How to start trading – a guide for beginners

If a long-term “buy and hold” investment strategy isn’t for you, trading can provide a faster (albeit riskier) way of generating returns.

Here, Telegraph Money, explains how to get started and the steps you can take to reduce risk.

Trading is essentially buying and selling financial instruments with a view to making a profit, and could include anything from shares and bonds to currencies, cryptocurrencies or commodities.

In the simplest terms, if you sell an asset for a higher price than you bought it, you’ll be quids in, but if the price falls you’ll make a loss.

However, traders aren’t limited to taking long positions, where they buy an asset in the hope that its price goes up. There are also ways to take a short position and profit when the price of an asset falls.

Before you get started you’ll need to decide which assets or markets you would like to trade. This includes:

• Shares – You can either choose to buy and sell physical shares in specific companies or speculate on price movements using contracts for difference (CFDs) or spread bets.
• Bonds – Trading bonds adds diversification to a portfolio. Corporate bonds are loans to companies while gilts provide a way for the government to borrow money, both pay a fixed coupon to investors.
• Currencies – Currency trading involves simultaneously buying one currency and selling another to make a profit, according to whether you think one will strengthen or weaken against the other. You might also hear it referred to as Forex or FX trading.
• Commodities – Commodity markets let you trade raw materials and agricultural products (like gold or coffee) to profit from price changes in these assets.
• Cryptocurrencies – Cryptocurrencies can be bought, sold and stored on centralised exchanges like Binance and Coinbase.

• Choose what you want to trade – The first step is to decide what you would like to trade and how. For example, do you want to buy an asset directly or use a more complex financial instrument such as a CFD, that lets you profit from price movements without actually owning it?
• Open an account – To access your chosen market, you’ll need to open an online trading account run by a broker. There are now multiple trading platforms offering access to a wide choice of financial instruments and markets but do your research carefully. Cost of trading is important but if you’re new to trading, it’s also worth exploring what tutorials, tools, guides and support are available to educate beginners. Look for platforms that are intuitive and easy to use.
• Do a test run – Trading can be high risk, particularly if you’re considering spread-betting or CFDs, because they use leverage. While this can amplify your gains it will also amplify your losses. IG.com, a trading platform, warns that 69pc of its customers lose money with these trades. By making dummy trades, you’ll get the opportunity to learn and hone your strategy before risking your cash.
• Try it for real – Only start trading for real once you know and understand what you’re doing and have given as much attention to your potential losses as your gains.

Whatever you’re trading, it’s important to have a strategy: a set of rules or guidelines that you use to inform you about what to buy and when to sell.

This can take into account market trends, technical indicators and fundamental analysis but can be personal to you, taking your own goals, timeframe and risk tolerance into account.

The idea is that by employing a systematic approach you won’t miss out on suitable opportunities and there’s less risk of emotions clouding your decisions.

Popular trading strategies include:

• Momentum trading – Here, traders strive to take advantage of short-term volatility and cash in on a price movement that is heading decisively in one direction – whether that is up or down – and exit before that direction is reversed. The skill is in knowing when to enter and exit a position. Momentum traders will commonly use technical indicators to identify when price reversals are likely to occur.
• Breakout trading – This involves using key points on a chart to determine when to trade – for example, when a share price breaches a certain threshold. A long position would take place when a price exceeds a resistance level while a short position would be when a price falls below a support level. Having clear entry and exit points make breakout trading a popular approach, but traders need to be aware of the risks, such as false breakouts, for example, where a price rises, before quickly dropping back. Successful breakout traders need to be adept at interpreting trends and have a strong grasp of technical analysis.
• Swing trading – Traders that are confident with charts and technical analysis can use swing trading to capitalise on short- and medium-term price swings over a specific period (normally a few days to a few weeks).
• News trading – Some traders will be skilled at seeing the impact of news – whether that’s company announcements, economic data or geopolitical events – on particular shares and seek to capitalise on subsequent price changes. Successful news traders need to be able to interpret information quickly and act fast.
• Position trading – This is a longer-term approach where traders hold onto a position for weeks, months or even years, enabling them to benefit from longer-term market trends or fundamental factors. Traders need to be prepared to ignore price volatility in the short-term and have the patience to see their position pay off.

The exact trading strategies you employ will come down to your personal trading style. Some strategies will be favoured by fast-paced active traders who could be buying and selling multiple times a day, while others suit those who trade less frequently but hold on to positions for longer.

Trading will always carry a risk, however, there are steps traders can take to manage it and put a brake on losses.

• Use stop-loss orders or profit points – Before you enter a trade, pinpoint the loss you can tolerate before you sell and the point at which you take your profit. This takes any emotion out of the decision to sell – stopping you from being greedy, for example, or clinging on to a holding in the desperate hope of a rebound.
• Don’t put all your eggs in one basket – Ensure you aren’t focusing too heavily in one area. For example, if you’re investing in shares, make sure you’re invested in a broad spread of companies that aren’t exposed to the same risks.
• Hedging – Traders may also “hedge” a holding by taking out another position which has an inverse relationship to it. A currency trade, for example, might be hedged by a position in gold – the idea being that a loss on the currency could be offset by a gain in the precious metal.
• The 1pc rule – Some traders may also employ their own rules. A popular one is never to invest more than 1pc of your capital into a trade.
• Research – The more knowledge you have of the market you want to trade in, the greater your awareness and understanding of the risks will be.

Trading and investing both offer the opportunity to make money from certain assets, like shares. The difference is around the frequency of buying and selling and the length of time positions are held.

Traders:

• More likely to buy and sell shares frequently.
• Will often only keep positions open for a short period.
• Look to make short-term profits.
• Decisions driven by technical analysis, often with a focus on taking advantage of short-term price volatility.

Investors:

• Buys and sells shares less frequently.
• More likely to employ a “buy and hold” strategy.
• Normally looking for long-term growth potential.
• Decisions driven by a company or sector’s long-term prospects, with less heed to short-term “noise”.

• How much money do I need to start trading? The advent of online trading platforms means you can start buying shares with a few pounds. You just need to be mindful that, in addition to the cost of the shares, there are platform and trading costs which may not be justified on smaller positions. You can also open FX accounts with low deposits – often $50 or less, but some platforms will require significantly more to get started.
• Which trading style is best for beginners? If you’ve done your research, position trading can be a good starting point as you have time to watch and learn, but if you fancy a faster pace, swing trading strikes a medium-term balance. Ultimately, however, the right approach for you will depend on your knowledge and confidence with technical analysis as well as the time you’re able to commit to trading.
• Is trading easy to learn? It’s significantly harder to trade successfully than it is to invest, and it takes a lot of research and analysis. However, if you’re prepared to commit the time there are huge amounts of resources online to help.