Let’s face it, global financial stability is a pipe dream. The markets have endured extreme volatility in 2020, and we’re not out of the woods yet. Geopolitical considerations notwithstanding, it’s tough to make sense of stock markets on a good day. The art of forecasting price movements of financial instruments is extremely specialized – most of us will simply watch from the sidelines as the market-makers shape the future.
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The trading spectrum
As a relative newcomer to the scene, you have several important decisions to make. Will you be trading, or investing? As a trader, your focus will be on the short-term. You’ll be looking at compressed time intervals, typically 60 seconds, minutes, hours, or days. Charts and graphs need to be poured over, while examining candlestick patterns, stochastic indicators, RSI, Bollinger Bands, moving averages, exponential moving averages, and a multitude of other technical indicators. It can get overwhelming, particularly in a bearish market where prices trend lower.
It’s really important to get started with a reputable trading platform. The established brokers don’t always offer newbies the resources they need to succeed. The benefits of trading with a broker like FBS include low spreads, easy payment processing, leverage up to 1:3000 and accounts with 100X less risk for new traders. When trading online, it is absolutely essential to pick a broker with a focus on the trader’s interests.
The investment timeline
As an investor, your focus shifts to the long-term. Investment horizons range from months to years – the precise period of time depends upon your age, your investment portfolio, and your objectives. Investors are less concerned with the choppy price movements from day-to-day, and more focused on building wealth over time. The best investments are those which have growth potential, meet the exigencies of the market, and are managed by dynamic professionals. A long-term investment should always have a forward focus. In economics, it is often stated that savings are a prerequisite for capital formation.
Should you trade or invest?
Anyone can trade at any time the markets are open. In fact, many online brokerages allow trading after hours, and during pre-trading sessions too. Trading financial instruments can be extremely profitable, provided the necessary preparation has been put into place. One of the biggest bugbears for novice traders is timing. Knowing when to get into a trade and when to exit a trade is crucial. It takes tremendous resolve to do this on a trade by trade basis, without using powerful tools and resources provided by trading brokerages, like stop-loss orders.
With trading and investing, the most important element to assess upfront is your risk preference. Risk-averse clients should avoid trading altogether, while risk-seeking clients should proceed with caution. In trading and investing, there is no reward without taking a risk. However, armed with the right information (technical and fundamental analysis, real-time market news, and important economic indicators) it is possible to mitigate overall risk. This type of knowledge provides clients with a competitive edge over traders and investors who choose to ignore these resources.
Your decision to trade is based upon the following:
- Your budget.
- Your selection of an appropriate trading platform based on your preferences.
- Your ability to learn about the financial markets and implement that knowledge accordingly.
- Your appetite for risk (risk seeking, risk neutral, or risk averse).
- Your preference for specific financial instruments (stocks, commodities, indices, currencies).
Your decision to invest is based upon the following:
- Your investment timeline.
- Your ability to sit tight when markets are roiling, and to capitalize when opportunities present themselves.
- Your understanding of economics, politics, market psychology, and geopolitical considerations.
- Your ability to diversify your financial portfolio to protect your investments from market volatility.
- Your skills in terms of reading and understanding economic data, earnings reports, news reports, and lesser-understood factors.
Is now the right time to trade or invest?
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Volatility is an essential ingredient for successful trading. Without price swings, it’s not possible to profit to the upside or downside. It may come as a surprise to learn that many traders are currently enjoying tremendous success in the financial markets. However, it takes practice, diligence, and a well-constructed plan to get started. When stocks are rising, many traders make the mistake of staying invested too long, hoping to maximize profitability. By the same token, many traders feel shortchanged when they sell too early. The best strategy is a premeditated approach which focuses on a percentage appreciation, or a nominal dollar value. Once you hit that target, the automatic sell order kicks in and your job is done, no regrets.
Take into consideration that successful traders (large-scale clients) are working off low margins, often mere fractions of a percentage. Since they work with millions of dollars, they are able to generate outsized returns. Most small-scale traders cannot compete in this arena. As a general rule, experts readily advise no more than 5% of your investable assets’ value should be allocated towards trading. Another factor that often gains little press coverage is taxation on trading profits and investment profits. It’s always a good idea to consult with a tax specialist to learn how the system operates, so that you can legally minimize taxable income.
The short and sweet of it is as follows: It’s always a good idea to buy on the dip, when the asset is undervalued. Market corrections present myriad opportunities to traders and investors looking for bargain deals. There are always opportunities available in stocks, commodities, indices, forex, and cryptocurrencies. Whether it’s CFD trading, short-selling or futures, discipline, focus, and a goal-oriented approach will get you where you need to go. This holds true with short-term trading and long-term investing alike.
About Carson Derrow
