You may find some economic information almost everywhere. There is a lot of news about Shares, Forex, Commodities etc. Thanks to the recent price rally of the Oil and its following fall and thanks to the general economic situation, as well, much more people begin to think about the markets and how do they really work. The question is: How can we use the market moves to our self-profit?
First of all, we should decide, what to trade. Maybe you are good in estimating next Stocks or Forex (Foreign Exchange) direction. Maybe you think that commodities price prediction (like gold, oil, corn) would be the easies one. All these assets can be traded on an Exchange – e.g. NYSE (New York Stock Exchange), CME (Chicago Mercantile Exchange) and many others. Based on the asset you want to trade, you will choose your Broker. The broker will realize the trades on behalf of you and your account. Please note that not every broker is able to trade everything. If you want to trade Forex, it’s better to choose a specialized Forex broker and if you want to trade commodities, you should find a broker, which can make it. The Forex broker wouldn’t help you much in such case.
Broker becomes the connection between you and the Exchange, where all the trades are done. Once you choose your broker and close an agreement with him, you can send the money to your trading account. The most common currency is the USD, but you are also allowed to send another currency. All next trading fees will be debited from your account. The most common fees are fees for Data and using the trading Platform, but mostly the fees for your trading orders realization.
The broker will charge some fees for the orders, you give him and that is a cost for you. On the other hand he enables you to use the leverage. Leverage means that you can trade a higher amount of asset than you could really afford with the money you deposited. It’s like he lends you the rest of the money. The Leverage for Shares can be 1:2, for commodities 1:20 and for Forex 1:200. The leverage expresses the fact how many times more of the asset you can control, compared to your own deposit. The higher the leverage is, the more asset/contracts you can control, but it also means that the faster you can loose your money. As this danger exists, the Broker and the Exchange determine the amount of money that will be blocked on your account every time you enter a trade. That is called a Margin.
The Margin is a deposit that is blocked on your account while you are in a trade and control a contract. After you exit the trade, it is un-blocked and returned to you. Despite you can use the leverage and control more of the asset, the whole profit (and the whole loss, as well) is settled with your account immediately. If your losses are very high and you almost run out of the money, you can get the Margin Call. Then you are supposed to send some extra money to your account, if you want to trade further.
There are some tools that can help us manage the money. We use Money Management, so we can manage both – our profits and losses, as well. If we wan to cut down the losses, we use mainly a Stop Loss. Stop loss can be compared to an emergency break. Profit Target can be described as a desired profit that is high enough to take it and not to hold the contract any further. By using Profit target we do not risk the regress-move i.e. lowering our profit.
We use various kinds of analysis to predict the future direction of the asset – Stocks, Forex, and Commodities etc. The basic ones are:
Fundamental analysis: which focus itself on financial and economic calculations, inventory level, weather forecast, escalation in tensions etc.
The second one is the Technical analysis. Traders, who use Technical analysis, are not interested in market information. They are just interested in the historical prices. The prediction of the next direction is based on the historical data. Technical analysis is based on visual evaluation of the information – the chart and its patterns, as well as the mathematical and statistical techniques – indicators of technical analysis. Such indicator calculations are based on historical prices but also volume of the trades.
The realization of trades is quite easy. If we decide that the time is right for the purchase or sale (e.g. through technical analysis), we send a trading order to our broker. Trade orders can be entered either in person or through the trading platform. Realization of orders takes place very quickly - in term of seconds. From the time of trade execution the losses and profits are immediately attributed on our business account, depending on the subsequent development of prices. On the Forex market we trade in lots, on the Futures market in contracts. Every time, we enter a trade, we get a confirmation what we have just done. E.g. that we have just sold 3 Oil contracts, at a price of 70 U.S. dollars per contract. In this particular case, when we sold 3 contracts, each drop of oil prices by $ 1 would mean a gain of $ 3000 on our business account. The shift of $ 1 to the oil price means a change of $ 1,000 (as 1 contract = 1,000 barrels of oil, i.e. 1000 x 1 dollar) per every contract. As we have purchased 3 contracts, our profit is multiplied by 3, then. Maybe you were also taken aback by the fact that we earn money on a decline in oil prices not only on its growth. Yes, it is possible through so-called Short Selling (Shorting or Short sales).
Short Selling is the opposite of usual earning money thanks to the growth of prices. Many people think that dealers make money only if the price of shares, commodities, etc. is growing. This is not true. You can make money on falling prices of various assets, too.
Let’s summarize the information we know so far. We know already that we earn (and also loose) money through an open trading account with your broker. We enter the orders after a thorough analysis of the situation on the market - whether technical or fundamental. For our earnings, it is irrelevant whether we bet on the rise or fall in price, we can earn on both movements. At the time of entry into the trade the Margin is blocked on our trading account. All the gains, losses and other fees are credited and debited from the Account, as well. The option to maximize our profits, but in particular to minimize our losses, we have thanks to the Money Management. Summary of all our trading rules is called a Trading system. Our trading system can be automated to such a level that orders will be sent by a computer, on the basis of fixed rules, and without our personal participation. Once we reveal the secrets of trading, find an approach that would be profitable but also robust enough and succeed to create a system of automatic rules that could be realized by a computer, we have just created a "machine for the money."
Conclusion: the successful trading is not a matter of chance. Rather, it's a question of information, quantity of work on our trading system and the willingness to constantly learn. While creating your trading system, don’t pay attention only to its profitability, but also to its robustness and long-term effectiveness. The primary goal of every trader should be to "survive" before we can reach our higher goals. Don’t ignore the rules of Money Management and do not take excessive risks. This is the only way to a long-term success.