In this article, you can learn how to research into trading, including a quick overview of forex and CFD trading, technical and fundamental analysis, how to create a proper trading plan, and how to cope with unexpected events when trading, covering the basis of trend trading, risk management and market analysis.
In this lesson you will learn:
- How to research into trading
- How to create a proper trading plan
- How to cope with unexpected events when trading
How to Research Into Trading
When first starting to trade, it’s crucial to familiarise yourself with the basic principles of fundamental and technical analysis. The next step should be to determine which instruments you’re most interested in trading. Below, you can learn more about CFD and Forex trading; both are extremely popular among XTB traders.
What Is CFD Trading?
If you decide you want to trade CFDs, it’s important to first understand how CFDs work, what their pros and cons are, and whether or not they are the right choice for you. The term CFD stands for contracts for difference.
As the name suggests, a contract for difference creates a contract between two parties (typically described as ‘buyer’ and ‘seller’) on the movement of an asset price.
The three key features of CFD trading to keep in mind are:
- CFDs are a derivatives product
- CFDs are leveraged
- You can profit and incur losses from both rising and falling prices
What Is Forex Trading?
Another popular branch of trading is forex trading. Forex – also known as FX or foreign exchange – is the exchange of one currency for another at an agreed price. It’s a decentralised market where the world’s currencies are traded as an over-the-counter (OTC) market, which means that trades are fast, cheap, and are completed without the supervision of an exchange.
You may not even know, but you’ve probably been a part of the FX market at least once in your lifetime. For example, when you’re planning a holiday to the United States, you need to change your spending money from pounds sterling (GBP) into US dollars (USD).
Because currency exchange rates fluctuate all the time, forex traders seek to profit on these fluctuations by speculating whether prices will rise or fall. Here’s what you need to know about forex trading in a nutshell.
Forex pairs are quoted in terms of one currency versus another, and each currency pair has a ‘base’ and a ‘counter’. Moreover, each currency could strengthen (appreciate) or weaken (depreciate), which means that there are essentially four variables you are speculating on when it comes to forex trading.
If you believe the value of a currency will rise against another, you go long or ‘buy’ that currency. If you believe the value of a currency will fall against another, you go short or ‘sell’ that currency.
How to Create a Proper Trading Plan
Having a plan is essential for achieving your trading goals. You should create your own custom plan and include what you think would benefit you the most, but it’s generally a good idea for a trading plan to have the following components:
- Skill assessment: honestly assess your level of trading knowledge and review your strengths and weaknesses.
- Set risk level: decide how much of your portfolio you’re willing to risk on one trade, and then stick to your own boundaries.
- Set goals: before you enter a new trade, set realistic profit targets and risk/reward ratios.
- Conduct market research: always be aware of what is happening around the world, even if you predominantly trade based on technical analysis.
- Prepare for trading: open your trading platform and label all major and minor support and resistance levels on the charts, set alerts for entry and exit signals, and make sure all signals can be easily seen or detected with a clear visual or auditory signal.
- Set exit rules: determine your stop loss, as well as your profit targets.
- Set entry rules: write down the conditions that must be met before you enter a trade.
- Analyse your day: no matter what happens, always conclude your trading day by analysing the events, noting your profits and losses, and evaluating your actions.
While a trading plan should always be written down, it’s also important to be able to know when to re-evaluate it and adjust it according to changing market conditions. And, most importantly, a good trading plan should always consider the trader's personal style and goals.
How to Cope with Unexpected Events When Trading
No matter how solid your trading plan might seem, there are always some surprises along the way. But, with a good understanding of how the market works and proper planning, even the unexpected can be turned to your advantage.
One of the most basic rules of trading is to trade in the direction of the prevailing trend. Trend trading entails identifying whether the market is in a downtrend or an uptrend, and then riding the waves of the trend. In order to be able to determine this, it’s good to have as much information as possible. The XTB trading platform features detailed market analysis, which provides traders with a real advantage in terms of looking for and identifying potential trading opportunities.
However, it’s also important to mention that markets do not always trade in clear trends 24 hours a day, 7 days a week. There are stabilisation periods in every market, which are also known as sideways trends. The key, again, is in recognising when this happens, keeping a cool head, and rationally deciding whether to start range trading or wait for a breakout.
In order to be able to successfully cope with the unexpected, it’s crucial to have a good risk management strategy in place. The basics of risk management include having a detailed trading plan, being able to control your emotions, and having a solid money management plan.
If you want to continue learning, make sure to visit our Trading Academy, where you can find beginner, intermediate, and premium courses that can help you improve your trading skills.
To find out more about managing your trading mindset, visit How to Control Your Emotions Course and How to Cope with Pressure Course.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
