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A financial expert and trading strategist answers 10 frequently asked questions about online trading

CMTrading’s Chief Trading Strategist, Fred Razak, has been trading the financial markets for well over 20 years. Here he answers 10 pressing questions about online trading that are commonly asked by internet users.

What is stock trading?

“Not to be confused with investing in stocks, stock trading is the act of observing the movement in the price of a particular stock throughout the day and then anticipating and speculating on future movements in that stock, then taking a pragmatic position (i.e., buying and/or shorting the stock share) to make a profit.

“Essentially, as a stock trader, you are looking for patterns and trading signals in the market and taking advantage of price swings – both up and down.

“When a stock price falls due to various circumstances, but you believe it may recover in the future, there is an opportunity to make a profit. It’s not an exact science, but there are many factors and historical patterns that you can reference to help predict future outcomes.”

What is options trading?

“Options are contracts that allow you to buy, sell short, or choose not to ‘option’ on a tradable asset. So you’re not buying the actual stock, you’re paying for the right to buy or sell the stock. Think of it as a down payment on something – not the full value, giving you an opportunity to buy or sell something in the future.

“When you buy an option, you base your speculation on the expectation that the price will go up, but since you’ve already set the price today, if the price trades above your purchase price of the option, you’ll profit immediately. You then have the right to trade the asset on that day. However, you are not obliged to do so. When you decide to trade, it’s called exercising the option.

“Options have traditionally been used in hedging strategies to reduce market risk.”

What is a CFD?

“CFD trading or Contract for Difference trading means that you are not trading the actual asset; Rather, they trade a representation of an asset. In the United States, CFDs are only traded by the major financial institutions themselves, not retail investors; while outside the US CFDs are widely available and traded by both.

“A CFD is a simple contract between a trader and a seller. In stock trading, if you buy 10,000 shares at R2.00 each, you pay R20,000. But if you buy a CFD instead of buying the shares, your broker can offer you a CFD at 10% of that value, with a 10% margin/difference agreement.

“With a 10% deal, you’re exposed to the same 10,000 shares at just 10% of the price a stock buyer would pay. That means you pay R2,000 and if the share price goes up 5c you make a profit of around R500 (5c x 10,000 shares = R500). So you get back your initial investment plus the difference.”

What is leveraged trading?

“Leverage implies the ability to control a larger amount of money based on a bona fide deposit. In other words, someone who opens an account with R 100 can trade for more than that amount to profit from the markets.

“Leverage is a trading mechanism that investors can use to increase their exposure to the market by allowing them to invest less than the full amount required to trade the asset.

“The trader uses credit provided by a broker so they only have to invest a percentage of the transaction value – BUT – something a trader must always consider is their coverage or risk ratio as the trader is responsible for any losses, not the brokers .”

What is forex trading?

“Forex trading is very common in the international trading arena. The principle is very simple. In fact, the concept is similar to stock trading in terms of observing price fluctuations and taking advantage of those fluctuations. For example, you would have two currencies trade against each other. You buy one and sell the other, or sell one and buy the other.

“Assuming you were trading US dollars against South African rands, you would buy one currency when its value fell and then sell it against the other currency when its value rose – a simple profit and loss principle.”

What is futures trading?

“Futures are a popular learning method for beginners. Futures trading is a contract of sale between a buyer and seller for today’s price and delivery of the asset at a future date, fixing the price now.

The buyer agrees to buy a commodity (or forex or stock) by a specific date. The seller undertakes to make the goods available at a later date at the price quoted today. In futures trading, once the agreement is made between the buyer and seller, the agreement is in effect even if the price of the commodity increases by the specified date.

“A good example of this is when the price of oil is traded in a contract form. In this way, the price of oil is intended to provide a basis for global financial stability. If the price of oil is $100 today and you agree to buy it for $100 a month from now on, you’re still paying $100 even if it goes up to $150 that month.

Conversely, if the price drops to $90, you pay $100 as well. Depending on the price movement of the commodity, either the buyer or the seller can win or lose. Setting these agreements helps transport companies like airlines set prices without paying too much attention.”

How do you trade stocks?

“That’s a clear answer. No matter what you trade – whether it’s futures, CFDs, forex, symbol indices or anything else – never gamble. Always apply technical analysis before investing any money. And always work with a reputable broker who can educate you and help you learn.

“Never overwhelm yourself. Start taking responsible risks with small investments that are in your comfort zone. Opportunities to become more aggressive and trade bigger will always present themselves, but first you want to build your confidence, both in yourself and in the markets. Always start with risk management.”

What is scalping?

“Scalping is a method of getting in and out of the markets in a very short amount of time and making many – even hundreds of – daily trades with small profits. Most of the time, scalpers want to get in and out of a trade in a matter of seconds.

“Using this method, exposure is limited to incremental amounts, and while rewards are small, risk is reduced. I could even call it “intraday” trading. It’s an effective, time-consuming trading method that won’t make you an overnight fortune, but it can pay off with patience and strategy.”

How do you trade cryptocurrencies?

“That’s the million dollar (or about 30 bitcoin) question. Cryptocurrencies are long gone. And most technical analysis is based on limited historical data. So it’s a bit harder to pin down exactly what the game entails.

“Bitcoin trading is volatile and unpredictable. Similarly, there was the dot-com boom of the early 2000s, which was briefly traded the way cryptocurrencies are traded today. But the dot-com bubble quickly fell out of favor. Bitcoin may or may not experience the same volatility, but it’s still trying to make its mark.

“Historically, bitcoin has fluctuated on shorter time frames and due to volatility, scalping is a way to potentially take advantage of this and minimize your risk (but this is opinion only, not gospel). Trade sparingly and cautiously, not necessarily on a daily basis, but possibly enough to generate a steady stream of income.”

How are commodities traded?

“Commodities are traded very closely under the umbrella of futures. Commodity symbols expire from month to month unless you have a recurring contract – for example with Oil or Gold. However, sometimes you can just trade the asset itself without a futures contract.

“As with any other asset, applying sound monthly analysis and working with an informed broker is the best way to go.”

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