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Online Trading 2022: How online trading works



Trade on the international financial markets from the comfort of your own home and earn a lot of money in the process? Yes, that is certainly possible. But is "trader" really a dream job? The fact is: you can very well earn a lot of money, but you have to realize day by day that although you can become successful relatively quickly, it is particularly difficult to stay successful.


Here are the most important facts about online trading that every future trader should know.



ONLINE TRADING STEP-BY-STEP GUIDE


You simply want to buy shares or other trading pairs and either hold them in anticipation of an increase in value or trade them actively? If you want to start trading online, you can simply use an online broker.


Step 1: Open an online trading account

First of all, you have to choose an online trading broker. We recommend the EU-regulated and licensed broker eToro, which is also our online trading test winner.


Step 2: Open an online trading account and deposit money

Now you need to create an account with eToro, prove your identity for verification and then deposit money into your online trading account. The best and quickest way to do this is to use a credit card as the deposit method.


Step 3: Open your first online trade

You can now place your first online trade. It is better to start with smaller amounts at first. You can also minimize your risk with buy settings such as a stop-loss order.



WHAT DOES "TRADING" MEAN?


Today, private traders can buy or sell an extremely wide range of financial instruments at the click of a button. In the end, all you need is a computer and internet access - so in reality there are no more hurdles to overcome if you want to make money online from your sofa.


You can trade the following financial instruments:

  • Shares

  • Futures contracts

  • Foreign exchange

  • Bonds

  • ETFs

  • Cryptocurrencies


The term "trading" usually refers to trading approaches that only have a fairly short time horizon.

This means that the trader sells the shares, currencies, or bonds again relatively soon - for example on the same day, in the week of the investment, or after a few months at the latest. No long-term investment horizon is pursued here.


The dividend strategy, for example, which is a classic long-term strategy, can be categorized as a "capital investment". This means that "trading" is primarily about achieving price gains within the shortest possible time because short- and medium-term market fluctuations are exploited. This means that the long-term development of the real economy hardly plays a role - it is more about market psychology and technology.


Those who like to trade in shares invest money so that shares of a certain stock corporation can be acquired. If the value of these acquired shares subsequently rises, they can be sold again - one thus makes a profit. This can also be a definition of "trading".


If an instrument is bought at a certain price and then sold at a different price, a profit is made if the selling price is higher than the buying price. The difference between the two prices is then the return. However, if the selling price is lower than the buying price, the difference is the loss.


In the case of "online trading", for example, transactions are carried out exclusively via the Internet. Here, the private investor uses an online broker.



ONLINE BROKER ADVANTAGES AND DISADVANTAGES


Advantages
  • Brokers are licensed and regulated.

  • Brokers usually have lower fees.

  • Brokers have a wider trading range with multiple order settings.

Disadvantages
  • No direct contact person on site

  • House bank advises on the choice of securities

For this reason, it is also advisable, if you really want to get to grips with online trading, to carry out a comparison in advance so that you can find out what the respective fee models look like. Because high fees naturally eat into profits - and that is precisely what must be avoided at all costs.



LEARN ONLINE TRADING


To know how online trading works, you first need to understand what it is.


Online trading is trading that takes place online. Traders and investors buy and sell financial assets online through a trading platform offered by a broker or bank. Trading decisions are made on the trading platform and then immediately sent to the broker, so a constant internet connection is required.


Before the advent of the internet, traders and investors had to trade by post, telephone, and fax. Most of the time, traders made a buy or sell decision on the phone with their broker.


This process was very slow as brokers had to confirm transaction details such as price, quantity, trade type, trade duration, exit price, account specification, etc. The digital age has had a major impact on online trading as a whole. The difference between the past and the present exceeds all expectations.



STOCK MARKET CHARTS


Stock market charts or stock charts allow a trader to visualize historical stock market prices or past quotations of financial instruments.


Most brokers provide free chart analysis software to clients with open trading accounts. Stock market charts provide useful information for the technical analysis of an asset for trading.


Stock market charts are indeed an indispensable tool for traders who want to use technical analysis to determine where and when to invest their money.



BEFORE I START TRADING, WHAT SHOULD I LOOK FOR?


  • Make a list of stocks to trade: Let it include 30-40 companies - it is their positions that you should watch in the first few months. The companies should represent different areas of activity: finance, commodities, technology, transport, services, etc.

  • Follow the news: news is as important as prices. If you follow them, you can see a correlation between this or that news background and the changes in share prices.

  • Don't overestimate diversification: it is certainly necessary and useful, but in the beginning, it is better to choose stocks of 3-5 companies to buy. A portfolio with significantly more issuers tends to indicate that the trader is working without a strategy - and that is a direct path to losses.

  • Do not go against the market: actually buying a stock when the price is falling is justified and often yields good profits. But if you are a beginner, try to follow the general market trend at least for the first 2-3 months.



WHAT ARE THE DIFFERENT FORMS OF ONLINE TRADING?


Every market has two basic states: a directional, pronounced upward or downward movement (the so-called trend movement) and a flat - a sideways movement of the price. Counter-trend strategies imply opening trades before the potential price reversal, but "the trend is the trader's friend" and counter-trend tactics are the way to lose the portfolio quickly.


Swing trading is one of the types of trend-following tactics that involves opening trades in the direction of price movement at the bottom of local pullbacks. This trading model is interesting because the number of losing trades is relatively small compared to winning trades and because the strategy is easy to understand even for beginners.


Margin trading is a way of increasing the funds involved in the transaction many times over at the expense of your broker's funds. In other words, it is a short-term credit service provided by your broker for the time you are in the trade.


When trading on margin, a trader can operate not only with his own funds but also with borrowed funds provided by his broker to increase the volume of his trades.



HOW DO I DEAL WITH LOSSES IN TRADING?


There are three aspects that will help you reduce your trading losses and will have an impact on how you deal with them.


Reduce your losses.

Maintain trading discipline and reduce loss-making trades that occur, for example, as a result of a trade that is not part of your strategy and can therefore be avoided.


Losses that occur as a result of orderly trading are nothing more than losing trades that are part of trading.


Reduce the mental and emotional impact these losses have on you.

Your reaction to losses is a factor in how you got those losses (whether you strictly adhered to your strategy or not), your magnitude, and your perception and belief about those losses. If you don't like to suffer losses and feel that you shouldn't have losing trades or engage in a trade where losing trades are possible, then your reaction will be very different from those whose mindset is more realistic and who understand that losses are an inevitable part of trading, that outcomes are probabilistic and that not every trade is a winning trade.


Knowing how to lose is the key to becoming a winner.

Many people are stopped or taken out of trading by feelings of fear or anger. Your behavior starts to be controlled by the emotions you are feeling at that moment and as a result, you lose control and discipline.


It is about managing your emotional state in real-time and keeping your mental faculties open to trading, as well as controlling yourself and maintaining strict discipline.



WHAT ASSET CLASSES ARE THERE?


There is an almost unmanageable number of securities on the capital market. They are divided into asset classes so that instruments with similar financial characteristics can be grouped together. The most important asset classes include shares, commodities, foreign exchange, and bonds.



Shares

A share is a securitised part of a company listed on the stock exchange. If you buy such a security, you are automatically a shareholder in the company. This means that you are not only entitled to a profit distribution (dividend), but also have the right to vote at the general meeting. However, private investors are not necessarily interested in voting rights, but in dividend distributions and rising share prices. The trader, on the other hand, is only interested in rising prices; due to the fact that he sells the shares again relatively quickly after a price increase has been recorded, he does not speculate on any dividends at all.

ETFs

Bonds

Forex

Cryptocurrencies

Commodities



WHAT INFLUENCES THE RATES?


If you are involved in trading, you naturally want to be right all the time. But that is impossible. Losses are simply part of the game. Even if you come across sites on the internet, again and again, that report on strategies with which you can never lose, in the end, it is simply not possible to always stay on the winning side.


In the end, it's all about reducing the loss - and in order to do that successfully, you have to follow a few tips and tricks in advance.


Above all, it is important to find out which factors influence the prices.


Share prices

Market capitalization represents the value of equity. If the outlook is positive, demand for the company's shares naturally increases - and it is precisely this demand that causes the price to climb. It should be noted that demand also depends on various factors:

  • For example, it is a matter of the overall economic environment. When the unemployment rate is low and consumer sentiment is high, it is usually easier for the company to post profits. The opposite can be observed in a recession. That is the company's profit decreases.

  • In addition, company-specific aspects must also be taken into account. These include the competitive situation, the future prospects, the financial situation, and also the unique selling proposition.

  • But political events or natural disasters can also have an impact that should not be underestimated.

To find out the market capitalization of a company, the share value of the company must be multiplied by the number of shares already issued.

 
Bond prices

The issuer's rating is one of the most important key figures. Ultimately, the rating is also an indicator of the default risk.


If the rating is bad, i.e. if there is a high probability that the issuer will not be able to repay the bond at all, you can look forward to a high-interest rate. However, if you are security-oriented, you should make sure that the rating is good - but that also means that you will be granted a lower interest rate.


The interest rate level also plays a role. If the interest rate level rises, the value of the bond falls. But that also means that the interest income on accruing coupons increases. What effect a decrease or an increase in the key interest rate will have on the bond, in the end, can only be determined by taking into account the key figures, elasticity, and duration.


 
Foreign exchange rates

The rates of currency pairs usually depend on the ratio of the price level in the countries formed by the currency pair. How low or how high the price level of the country is or how much it has changed always depends on the following factors:

  • The buying mood of consumers.

  • The scarcity in the production process.

  • The influence of the central banks.

 
Commodity prices

The price of commodities is primarily determined by the existence of overcapacities or supply shortages. Of course, the level of demand also plays a significant role.


But not only fundamental factors have an influence - natural disasters such as political events can also become real price drivers. If, for example, the investor suspects that disasters such as civil unrest will result in bottlenecks or even a collapse in demand, price movements are pre-programmed.



WHAT THE TRADER SHOULD TAKE INTO ACCOUNT


How can one book profits with short-term price fluctuations in the first place? In order to know when a fluctuation is occurring, one must first understand how stock exchanges work.


Stock exchanges are central trading places where both the supply and the demand for securities meet.


1. The stock exchange participant is the intermediary

As a private investor, you cannot place an order in the exchange's trading system. This only works via exchange participants - these are brokers as well as banks.


They then provide their customers with order masks and subsequently accept the orders via the Internet. If it is a buy order, the exchange participant also checks whether there is enough money in the securities account to actually carry out the transaction.


2. The Xetra trading venue

Once an order has been placed with the broker, it is then forwarded to the stock exchange selected in advance.


Xetra, an electronic trading platform, is probably the most important trading venue when it comes to trading German shares. Xetra is operated by the Frankfurt Stock Exchange. Incoming orders are executed according to certain rules; limits are also taken into account.


3. How high are the transaction costs?

The broker is subsequently informed of the order execution and then credits the clearing account with the sales proceeds minus the transaction costs if it was a sell order.


If it is a buy order, the account is debited with the purchase price - including the order fee. The purchased securities are then booked into the securities account.


4. There are hardly any hurdles

The private investor can place several orders per day - there seem to be no limits here. Even the purchase, as well as the sale, of the security, is possible without any problems within hours - in this case, the so-called day trading or also intraday trading is operated.


However, this is only possible if it is not excluded by the broker in advance. So if you want to be active as a day trader, you have to check in advance whether the broker agrees at all.


Tip: It is therefore always important to carry out a broker comparison in advance, which is not only about what the fee model looks like - it is also about any functions or restrictions.


5. When is online trading worthwhile?

Money is earned when a large part of the transactions leads to a profit. But at this point, one should not forget that a part of the profit must of course be used for the fees - for example for transaction or possible custody account management costs. Only if a profit remains after deducting the fees can it be said that money has now been earned.



SUCCESSFUL THROUGH THE RIGHT STRATEGY


No matter what kind of online investment you are interested in, you should always choose and follow a suitable strategy in advance. If one is concerned with the so-called breakout strategy, screening is necessary at the beginning, which refers to one or more markets.


Markets are already relevant if there are several indications that a breakout is imminent. For example, if the market moves in the direction of a resistance.


The strategy then takes effect: here it is determined under which circumstances the position should be opened at all - for example, when the daily closing price is 1.0 percent above the resistance.


A determination that is much more than just a detail, however, as the exact definition then determines the "hit rate". If one opens the position too early after the supposed breakthrough, the probability is high that it was only a "false alarm" in the end.


If, on the other hand, one enters too late, this reduces the profit. So it is very much a fine line on which a trader has to move. Incidentally, the optimization of the parameters is always based on empirical findings.


This means that the strategy is implemented in detail on the basis of historical price trends. On the basis of marginal changes to the parameters, a procedure can then be determined which settings would have been necessary to achieve even higher profits in the past. Thus, concrete conclusions can be drawn for future applications.


Stop Loss & Take Profit


By setting a loss limit, an initial exit price is determined when a position is opened. As a rule, the maximum loss is always limited by stop loss - if the price falls and reaches a pre-defined level, the position is automatically closed.


For example, if you buy a share at 105.50 euros/share (ask price) and set a stop loss at 95.50 euros (bid price), a sell order is then automatically triggered if the price falls below 95.50 euros.


It is important that the stop loss level is always adjusted. If the price were to rise from 105.50 euros to 120.50 euros, it is advisable to set the stop loss at around 110 euros.


There are indeed strategies that are quite promising. The trend-following or trend-reversal strategy are interesting here. In this case, it is about recognizing a trend or even the end of a trend.


Those who jump on the bandwagon at the right time can also book high profits. However, one must not believe that there are strategies with which one can never lose. There is no strategy that always leads to success.

Social Trading


ONLINE TRADING IS NOT GAMBLING


Of course, active trading is criticized time and again. It is repeatedly claimed that price developments are either based on complicated and incomprehensible as well as unpredictable mechanisms or simply occur by chance.


In the end, critics are convinced, that it is therefore almost impossible to make money with price fluctuations - especially in the long run.


However, this is not correct. If that were actually the case, online trading could not be sold as a business model created by brokers but would be nothing more than a game of chance.


However, the fact that this is not gambling is not new - it has even been proven for several years. It is certainly possible to speculate on price changes in a targeted manner in order to be able to book profits on a permanent and systematic basis. It's about meaningful constellations that ultimately lead to the possibility of finding out whether the price will rise sharply or crash. It isn't about a "sixth sense" or luck - in the end, it is analytical thinking that decides whether you win or lose.


But don't worry: If you think you have to reinvent the wheel, you're wrong - with technical market analysis you can find out relatively quickly whether the price of a certain stock corporation will climb or plummet.


You only make money if you consistently implement trading strategies:

  • Consistently implement trading strategies,

  • You pay attention to world events, and

  • Take technical analysis into account.

Of course, you need some experience and also patience, but in the end, it is also hard work that leads to success.



CONCLUSION: IT IS ALWAYS ABOUT CAPITAL PRESERVATION


When can one speak of a successful trader? When a high return is achieved. But this is only partly true.


Beginners may think that success can only be seen in terms of profits, but it is also about preserving capital. A good trader not only wins but also has precautions in place for when he misses the mark - if things go south, it is important to cushion the impact.


In the beginning, it is also important that you calmly familiarise yourself with the desired trading platform and first test your intended strategies in demo mode.



ONLINE TRADING - FAQ


What is Online Trading?

Internet-based trading in securities is called online trading. Investors can buy and sell securities and shares via an online broker.


What are the advantages of online trading?

Before the internet existed, transactions had to be carried out by post, telephone, or fax. For this reason, the transaction costs of online trading are now lower, as trades are now made online. The transactions can now also be carried out much faster.


What are the differences between trading and investing?

The two terms cannot be clearly distinguished from each other. However, it can be said that trading is more of a short-term and medium-term matter while investing is always aimed at a longer investment period.


How can one learn to trade?

There is no state-recognized training to become a trader. However, you can try out trading with a free demo account. You should watch out for cost traps and not switch too quickly to trading with real money if you are only successful with the demo account by pure chance. A successful trader does not buy anything at random. He knows and plans exactly what and when to buy and when to sell again.

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