How can I start trading?

Trading is the practice of buying and selling financial instruments in order to profit from price movements. But let's dig deeper into this definition, because understanding what trading truly means is the foundation of your entire financial journey.

Imagine you’re at a farmers market where a vendor sells apples for CHF 3 per kilogram. You also know that across town, buyers are happy to pay CHF 4 for the same quality apples. You purchase 10 kilos from the vendor, sell them across town and pocket a CHF 10 profit. Just like that, you’ve made your first trade!

Financial trading operates on the same principle, but instead of apples, you're dealing with stocks, bonds, currencies, interest rates, commodities, digital assets or other financial instruments. 

“The goal remains the same: buy low, sell high and profit from the difference.”

This analogy perfectly captures the essence of what we're about to explore together. Trading might seem straightforward from the outside, but once you dive into the mechanics, you realize there's a whole world of knowledge, strategy and discipline required to navigate the financial markets successfully.

Trading isn't a one-size-fits-all activity. There are several approaches, each with its own time horizon, risk profile and strategy:

1. Scalping is the most intense form of trading, where traders make dozens or even hundreds of trades per day, profiting from tiny price movements. Scalpers might make just a few cents per share but multiply this across thousands of shares and numerous trades.
2. Day Trading is like being a sprint runner in the financial world. Day traders buy and sell securities within the same trading day, never holding positions overnight. They capitalise on small price movements and rely on volume to generate profits. A day trader might buy 1'000 shares of a stock at CHF 50.00 and sell them at CHF 50.50, making CHF 500 in profit (minus fees and taxes).
3. Swing Trading represents the middle ground. Swing traders hold positions for days or weeks, aiming to profit from short-term price patterns and trends. They're like skilled surfers, waiting for the right wave (price movement) to ride.
4. Position Trading is the marathon of trading styles. Position traders hold investments for months or even years, focusing on long-term trends and fundamental analysis. They're less concerned with daily price fluctuations and more interested in the bigger picture.

Understanding what you can trade is crucial before diving into how to trade. The financial markets offer a vast array of instruments, each with unique characteristics and risk profiles.

Stocks: Your Share of Company Ownership

When you buy a stock, you're purchasing a small piece of ownership in a company. If you own 100 shares of Apple and there are 16 billion shares outstanding, you own 0.00000625% of Apple. It's tiny, but it's yours!

Stock prices fluctuate based on company performance, market sentiment, economic conditions and countless other factors. The beauty of stock trading lies in its accessibility and the wealth of information available. You can research companies, analyse their financial statements and make informed decisions about their future prospects.

Bonds: Lending Your Money for Profit

Bonds are essentially IOUs issued by governments or corporations. When you buy a bond, you're lending money to the issuer in exchange for regular interest payments and the return of your principal when the bond matures.

An IOU literally stands for “I owe you”. It’s an informal way of acknowledging debt: one party promises to pay back money they borrowed from another.

Bonds work a bit like a savings deal: you lend your money to a government or company, and they pay you interest in return. Government bonds are often seen as the safer option, but they usually pay less than corporate bonds.

Forex (Foreign Exchange): The Currency Exchange Arena

The forex market is the largest financial market in the world, with over $7.5 trillion traded daily. Here, you're trading one currency against another, speculating on their relative values.

For example, if you believe the Euro will strengthen against the US Dollar, you might buy EUR/USD. If the Euro indeed strengthens, you profit from the difference. Currencies are influenced by economic indicators, political events and monetary policy decisions.

Commodities: Trading the Building Blocks of the Economy

Commodities include physical goods like gold, silver, oil, wheat and coffee. You can trade these either through physical delivery (rarely done by individual traders), through ETPs (Exchange-Traded Product) or through derivatives like futures contracts, options or Contracts for Difference (CFDs).

Commodity prices are influenced by supply and demand dynamics, weather conditions, geopolitical events and economic cycles. For instance, a drought in Brazil might drive up coffee prices, while a recession might decrease demand for industrial metals.

Digital Assets: The New Frontier of Finance 

Digital assets, primarily cryptocurrencies like Bitcoin and Ethereum, represent a revolutionary new asset class built on blockchain technology. Unlike traditional currencies controlled by central banks, most cryptocurrencies operate on decentralized networks maintained by participants worldwide. Digital assets are known for their extreme volatility, with prices capable of swinging dramatically within hours. They're influenced by factors ranging from regulatory announcements and institutional adoption to technological developments and market sentiment. While offering significant growth potential, digital assets require careful risk management due to their nascent nature and regulatory uncertainty across different jurisdictions.

ETFs: Instant Diversification Made Simple 

Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges like individual stocks. They typically track an index, commodity, bonds, or a basket of assets, offering instant diversification with a single purchase. When you buy an S&P500 ETF, you're essentially buying a tiny piece of all 500 companies in that index. ETFs combine the diversification benefits of mutual funds with the trading flexibility of stocks. They're cost-effective, transparent and available across virtually every asset class and geographic region. Whether you want exposure to emerging markets, specific sectors like technology or alternative investments like real estate, there's likely an ETF for it.

Derivatives: Advanced Instruments for Sophisticated Strategies

Derivatives are financial contracts whose value depends on an underlying asset. Options, futures, Contracts for Difference (CFDs) and other swap contracts are common types of derivatives. These instruments can be used for hedging risk or speculating on price movements with leverage.

While derivatives can offer significant profit potential, they also carry substantial risk and require a deep understanding of their mechanics. They're like specialised tools, incredibly useful when used correctly, both to take a direction in the market but also for hedging purposes. You have to be well aware of their inherent leverage effect, as they can increase profits but also losses: that is why you have to know them well before using them... and at Swissquote we are committed to education!

• The Emotional Rollercoaster

Every trader experiences the same emotional cycle: excitement when making profits, fear when facing losses, greed when wanting more and regret when things go wrong. These emotions are natural, but they can be your worst enemy if not properly managed.

Consider this scenario: You buy a stock at $100, expecting it to rise to $120. It drops to $95 and fear kicks in. You panic and sell, locking in a $5 loss. The next day, the stock rebounds to $115. Your emotional decision cost you potential profits and turned a temporary floating loss into a real one.

• Developing Emotional Discipline

Successful traders develop systems to manage their emotions. They set predetermined entry and exit points, use stop-loss orders to limit losses and never risk more than they can afford to lose. They treat trading like a business, not a game of chance.

The key is to have a plan before you enter any trade. Know why you're buying, what your profit target is, and at what point you'll cut your losses. This removes emotion from the equation and helps you make rational decisions.

Now that we understand what trading is and the psychological challenges involved, let's discuss how to actually start your trading journey.

• Step 1: Education – Your Most Valuable Investment

Before risking any real money, invest in your education. Read books, take courses and watch educational videos (do you know that Swissquote, for example, has several YouTube channels in different languages?). The more you learn, the better equipped you'll be to make informed decisions.

Start with understanding basic financial concepts: what moves stock prices, how to read financial statements, the impact of economic indicators and basic technical analysis. This knowledge forms the foundation of all successful trading.

• Step 2: Choosing Your Broker – Your Gateway to the Markets

Your broker is your gateway to the financial markets. Modern online brokers offer user-friendly platforms, competitive fees and access to multiple markets. When choosing a broker, consider factors like trading fees, available instruments, research tools, customer support and regulatory compliance. With Swissquote, you can focus on opportunities while we handle the rest.

• Step 3: Starting Small – The Importance of Capital Management

One of the biggest mistakes new traders make is starting with too much money. Begin with an amount you can afford to lose completely – this might sound pessimistic, but it's realistic. Trading involves risk and even the best traders lose money on individual trades.

A good rule of thumb is to never risk more than 1-2% of your total trading capital on any single trade. If you have CHF 10'000 to trade, you shouldn't risk more than CHF 100-200 on any one position. This approach helps you survive losing streaks and stay in the game long enough to develop your skills.

• Step 4: Developing Your Trading Strategy

A trading strategy is your roadmap for navigating the markets. It should include your approach to market analysis, entry and exit criteria, risk management rules and position sizing methodology.

Some traders rely primarily on technical analysis, studying charts and price patterns to make decisions. Others focus on fundamental analysis, examining company financials and economic data. Many successful traders use a combination of both approaches.

Your strategy should be written down, backtested if possible and consistently applied. It's not enough to have a vague idea of what you want to do, you need specific, actionable rules that you can follow regardless of market conditions or emotional state.

• The Foundation: Position Sizing

Position sizing determines how much of your capital you allocate to each trade. It's the difference between surviving a losing streak and blowing up your account. Define your maximum risk per trade: for example, you might decide never to risk more than 1% of your total capital on any single trade.

Let's say you have $50'000 in your trading account and want to buy a stock currently trading at $100. You believe it will rise to $120, but you'll sell if it drops to $95. Your risk per share is $5 ($100 - $95). Using the 1% rule, you can risk $500 on this trade ($50'000 × 1%). Therefore, you can buy 100 shares ($500 ÷ $5 per share).

• Stop-Loss Orders: Your Safety Net

A stop-loss order is an instruction to sell a security when it reaches a specific price. It's your safety net, automatically limiting your losses if a trade goes against you. Setting stop-losses before entering a trade removes emotion from the exit decision.

There are different types of stop-losses: fixed percentage stops, volatility-based stops and technical stops based on support and resistance levels. The key is to set them at a level that gives your trade room to breathe while still protecting you from significant losses.

• Diversification: Not Putting All Your Eggs in One Basket

Diversification means spreading your risk across different investments, sectors, or markets. If you put all your money into technology stocks and the tech sector crashes, you'll suffer severe losses. But if you spread your investments across technology, healthcare, finance and other sectors, the impact of any single sector's decline is reduced.

Geographic diversification is also important. Different countries' markets don't always move in tandem, so international diversification can provide additional protection.

Every new trader makes mistakes, it's part of the learning process. However, understanding common pitfalls can help you avoid the most costly ones. 

A trading plan is your personal roadmap for navigating the markets. It should be comprehensive, written down and regularly reviewed. Your plan should include:

• Your Trading Goals: What do you want to achieve? Are you looking for supplemental income, building wealth for retirement or trading as a full-time career? Your goals will influence your strategy and risk tolerance.
• Your Risk Tolerance: How much volatility can you handle? How much of your capital are you willing to risk? Be honest about your comfort level, there's no point in choosing a high-risk strategy if you'll lose sleep over every trade.
• Your Trading Style: Will you be a scalper, a day trader, swing trader or position trader? Your available time, personality and goals will influence this decision.
• Your Analysis Method: Will you use technical analysis, fundamental analysis, or a combination? What indicators, patterns, or metrics will guide your decisions?
• Your Entry and Exit Rules: Under what conditions will you enter a trade? When will you take profits? When will you cut losses? These rules should be specific and objective.
• Your Position Sizing Rules: How much will you risk on each trade? How will you determine position sizes based on your account size and the specific trade setup?

The content in this article is provided for educational and marketing purposes only. It does not constitute investment advice or financial recommendations. 

All products and services are offered by Swissquote Bank SA, a FINMA-regulated bank in Switzerland. Forex and CFD accounts are promoted by the Representative Office of Swissquote Bank SA, licensed by the UAE Central Bank. Swissquote MEA Ltd. is regulated by the DFSA and incorporated in the DIFC.