When people think of online trading, initially the idea of eBay or Ali Baba might come to mind as websites like these were of the first to support the commerce of goods facilitated via the internet, such as online orders to buy or sell (trade) goods which were then shipped out physically or even at times delivered in electronic format (as in the case of an eBook or electronic format music file, or picture).
In today’s times such transactions are done even with money, as in the case of PayPal and a vast number of mobile and web apps that enable the transfer of funds online, such as mobile banking and the ability for online trading. However, that is not what this article is about, as will be revealed below, online trading has a broader yet more focused meaning as it relates to investments.
This article will look at an even larger market place largely unknown to the masses as it was recently only available to high-net worth sophisticated investors and still relatively new over the last 15 years in terms of its availability to the general public.
The answer to what is online trading that will be discussed here below will focus on Foreign Exchange, also known as Forex, or FX, and represents the trading of currencies online as this market is the largest market in the world, and $5.3 trillion per day on average (according to the latest triennial central bank survey using data from April 2013), and is mostly electronic thanks to the internet and the advances in technology both in terms of speed and capabilities.
In addition to Forex markets, online trading is also available for markets such as the US Stock Market, via a world-class brokerage such as worldwidemarkets.com, where clients can establish a trading account and execute orders on US regional stock exchanges like the Nasdaq, New York Stock Exchange (NYSE) for example, and other trading instruments which offer different ways to trade the same underlying markets such as using CFD trading strategies and tips (in off-exchange markets), also available.
A Shift to Electronic Financial Markets
Online trading involves the use of software and/or hardware to connect computers and servers directly to brokerages which operate exchanges either in the over-the-counter market or on-exchange, and provides traders the ability to send order to buy and sell so that brokerages can execute those orders on their behalf at the speed of light, thanks to the electronic connectivity. This can be done with a website, for platforms that are web-based, via mobile phone through an app, or by installing a downloadable version of the platform, and all thanks to the internet which bridge the connectivity gap.
Much trading across other markets in addition to Forex is also done via an API (application programming interface) and serves institutional and automated trading systems, forex trading algorithms, where programs can talk to each other using specific computer language or code.
All of this is possible because markets have become electronic, since in the last few decades and even today, a significant yet dwindling amount of foreign exchange transactions are carried out over the phone, such as when a buyer or seller will call their brokerage and instruct them to execute an order via voice -brokering.
Leveraging the Internet to your advantage, yet avoiding common pitfalls
The electronic side of the foreign exchange market is so efficient, that even milliseconds can count with regards to the speed that a broker can execute a trade, or the speed at which prices update or change, since every little bit can add up when dealing with billions and trillions of dollars, obviously in this case computers have an edge over humans in terms of their speed.
For the average day trader, trading from their personal home or work computer, such small differences might not mean a lot, but over time even one pip (small change in price) in foreign exchange over a series of many trades can add up to serious money, and traders are starting to leverage technology more and more to automate their trading, however, just like anything in life a balance is needed and over-relying on trading models or computer programs also carries its own risks.
The important thing is to understand that in online trading, price isn’t always the most important, since it is of no value if the quality or speed of execution is lacking. Therefore, clients seek a broker that they can first trust with their capital, preferably a regulated brokerages like worldwidemarkets.com, and one who can provide both high quality execution and competitive spreads (commissions), so that traders can focus on their trading and not dwell on brokerage costs alone and the quality of the service.
If a client is not happy with either of these, (service and costs), it can make for an unpleasant experience. By choosing the right company, traders can focus on the available tools, and make the best use of them while working closely with their representatives on their road to becoming a more successful forex trader.
This is the epitomy of what is online trading. It is about trading forex via the internet, by accessing the market electronically, and doing it with a brokerages that you can trust just as you choose a bank that you want to feel comfortable with, choosing a brokerage is equally important. At the same time, traders need to take responsibility for their actions, when applicable and not rely too much on either a guru or technology, but rather understand the key elements they need to succeed and then decide on appropriate action while continually striving to improve their approach.
What is the number one most important element to be successful in Forex trading?
It is a fact, based on supported theories, that even a monkey can get lucky and make a profitable trade or even a few profitable trades in the financial markets, when giving what some argue are homo sapiens late ancestors the chance to choose or hit a buy or sell button, in controlled studies. Such tests have actually been carried out to determine if the results were just random, and to compare against highly experienced traders –for research purposes. This highlights that anyone can get lucky on a few trades, but to do so over a large number of trades over time requires more than just luck.
Therefore, doing well on one trade or a few trades is not meaningful -even for a monkey, however, the key to making money over a large number of trades as discussed above, over time, especially for us sapiens is simply to keep the average size of profits higher than the average size of losses. This is far simpler as it sounds, as it often requires discipline and strict dedication to following self-established rules, monkey-business aside.
This means that if for example, 200 hundreds trades were made over a period of time, and half were profitable with an average return of $10 per profitable trade (i.e. $10 avg profit x 100 trades = $1000 net profit), however the average loss was $11 per losing trade on the other half of the trades (i.e. $11 avg loss x 100 trades =$1,100 net loss), the final result would be a loss of $100 dollars (e.g. $1,000 profit minus $1100 loss equals -$100) over the 200 trades.
How to run your forex trading like a real business
As simple as that equation is, just as in any business the amount of revenue must be enough to overcome costs, in order to return a net profit, and in Forex trading it is no different.
Despite how simple this may sound, surprisingly, traders on average do not apply this rule of focusing on proper risk management, which is the reason while all but a small percentage of traders can consistently succeed over a longer period of time, and counter loses with enough profits.
In order to do so, it is essential to calculate the risk/reward ratio or Gain-to-Loss (GTL) ratio by comparing the amount of money at risk on a trade relative to the amount of money targeted as a profit per trade –and applying an ideal ratio to the level of risk taken versus targeted profit.
This will of course vary per strategy and depending on the risk-tolerances and appetite of each trader and therefore there is no perfect answer or magical risk-reward ratio that could work best for everyone.
However, common sense shows us that if on average the amount of money that is being put at risk is greater than the amount of profit, then the odds will be less favorable as it will be easier to lose money and harder to gain it back. For example. If over the course of 5 trades, there is $50 risked per trade, in order to target a profit of $10 per trade,(i.e. a risk-reward ratio of 5:1, or gain-to-loss ratio of 0.20), if even one trade hits it max risk threshold (stop-loss level) and a $50 loss is realized, even If the other 4 trades hit their target of $10 each, the $40 profit won’t be enough to overcome the $50 loss.
What is worst is that if all trades got stopped out ( $50 x 5 = $250) the maximum potential loss would far exceed the maximum potential profit, since even if all 5 trades hit their profit target the result would only be a $50 profit ($10 x 5 =$50).
Finding the right risk-reward ratio requires homework and goal-planning
While this is an extreme case, generally a positive ratio means that less money is being risked in the hope of making more money (not the other way around). For example, if $1 is being risked to make $1.50, that would be considered a gain to loss (GTL) ratio greater than 1.0 – in this case a GTL of 1.5.Whereas if $1.5 was being risked to make $1.0, the GTL would be .66. This is calculated by dividing the potential profit into the potential loss, (i.e. $1.00 divided by $1.50 = $0.66).
For example, a trade that was opened or established to buy EUR/USD at a rate of $1.3560 per each Euro, with a stop-loss to sell at 1.3540, and a limit to sell at 1.3580, this would result in a potential risk of 20 pips (1.3560 minus 1.3540 = 0.0020), and a potential reward of 30 pips (1.3590 minus 1.3560 = 0.0030), and thus the risk reward ratio would be 2:3, and GTL of 1.5. If a thousand trades were made with a ratio like this over the course of several months, for example, you could
To calculate the risk/reward ratio you place the risk on the left side of the colon and reward on the right, as in the above latest example. So with a risk-reward-ratio, ideally the number on the left – the risk- should be smaller than the number on the right – to varying degrees depending on the strategy in order to keep odds more favorable over a large number of trades. And for the GTL the value should ideally be 1.0 or higher.
What is the best way to start?
Since online trading is done electronically, often software programs are used, which contain all the tools and functionality for traders to use, while web-based versions of trading platforms are available as well and normally contain lighter versions of the platform that are easy to access – such as a mobile based forex trading app. Forex Blog provides traders with world-class brokers such as WorldWideMarkets.com which also has Android and iPhone versions of MetaTrader4 and AlphaTrader trading platforms available to best suit trader’s needs.
Therefore, the best place to start learning what is forex trading all about, is to get some hands-on practical approach now that you have a basic understanding or high-level overview of the theories described above, and open a forex trading demo account so that you can start learning how the trading software works. Traders are also encouraged to continue reviewing information such as in a forex trading tutorial for beginners found within ForexBlog.com, including forex currency news, and support offered from WorldWideMarkets.com.