The world of trading is huge, with various products and markets offering different ways to get leverage to trade your view. Not to be confused with investing, trading I consider to be more about trying to achieve short-term gains. For many people who want to learn how to trade it is very difficult to find a right place to start. Try googling “learning to trade” and you will be hit with ads from many Forex, CFD, Binary options, and Crypto Currency providers from around the world. I only recommend trading products that are listed on a regulated exchange’s like the Australian Securities Exchange (ASX) or The New York Stock Exchange (NYSE).
So where should you begin?
The first thing you need to decide is which market to trade. I’m a firm believer in trading what you know. If you live in Australia and listen to the news every day you will have a general feel for what is happening around the country and what could be affecting Aussie businesses. Therefore, a good starting point is to trade Aussie equities. Trading things on the ASX also gives you a fair and regulated environment, which equals peace of mind.
Once you know what market you want to trade, you then will need to pick an instrument to trade. The majority of retail traders (the general public) use derivatives as they will gain the ability to trade short-term movement without needing the massive trading bank needed to trade the shares directly.
Example of leverage from a derivative – Mini Warrant Vs Stock.
Derivatives give you the ability to make larger profits from smaller movements in share price vs buying the stock directly. But it also increases losses, so you need to learn the risks of the product you choose and ensure you have a system to follow to keep risk under control. Another way to look at it is that you can put a smaller amount of money on a derivative to get a similar result as putting a large amount of money on stock.
When I first set out on the journey to become a trader in 2011, I was faced with the predicament of what instrument to trade. After months of research and reading, I came across Exchange Traded Options (ETO’s). Traditionally other instruments only give you the ability to trade an upward or downward movement.
The big difference between ETO’s and other instruments was the flexibility to profit from sideways movement. This opens a world of opportunity as the market doesn’t always trend up or down, it can go sideways in a tight range for long periods of time. Below is the chart of the XJO, which is a major index for our market of the top 200 stocks, and you can see that it has long periods where it doesn’t really go anywhere – it just whips around going sideways.
Below is the payoff of a Short Iron Condor, which is my favourite ETO strategy when I have a sideways view of the market. The maximum risk is $7,600 pre costs. If the XJO remains between 6,425 and 6,200 I can make up to 31% profit come expiry day of the 20th of September (12 trading days).
Otherwise, if I have a directional view I can use a combination of other Options strategies or a Mini Warrant. Using a combination of Options and Mini Warrants gives me access to over 200 shares, indices locally and offshore, and a selection of commodities, all traded through the ASX. This is important to have peace of mind that my trading bank is safe, and the other side of my trade is guaranteed once filled.
ETOs and Binary Options are very different. ETOs are traded and regulated through a major exchange like the ASX or CBOE. Whereas Binary Options markets are created by an individual company that is both market maker and market. Some Binary Options Providers can be scams so ensure you do your research before putting money into these products. Be aware of any company stating that profit is guaranteed. https://www.scamwatch.gov.au/news/dont-be-lured-into-binary-options-scams
For peace of mind look at trading products listed on a major exchange.
Finally, I have a set of rules mainly based on Technical Analysis to place my entries and exits and what product/strategy to use. Most of my analysis is Technical, but I also have gained a good understanding of what effects our market and the stocks that I regularly trade.
So, if you are looking to learn to trade you need:
- A set of rules to help you enter and exit the market whilst controlling your risk and keeping your own psychology out of the way.
- Choose which market you want to focus on.
- What instrument/s you will use.
- An advisor to run your ideas past and help you with transacting.
- A Broker, either Full Service or Online that you trust.
We provide both Education services and Broking services to clients of all levels whether beginner or experienced. If you would like to learn more, call us on 03 80805788 or fill out the form at the bottom of the page.
Otherwise, good luck in your journey in becoming a trader; it is a long-term pursuit not a get rich quick scheme.
Free Resources
Options Introduction
What is an Option
Call and Put Options
Options Strategies