Online trading is a type of investing that estimates short-term profits over long-term gains. It can be very unpredictable if someone enters it without precisely understanding its basics.
While online trading can provide you profit very quickly if you time the market precisely, it also carries the risk of noteworthy losses.
So before you start trading, you should ensure you understand online and how it works, the types of online, the best free online trading app, and how to do execute trading step-by-step.
What is Online Trading
Online trading includes buying and selling stocks, commodities, currency pairs, cryptocurrencies, or other instruments via a trading platform or mobile app. The purpose is to drive returns that exceed buy-and-hold investing. Trading is a risky investment.
It is also essential to take into account that when you are trading online, you’ll use derivative products recurrently to play the game on the price movements of underlying assets without ever possessing the asset itself.
This is for the reason that derivatives like CFDs monitor the price of the asset on which they are established. Traders utilizing derivatives never take delivery of the foundational assets, whether it be a physical commodity such as gold or oil, foreign currency, Bitcoin, or security like organization shares. On the contrary, if you invest, you will buy, own, and sell an asset.
You might be thinking what is CFD? A ‘contract for difference’, or CFD is an agreement to exchange the difference in price of a foundational asset, as evaluated from when the contract starts to when it ends.
Types of Online Trading
Based on asset class
- Stock Trading: Stock trading includes buying and selling shares in companies to earn on daily and weekly changes in price. This transitory approach is what makes stock traders stay ahead as compared to traditional stock market investors who tend to be in it for the long run.
- Forex Trading: Forex trading is the concurrent buying of one currency and selling another for earning on a flexible exchange rate between two currencies. (e.g EUR/USD) by either:
- When you buy low and sell high, you expect the first currency in the pair to go up in value compared to the second currency.
- When you sell high and buy low, you expect the first currency in the pair to go down in value compared to the second currency.
- Commodity Trading: Similar to equity and currency, commodities are popular trading assets. Commodities that are traded are generally sorted into four major categories metal, energy, agricultural, livestock & meat.
Metals commodities: Gold, silver, platinum, and copper.
Energy commodities: Crude oil, heating oil, natural gas, and gasoline.
Agricultural commodities: Corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar.
Livestock and meat commodities: Lean hogs, pork bellies, live cattle, and feeder cattle.
- Crypto Trading: Cryptocurrency trading signifies the process of surmising a cryptocurrency’s price movement. If we talk about other asset classes mentioned above, online crypto trading is the latest concept. Cryptocurrency trading become more accepted instead of time-consuming, pricier mining which is not suitable for most people.
Based on objective
Find what you need from your trading, Is it something you want to execute on your own or do you want to allow robots and experts to take control of your trading?
- Manual Trading: Manual trading is a process in which a trader decides when to buy or sell an asset and then places the trade themselves through the market or pending orders. The manual trader may check various markets first to search for opportunities before taking action. All the strategies are executed by the trader which signifies their output is only as profitable as their input.
- Automated Trading: In automated trading, there is a pre-programmed algorithm that will make all the decisions on what to buy and sell, and when, centered on the instruction described in its codes. A trader, programmer, or ‘quant’ may code their manual techniques so that when particular rules or events take place, the algorithm will automatically take trades.
- Social Trading: Social trading is a type of investing that enables investors to monitor the trading behavior of their competitors and proficient traders. The main objective is to follow their investment techniques by making use of copy trading or mirror trading.
Based on timeframe
A timeframe in online trading is defined as any selected unit of time in which trading takes place.
- Day Trading: Day trading is a process of buying and selling an investment good within the same trading day, or even multiple times in a day, taking benefits of small price moves and making sure they close all their trades before the market closes for the day.
- Swing Trading: Swing trading is a process trading method where short-term techniques are used in the most liquid markets to take benefit from price swings, whether prices return to their average or move against a trend.
- Positional Trading: As compared to swing trading, the amount of the trades is larger for positional trading. Positional trading comprises trades lasting from a few weeks to a few months and sometimes even more. Positional trading is the closest type of trading to long-term investing.
Based on the analysis method
- Technical Trading: Technical trading makes use of charts and graphs to monitor price patterns and signals that determine when to buy or sell. It depends on analyzing these price movements and does not consider other factors.
- Fundamental Trading: It is established on fundamental analysis, which evaluates economic and financial factors that make an impact on a business, a currency, or a commodity. Fundamental is ideal for long-term trades that avoid short-term price fluctuations.
Advantages & Disadvantages of Online Trading
| Advantages | Disadvantages |
| Eliminates the Middleman | Easier to Invest Too Much Too Fast |
| You can buy and sell without needing to speak to a broker. This is cost-effective for those who can’t afford full-service brokers. | Online trading’s ease can lead to poor investment choices or overinvesting. Safeguards like limit orders can help control this. |
| Cheaper and Faster | Overexposure |
| Online trading typically costs less than using a traditional broker and is almost instantaneous. | Taking on too much risk or investing too much in one position or market can lead to significant losses, especially with leverage. |
| Greater Investor Control | No Personal Relationships with Brokers |
| You have control over your trades and can make decisions without broker interference. | Without a broker to provide advice or support, traders must rely on their research and learning. |
| Real-Time Monitoring | Addictive Nature |
| Advanced tools and interfaces allow you to monitor your investments and see real-time gains or losses. | The excitement of trading can be addictive, similar to gambling, and can lead to poor decision-making if not controlled. |
Conclusion
Online trading can help you make quick money and gives you more control, but it also has risks like possible losses and requires self-discipline. It covers different methods and assets like stocks, currencies, and cryptocurrencies. Knowing the basics and how to use trading tools is key to handling its ups and downs and making smart choices.
