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Trading on a Shoestring Budget

Posted by : Premraj | Posted on : Wednesday, July 19, 2017

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Trading in the financial markets can be a little overwhelming to a novice. All those charts, graphs, numbers, and terminology are enough to give you pause. However, upon closer inspection, the financial markets are about two things: buying and selling. When all the gobbledygook is pushed aside, you are effectively making a decision about a financial instrument you’re interested in trading. Buy or sell? In terms of the range of assets available to you, there are 4 broad categories including stocks, commodities, indices and currency pairs.

Once you have decided on an asset, your next step is to determine which way the price is going to move. Leading analyst, Michael G. Fauster of Stern Options advises traders to consider macroeconomic variables when dabbling in financial assets: “Right now, we are seeing central banks inching towards monetary tightening. This is an important component of your trading strategy. Remember, trading and investing are on opposite ends of the spectrum. With trading activity, you are speculating on future price movements over the short-term. Investment has a long-term horizon where ownership and appreciation of financial assets is the goal.

Trading on the Cheap

Conventional brokers make it difficult for novices to enter the trading arena owing to the high minimums on mutual funds, ETFs etc. You are likely to find annual fees, monthly management fees, commissions, and brokerage charges at many of the big-name financial brokers on the market. Besides for fixed fees per trade, there are many additional expenses that you may incur as a novice trader at these institutional brokerages. For this reason, many traders eschew these ivory tower financial entities in favour of non-traditional options.

Derivatives trading has been gaining ground ever since the collapse of the financial markets in 2009. That was a wake-up call for the financial markets, and it was followed by a loss of confidence in central banks and their influence over the global economy. Non-traditional trading platforms have sprung up, and they have gained in popularity in recent years. They bring an interesting mix of financial assets to the table, and trade sizes range from as little as $5 to $25, and minimum deposits are much lower than traditional brokerages. This makes it easy for neophytes to begin trading their favourite assets.

Limit Your Risk While Trading

These trading platforms run real time price feeds of stocks, commodities, indices and currencies. Traders get to enjoy an authentic trading experience without having to contend with the excessive paperwork and fees and commissions of traditional brokers. As a rule, it is always advisable to limit your trading activity on any one trade to just 2% of your available capital. By doing this, you will diversify your overall risk, and prevent any single trade from sinking your portfolio. For example, a trading account balance of $1,000 should assign no more than $20 to any trade. That means you have 50 trades of up to $20 to spread out across your platform. In this vein, it’s important to include a mix of assets to hedge against volatility in the markets.

For example, equities call options could be backed up by trades in commodities. A classic case of double benefit occurs with the GBP and the FTSE 100 index. Since these are negatively correlated, an appreciating GBP is coupled with a depreciating FTSE 100 index and vice versa. Double trades can double profits in the same time. Since low investment amounts are possible on these trading platforms, you can afford to use different combinations of trades to gauge market sentiment.

 

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