Financial Markets: What and How to Trade

These days, thanks to the Internet, everyone can be a successful trader in the financial markets. To start moving towards success and financial independence one must know where, with what and how to trade. Besides, it is necessary to master several rules which will help to avoid too costly relations with dishonest brokers and other swindlers, of which there are a lot on financial markets (trader complaints).

Which financial market to choose?

The financial market (Fig. 1), in a broad sense, is an environment of capital concentration and a system of economic relations, thanks to which the whole modern economy exists and develops. But for the modern trader it is an Internet resource, where something is bought and sold so that the trader could profit from it. The trader can trade on the currency and cryptocurrency market, stock market, the futures market, and options, CFD market. The most affordable one is the currency one. forex marketand most traders start their careers on it. This is facilitated by a number of advantages:

• Low entry threshold, that is, the ability to start trading with the amount available to almost anyone (Trading on Forex with a Minimum Deposit);
• The ability to train on demo services, that is, without spending your own money (Forex without Investment and Risk);
• Leverage, – some brokers offer quite large leverage;
• Many online resources and trading platforms;
• Unlimited number of training materials (Forex Trading Training).

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Forex is the largest, most volatile and liquid of the financial markets. Because of its accessibility, forex is mistakenly considered to be the easiest to trade (Forex Trading). In reality, banks and funds play the main role, so the movements in the forex market are the most difficult to predict (forex forecast). Also, there are more scammers in forex than in any other market.

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Stock market (Fig. 2) is stock trading on stock exchanges, depending on supply and demand fluctuations (securities market). The stock market is regulated by state controlling institutions. That is, the level of protection for traders here is higher than on forex. The entry to stock trading is more expensive, although you can try to trade inexpensive stocks and using leverage, although it is not as big as on the foreign exchange market (stock market characteristics). Many traders recommend trading stocks as the safest and most predictable asset (how to start trading in the stock market).

Futures and options trading is also a popular type of trading. A futures contract is a contract in which one party undertakes to sell an asset (securities, currencies, commodities, etc.) at the price at the time of the transaction, and the other party undertakes to buy the asset at these conditions. When buying, the buyer pays a deposit and redeems the asset in full at the end of the term.

An option is a contract under the terms of which the buyer of an option has the right to buy an asset at a specific time at the transaction price. The seller, on the other hand, is obliged to sell the product at the agreed terms. Options can be for purchase and for sale. If the buyer buys an option to buy an asset, he/she has the right to buy, and the seller has the obligation to sell. If the buyer buys an option to sell the asset, the buyer has the right to sell the asset to the option seller, and the seller has the obligation to buy the asset if the buyer decides to sell it.

CFD trading (Contract For Difference, CFD, Figure 3) is the trading of assets, particularly stocks (or futures), which the trader does not own, but receives a profit (What you need to know about CFD trading). CFDs are suitable for traders who would like to trade on the stock market but do not have sufficient funds to buy stocks. CFD trading takes place between the broker and the trader. In financial markets, a trader can trade independently or entrust operations to a broker. When trading at financial markets, trader earns money at the expense of the difference of currency rates or values of assets. One can count on big profit only when trading for a certain period of time and only when operating with big volumes.

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But it is possible to learn how to trade small amounts of money, although it requires a lot of work. The positive side of trading lies in the fact that one can progress in it practically without limits – everything depends on the labor invested and persistence of the trader. The choice of market for trading is individual and depends on trader’s financial possibilities, market liquidity, available instruments, trading conditions, peculiarities of registration on trading platforms and also on trader’s purposes. But, as a rule, trading is started with forex trading because it is the least expensive option. If you have decided to trade in the stock market, we advise you to pay attention to the best stock brokers from the rating of our website: Finam, Tinkoff Investments and BCS.

Trading on the forex market

There are several basic ways to trade forex. Let’s consider them in more detail.

Forex trading basics

The forex market has no specific geographical reference, it exists on the Internet, so you can trade around the clock and from anywhere in the world. But it is necessary to take into account the trading sessions held at different times in different parts of the world: American, European and Asian-Pacific. To start trading, you can go step by step through several steps (How to start forex trading). A beginning trader will need:

• To study the theoretical basics of forex trading;
• Choose Forex broker, register on his website;
• Open a demo account;
• Download the trading platform;
• Practice in the demo mode. Before you start trading, you should be able to confidently open and, more importantly, close positions, set stop-loss and take-profit levels, and confidently use graphs and forex indicators;
• Open a real trading account and fund it;
• Make an initial trading plan;
• And if you have confidence in your abilities, you can start trading, sticking to your trading plan and noting the results;
• Analyze the results, make adjustments.

The algorithm of trading on the platform is repeated in the main features of other types of trading in the financial markets. Transactions in the market are concluded in the forex market around the clock. Transactions are made in the Metatrader platform, which can be downloaded. To make a deal, you need to order the broker to open a position. This order is called an “Order” (“New Order”, Figure 4). It means that the broker must buy or sell, for example, the currency pair EUR/USD at a price set by the trader.

The asset and price are selected in this platform in the “Symbol” field. “Ask” – buy price, “Bid” – sell price, the difference between these prices “Spread” – the spread. It is also necessary to select the volume of the position and set Stop Loss and Take Profit. Stop Loss will automatically close the position when it reaches a certain loss, Take Profit will close the position when it reaches a certain profit. Stop-loss on sale is set above the current market price on sale, and below the current price on purchase. Take Profit is placed below the current price if the transaction is for sale, and above the current price if it is intended to buy.

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In fact, the central action of the entire trade is to click (Fig. 5) “Sell” if a decline or “Buy” if a rise is predicted. After the operation of sale or purchase the trader receives a loss or profit. The open positions are displayed in the “Terminal” section of the “Trade” tab, “Price” shows the value of the asset, “Profit” shows the result of the transaction. If an order needs to be closed, then the selected position must be right-clicked to bring up the “Close Order” window and close it or use the “+” in the line to the right of the trade result indicator.

If trades could only be closed manually, it would require the trader to constantly monitor the situation, you would have to devote all your time to trading, at the risk of missing profitable conditions, and it would be impossible to implement many effective trading strategies. But in the terminals there is an opportunity to exhibit pending orders, which are executed automatically at the prices that are set by the trader. In this case to place the order it is necessary to choose “Pending order” in section “Type” and to choose the corresponding decision: Buy Limit – purchase at the price below the current, Sell Limit – sale at the price above the current market price, Buy Stop – purchase above the current market price, Sell Stop – sale below the current market price.

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Forex trading strategies

Prices in financial markets either rise or fall, or move in a flat, that is moving with small fluctuations for quite a long time. On the basis of these three directions, numerous trading strategies are formed (Forex Trading in 2020). We can say that there are three types of trend-following strategies, Flat and countertrends (Best Forex Strategies). A trend is the direction of price movement. It can be ascending, descending or flat. If the maximum price value (maximum) is higher than the previous maximum, and the minimum price value (minimum) is higher than the previous minimum, such a trend is ascending.

If the price minimum is lower than the previous minimum and the maximum is lower than the previous maximum, it is a downtrend. Thus, 4 points are enough to determine the trend in each case: two highs and two lows. The main task in implementing a trend trading strategy is to determine the entry point, after which it will be able to profit from a rising price. Simplified, the entry point is the third touch of the price of the trend line – this confirms the correctness of the definition of a stable uptrend. But in practice it is not so simple, and the definition of the entry point is the most difficult task, which requires practice.

Trading in a flat movement implies that the trader should be able to make money on minor price fluctuations. To make sure that a flat is forming on the market, the main levels between which the price fluctuates are determined. Support levels are price levels below which buyers of assets (bulls) don’t let them go, and resistance levels are price levels above which sellers (bears) don’t let them go.

The flat becomes noticeable when minimums and maximums stop being updated, and only minor price fluctuations are observed in a certain stable price range. Profit in the flat is derived by opening trades on the boundaries of the flat, on resistance and support lines in the expectation of a rebound: when the price touches the boundaries of the price channel, but does not “break through” it, and returns to the corridor.

Counter-trend strategies are used as additional strategies, on corrections and pullbacks, price movements that are contrary to the trend, but do not form a new trend, but develop for a short time, after which the price returns to the main trend. So the main task in this case becomes the identification of the correction, so as not to confuse it with the beginning of a new trend. This is not easy, so trading against the trend is not recommended for novice traders. If you have decided to trade in the forex market, we advise you to read the reviews of the best forex brokers from our website: FinmaxFX, Alpari and BCS Forex.

Fundamental analysis

The main activity of a trader is to try to predict the price of the asset he trades (forex analytics). In this he is helped by Fundamental and/or technical analysis. Fundamental analysis is aimed at determining the price of an asset in the medium and long term, based on such basic postulates:

• The price changes for some reason(s);
• You can predict how the cause will affect the price of the asset.

Traders analyze such data:

• GDP dynamics;
• employment figures;
• the dynamics of business activity;
• the dynamics of industrial production;
• consumer demand indicators;
• central bank decisions (Figure 6).

The fundamental analysis is not limited to these indicators. If the trader practices the fundamental analysis, then he forms his own block of information sources, on the basis of which he makes his forecasts. Among them are the major news agencies, stock exchange indexes, corporate news, governmental resources and so on. At the fundamental analysis the indicators are estimated not only and not so much on the national level (for example, Russian or Ukrainian indicators), but often the situation in the world and economic indicators of the USA, as the country, which events have the strongest influence on all the financial markets, are much more important.

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Technical analysis

Technical analysis is based on such provisions:

• Prices take everything into account. That is, the price already reflects all possible influencing factors;
• Prices follow trends: the price is falling – a downtrend, the price is rising – an up trend, the price fluctuates around the same level – a flat;
• History repeats itself: at different times in similar situations, prices behave the same way.

Thus, technical analysis comes down to predicting the future price behavior based on its behavior in the past. For this purpose a very extensive arsenal of tools is applied. Graphical patterns are one of the basic tools, now. There are about a hundred of them in total, but the main figures are few, and they have not changed for decades. Among them are the following graphical patterns:

• “Triangle”, which shows the continuation of the trend;
• “Double Top.” (two recurring highs in an ascending market), – a pattern that shows a change in trend;
• “Double bottom” (two recurring lows in a downtrending market), also showing a change in the trend;
• Expanded versions of previous patterns – “Triple Top” and “Triple Bottom”;
• “Head and Shoulders.” – three highs, of which the high average stands out – the figure indicates a change in the trend;
• “Inverted head and shoulders” is a mirror image of the previous pattern;
• “Flag.” and “Vympel” similar to it – figures, confirming the development of the trend – other patterns.

Both the identification and the correct interpretation of patterns on the chart are available to traders with sufficient trading experience. All traders use support/resistance levels, ascending and descending channels, trend lines in technical analysis – these are the basic tools. The price dynamics is displayed most often with the help of Japanese candlesBut there are many varieties of Japanese candlesticks, as well as many alternative ways to display candlesticks.

To refine forecasts and find entry points into trades traders use different types of moving average, tools based on Fibonacci numerical series, Bollinger lines, Williams indicators and much more. Such tools are divided into indicators and oscillators (Figure 7). Indicators are placed on the price chart, oscillators under the chart, but many tools combine both of these visual ways of providing information.

Trading stocks, futures, options, CFDs

Let’s talk more about how to trade different assets in financial markets.

How to start trading stocks

A share is a security that confirms its holder’s right to a share in the authorized capital of the company that issued the share. That is, the holder of a share owns some portion of the company as long as he has the share. In stock trading, theoretical training is especially important (Trading in the Stock Market in 2020). In contrast to forex trading, stock trading is an inherently expensive activity, you can’t learn to trade immediately in “combat conditions” without risking big losses.

That’s why you need to take the time and learn the terms and concepts of trading, learn how to choose, monitor and analyze reliable information sources, decide on the direction of investment, determine your goals, master the trading tools, practice in the demo mode. All this contributes to safe entrance to trading. Stocks are traded through stockbroker.

It is important to choose a quality broker who can be trusted with your trading operations. This, however, applies to the choice of a broker for trading in any direction of financial markets. When choosing a broker, one should pay attention to the broker ratings. Our website has such a rating, we advise you to read the best brokers: Finam (go online), Tinkoff Investments (go online) and BCS (go online). It is important what platforms and tools the broker has, what control authorities regulate, what are the amounts of commissions and deposits. It is also necessary to get acquainted with the reviews of the brokerage office.

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Where and how to buy shares

Shares are traded on stock exchanges; there are about two hundred of them in the world, but only a few dominate, among them the NYSE (https://www.nyse.com/) (Figure 8), AMEX, LSE, TSE and a number of others. Shares are bought through a broker. First you have to register with a brokerSign a service agreement, fund an account with the broker and give him an order to buy through the trading terminal (register with a broker online). The rules for buying shares are subject to certain requirements at the national level.

For example, in order for a Russian to buy shares, he must obtain the status of a “qualified investor,” which is very difficult for the average trader (Russian Stock Market). How to get the opportunity to start trading stocks without initially being a millionaire (at least ruble) should be clarified with the selected broker, because there are possibilities and nuances. Technically shares are bought through the terminal, although large buyers give orders to brokers by voice message, that is literally on the phone, like in the old days.

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But terminals that can be downloaded and installed on the computer are more popular now, such as QUIK and ROX services. Terminals offer a wide range of instruments with which you can analyze the situation on the market. Brokers also offer browser versions of terminals, which are lighter. When trading shares, three operations are realized: buying (Buy), selling (Sell) and sale of shares, which the trader borrowed from the broker (Sell Short). An order to buy or sell a stock can be a market order, i.e., at the market price, and it will be executed instantly.

Also, the bid can be limited, that is, the purchase or sale will be carried out only at a specific price. The shares, once purchased, are held in the company’s depository, which keeps track of the shares. Brokers’ depositories are united in the Central Depository, so if the broker goes bankrupt, customers’ shares are safe. How payments are made after successful trades in shares need to be clarified with the broker, there may be nuances.

Futures trading

A futures is a contract to buy or sell an asset in the future, at current value. The asset (underlying asset) can be stocks and other securities, currencies, commodities and more. In other words, a futures contract is a derivative of the underlying asset which has a limited running time. When purchasing or selling the futures contract, the trader does not pay for the entire contract, but makes a certain payment to initiate a position with the exchange security. Futures are either deliverable or settled. Delivery futures suppose real delivery of goods, and settlement futures are just the mutual settlement between the parties of the contract, when the term of expiration (completion of the contract) comes. Traders are interested only in settlement futures.

The trader’s profit is formed as follows: suppose he bought 10 futures for an index, expecting that by the end of the futures contracts period the index will grow. If it happens, then at the expiration of the expiration date the trader will receive the profit. The price of the futures can change before the expiration date. Futures are attractive because of their high liquidity, relatively low commissions, low trading entry threshold and collateral.

Futures trading is quite complicated for beginners, although there are few strategies. In order to trade in futures one must be theoretically prepared, choose the right broker, choose the trading direction, read the specifications of the particular contracts and then you are ready to go. The risks of the futures trading are connected with the incorrect evaluation of the price for the underlying asset and with the fact that this type of trading is margin trading so the price of the futures changes within quite a wide range.

Options trading

An option is a derivative similar to a futures, but differs from it in that it is an exchange transaction in which the trader has the right, not the obligation, to buy (call) or sell (pull) at a fixed price the underlying asset. As you can see, there are two types of options: Call – an option to buy and Put – a put option. Operating with options, the trader works not with the price, but with the volatility, his main task is to determine in which direction the price will go – up or down.

To buy an option, the buyer pays a premium to the seller; accordingly, the trader selling the option receives a premium. The premium depends on many factors, including the price of the asset. The selling or buying price of the underlying asset, – this is the strike price of the option. In order to make a profit, the price of the asset must be higher than the strike price for call options and lower for put options – before the option is exercised. Trading options is difficult for beginners and full of risk (Binary Options Risks). Sufficient trading experience in the financial markets is required to be able to effectively engage in trading this financial instrument (binary options without risk). And it is just as important to choose options broker with a good reputation. We advise to pay attention to the following brokers from the rating of our site: FiNMAX, Binarium and Pocket Option.

CFD trading

CFD (Contract for Difference, CFD) is an over-the-counter derivative that can be traded to profit from changes in the price of the underlying asset. CFDs are traded between CFD broker and trader. We advise to read about the best CFD brokers from our rating: FiNMAX, Alpari (go online) and BSC Forex (go online). The trader does not own the underlying asset, but can benefit from price movements.

When the parties close the deal or when the contract expires, if the value of the asset has risen, the difference between the current value and the opening price is paid by the seller. If the price fell, the difference is paid by the buyer. The risks of CFD trading are determined, for example, by the fact that brokers give considerable leverage. The number of contracts for the difference is determined by the trader. The contract prices can be different on different platforms, but there is a minimum price.

Scammers in the financial markets

Since their existence, financial markets have been extremely attractive to all kinds of fraudsters. Brokers-fraudsters are not uncommon at all, and a beginning trader may not be able to distinguish a real broker from a false one. Sometimes the experienced traders also fall for the tricks of swindlers, because swindlers invest huge funds in PR, promotion and creation of the appearance of respectable companies, which then more than compensate at the expense of the clients. One of the well known ways to take money from the public in a relatively honest way is the “forex kitchen”.

Brokers receive applications from clients and send them to the liquidity provider, and then all this money is turned around at the interbank level. In the “forex kitchen” the application does not go any further than the “broker”, all operations are carried out “in the kitchen”. If the trader is successful, he takes the money from the scammers, which of course they can’t do. And some time after the payment they start to apply various methods of non-payment to successful traders. This activity develops practically with impunity. But the main profit the “kitchen” has not from such traders, but from the vast majority of newcomers and inexperienced traders who simply lose their deposits.

Another way to cheat is to “draw quotes”, when one broker’s quotes are different from the quotes of most other brokers. This happens, for example, when it is necessary to give an impulse to the price of an asset in order to trigger traders’ stop-losses. It does not happen during the natural evolution of the situation, and then the broker decides to push the process a little. It can happen during the natural development of the market, but honest brokers warn about some sharp possible price changes, for example, about the probable increased volatility.

PAMM-accounts due to their specific nature are an effective way to deprive the trader of investment and honestly earned money. PAMM account is an account managed by a presumably experienced trader. For quite a long time, it can show a productive trade, in favor of the principal, then the trader’s account is zeroed out. The point is that the position is opened on the PAMM-account, and the other on the account manager, and positions are multidirectional. When the deposit is wiped out in the PAMM account, it will grow in the manager’s account. To the investor, it looks like an unsuccessful trading move, but in fact his money is simply moved directly to the fraudster’s account.

There are many similar ways, and the goal of the scammers is to convince the client to give them money for “effective management”. There are less visible ways to make the trader pay the broker more. For example, they make additional surcharges on top of the fixed commission. If the trader notices this, the broker can say it’s just a technical error. The trick to re-quote is that on a sharp rise in price, if the trader guessed the direction correctly, the broker delays the order for a few seconds and puts a higher price, on a falling market the broker holds the bid until the price goes down. The justification in case of questions is the same – “technical failure”.

The trick, which is designed for ambitious traders, comes into effect when the trader successfully rises from a small account to a notable amount. At a certain moment, the broker says that there is an opportunity to greatly increase the account, offers to deposit funds. But the trend goes in the opposite direction, the trader loses money. Generally speaking, in this case the trader who has decided to trust the broker for some reason is guilty so far and it is a standard situation.

But at this point, the credit department comes to the trader and offers to win back at the expense of the credit. The predictable result is that the trader loses again and goes into deficit, while the broker stays in the plus. A variant of this kind of “trick” when the broker shows that he is able to trade with profit on a small sum of the client and persuades the trader to deposit a much larger sum. The result is a bit predictable – the trader loses the deposit.

The markers indicating that the broker is a fraud are, for example, promises of huge returns, if we are talking about a guarantee of income – this is practically 100% scam. Often pseudo-professionals abuse professional slang – an experienced trader immediately sees that the terms are used incorrectly and inappropriately, but a beginner may have the impression that the broker is extremely professional. In the course of trading it is possible to assume that the broker is unscrupulous, if such signs are observed:

• It takes too long to execute an order;
• When stop-losses close above or below the set;
• When an order is not executed at the assigned price;
• Profitable order is not closed;
• When the price of a given broker is markedly different from that of other brokers;
• When “technical failures” occur during a productive trade, especially if they interfere with profit or withdrawal;
• When you find incomprehensible commissions or the deposit has decreased for some unknown reason.

The best protection against scammers in financial markets is the professionalism and common sense of the trader. He must have a good command of trading methods, this gives him control over costs and profits. In addition, brokers are afraid to play against experienced traders who have everything under control and to whom it is very difficult to explain the loss of even a small part of money. The trader must stay calm in any situation, since any wrong action can be used by the broker against him and give the fraudster a reason to claim that the trader is guilty of his losses. And, of course, it is important to be able to choose a broker, to check his reliability by ratings and reviews, to study the peculiarities of the service of a concrete broker.