Four Essential Approaches to Financial Trading for New Retail Traders
September 26, 2024 (Investorideas.com Newswire) In the global forex markets alone, over $7 trillion is traded by governments, banks, hedge funds, bots and retail traders daily. That's before you consider equities, indices and commodities too. All of which underlines the opportunities that present themselves when trading the financial markets.
However, as a new trader, it can be daunting knowing where to start. There's an abundance of information and analysis published online and offline. So much so that it can be difficult to define your own strategy or approach to tackling the markets.
Below, we've distilled the process into three key areas to help novice traders find their feet in the volatile world of financial trading.
Bankroll management
In the volatile world of financial trading, protecting capital and minimising the downside is crucial. Many financial traders view a break-even trade as a win, simply because they've not lost any of their capital from speculating on the trade.
Novice traders should look to implement a risk-reward ratio for all their trades. Most professional traders will only consider risking as little as 1% of their capital on a single trade. This is a self-preservation move, since they'd need to experience 100 consecutive losing trades with a 1%:1% risk-reward ratio. Risk-reward ratios are achieved using market orders like stop-loss orders and take-profit orders, automating the process of stopping out a trade for a loss or a profit.
These are bankroll management lessons which have been readily adopted by other industries too, not least the iGaming industry, where many slot players now risk only a tiny percentage of their bank per session. By establishing a budget and adhering to it, players maximise the use of their accounts. This is ultimately the most important risk management move for iGamers, since there are typically hundreds of online slots to sample within the game libraries of leading iGaming operators. By applying trading-style bankroll management to casino balances, players can elongate their spending, spreading it across a broad spectrum of slot themes and concepts for optimal entertainment.
Fundamental analysis
First-time financial traders need to develop a knack for understanding the intrinsic value of assets, be it companies, currencies, or commodities. This requires traders to become adept at fundamental analysis, making informed decisions based on micro and macroeconomic indicators like hikes or cuts to interest rates, company financials, and other relevant risk factors. All of which can be used to determine an asset's potential growth or decline.
To become good at fundamental analysis, you need to develop a little black book of contacts and sources that you trust. This includes publications, economists, and journalists that you respect and consider having the inside track on the assets you wish to trade. You also need to have you finger on the pulse of the economic calendar. Since market volatility is often driven by new economic data that can change the narrative or direction of a market.
Trend following
Novice traders also need to be able to identify and align with the prevailing winds of the markets. This involves mastering technical analysis indicators to ascertain the direction of a trend - and open trades which align with it.
For example, if a stock has been trending upwards for some time and the technical analysis suggests the moment of the trend is slowing down, you may decide to open a trade on the stock's price reversing or correcting. Equally, if your technical analysis suggests the trend still has legs, you can capitalise on the momentum yourself until such time as it reaches as sticking point.
Mean Reversion
This is a different type of trend following, but one which many technical traders swear by. There is a theory that asset values often return to their historical average over time. The key is to pinpointing assets which have deviated most from their mean and trade on it returning to average levels over time. Traders lean on statistical tools and historical data to help assess the likelihood of reversion.
Employing these types of trading strategies can help fledgling retail traders to make better sense of the markets, while preserving their capital for the ideal trading opportunities.
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