stocks of publicly listed companies, bonds that are listed on the bond markets, currencies through the forex markets and indices of the commodities, stocks, bonds and currencies markets. Understanding the difference among all the above asset classes before venturing into online trading will help you to focus on an asset class that you are familiar with; and one that you will be able to analyze and understand its market dynamics in order to make wise trading decisions and maximize your returns.
2. Online Trading Strategies
After fully comprehending the different asset classes at your disposal and choosing your most preferred option, you will then need to learn the different trading strategies you can use for online trading. First, we have binary options trading which is the easiest to understand; since all you need to do is to predict the direction of the price movement for the underlying asset, and if you are right you return gains. On the other hand, we have CFD trading which is an advanced version of binary options trading. CFD trading is a contract between you, the trader, and your online trading broker; whereby the broker pays you the difference between the strike price and the closing price of an underlying asset, if your prediction in terms of the direction of price movement of the underlying asset is right.
There are a few similarities and differences between binary options trading and CFD trading. First, they are both derivatives in the sense that you do not actually own the underlying asset but rather just trade on financial instruments created based on its price movements. Second, you can gain by speculating price movement of the underlying asset on either way. In binary options an upward movement in price is called a “call” and the downward speculation is called a “put”. On the other hand, in CFD trading, speculating that the price will rise is called “going long”, while speculating that the price will fall is called “going short”. Other similarities include the short-term nature of both binary options trading and CFD trading.
The fundamental difference between the two online trading strategies is the knowledge of the possible payouts or loses. In binary options trading, you are given the percentage payout before you trade and hence your maximum return is already known before you even start trading. In addition, the maximum loss is also known since you can only lose the amount you invested in each transaction. For CFD trading however, the payouts and loses are not known. Your maximum payout is determined by how high or low the price of the underlying asset will have gone from the strike price when you go long or go short. Your loss is also unknown until the close of the period for which your trade lasts. If you go long and the price of the underlying asset goes down instead, then you will pay the broker the difference between the closing lower price and the higher strike price you agreed on when you entered into the CFD trading contract.
3. Market Information and Trends
You can choose to either go with pure binary options trading or CFD trading or combine both in your online trading strategy. Regardless of which strategy you choose, you will need to also learn how to get relevant market information relating to your chosen asset classes and how to interpret price trends. This will help you to be able to make informed decisions as compared to gambling on which direction the price of the underlying asset will take within the set trading period. Most online trading platforms will have relevant market information on their sites; but it is always advisable to look for more information from other credible online sources in order to have precise predictions and increase your chances of winning in every trade.
It is important to note that CFD trading is not allowed in the USA; but it is allowed in other countries such as United Kingdom, Canada and South Africa among others.
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