How to Start Online Trading and find the optimal entry

Online trading: In our digital age, it is no longer usual to always have to go to a bank for banking transactions. Therefore, the time is over when you had to instruct your personal broker by phone, FAX, personal conversation or even with a letter. Instead, it is now easier and cheaper to do all these transactions online. Then one speaks of online trading. However, trading beginners and inexperienced traders are usually not really familiar with it. Therefore we dedicate this article to online trading, corresponding trading strategies, platforms and advantages as well as disadvantages of online trading.

What is Online Trading?

Online Trading itself has many different definitions. Because you can sometimes more and sometimes less parts of trading online. In general, however, it is the trading of securities, options etc. via the Internet. With the help of an online broker or bank (for example Comdirect, OnVista, Flatex etc.) shares and other investment products can be bought and sold. This trading can be done from the comfort of your own home using a computer or smartphone. However, the aim is no different from “normal” investing via direct contact with a banker – the ultimate goal is to achieve the highest possible return and to increase the capital invested. Online Trading supports this by mostly lower costs.

Why Online Trading?

Those who are completely inexperienced and have little experience in the field of shares and stock exchanges often rely on their bank advisor. Every normal bank, Volksbanken Raiffeisenbanken or Sparkassen offer the purchase and sale of shares or share funds. For this purpose, one gets advice on site or by telephone and then one can trade in shares. However, it is not always wise to rely on the expertise of the bank advisor. After all, with such investments, it is mainly the bank that earns money through commissions and administrative costs.

Online trading is strongly supported by various financial software and algorithms and there is not always a direct client advisor for every client. This saves on personnel and this advantage is passed on to the online traders. Transaction costs do not disappear completely with most banks and brokers, but a lot can be saved.

We can look at a small comparison between a local Volksbank Raiffeisenbank or Sparkassen on the one hand and the online broker on the other:

Volksbanks, Raiffeisenbanks, Savings banksOnline Bank/ Online Broker
Transaction feeOften between 20 – 50 euros per purchase / sale (depending on the investment amount)Per purchase / sale between 1 – 15 euros (depending on the investment amount)
Trading opportunitiesLimited trading hours due to the limited (unavailability of the customer advisoralmost around the clock – orders can be placed permanently and the execution depends on the stock exchanges

So if you want to save money, with which you could for example sometimes already get one share more, you should rather deal with online trading than with your local bank consultant.

Take off with Online Trading

In order to make profits successfully through online trading, one should first start trading via the Internet. This online trading can then be done more passively or actively and very intensively. Everyone has to decide for himself and sometimes it depends on the type. If you want to remain passive, online trading is a great way to work on savings plans, but if you want to be a little more active, you have almost unlimited possibilities. Whether shares, warrants, CFDs, derivatives, precious metals – you can trade almost everything online. For this you sometimes only need several providers, because not all banks and brokers offer the same wealth of asset classes.

However, it is important to be aware that trading – whether digital or analogue – is not easy and cannot function effectively without theoretical and practical knowledge. Experience is important and knowledge must be acquired. To do this, it is not enough to read the currently hip book on the stock market and click through a few websites. Instead, you need to research and test different strategies.

Stock market trainings

Just as one learns a profession through an apprenticeship or qualifies for it with a degree, one must also learn to trade. For this one can go different ways. Reading books and looking through websites is certainly a first way. Afterwards stock exchange workshops or training courses should follow. So for example about our Masterclass, where you learn the craft of trading from A to Z. If you don’t yet know exactly where you want to go, you can also take a look at the other training courses and workshops and choose the one that suits you best. These can be found here.

Some beginners want to start immediately and use the initial capital for stock purchases and not for a solid and expensive stock market training. But this is often already a crucial mistake. Who has no or hardly any idea, can lose a lot of money very quickly through bad decisions. Because sometimes you blindly follow one hype or another and try your hand at penny stocks or get involved in so-called short selling. Then all the capital can quickly be gone. To avoid this, the first investment should always flow into oneself and a corresponding sound knowledge. You will have more of that in the long run. A good stock market education will usually pay off and bring in more money.

What goals do I want to pursue?

Even before starting with online trading, you should set yourself some goals. The most important thing is to set yourself a realistic goal. Often you will see inexperienced traders who want to make double or triple their invested capital quickly. That would always be nice, but is so difficult to manage. Just because a Tesla share rises by 300 percent in a short time, this cannot be achieved for an entire portfolio. And putting your money on just one card is riskier than a visit to Las Vegas. Diversification and a solid, realistic vision help you to gradually achieve your own goals and then set new ones.

Kostolany hits the nail on the head. If you want to get rich quickly, you’ll fall on your face and sometimes you won’t be able to recover from it. So the goal must not be completely unrealistic and should also be set with a certain time horizon.

Nowadays, many people dream of retiring at 40 or at least part-time, as they have made enough money aside through their trading successes. This financial freedom is a nice thought and certainly a goal to pursue. But perhaps one should start with smaller goals. Financial freedom could be, for example, if you can pay the monthly utilities or part of the rent through dividends or share profits. Gradually, you can then increase your claim. However, such a development can almost only go wrong if it is set as a goal right from the start.

After all, the stock market does not always go only upwards, which is why one will not only make profits. Losses are part of it, because online trading and trading in general is almost a zero-sum game. What you win, someone else loses and vice versa. In order to be able to test out different goals, sample portfolios are a very good choice.

How do share prices develop?

Anyone involved in online trading has to ask themselves how share prices come about in the first place. Because it goes up and down again and again and by far not linear. Sometimes the company figures are right and sound very positive, but the result is still a fall in share prices. This can quickly become very confusing for beginners and less experienced stock market experts.

A simple look at this financial mathematics can help to better understand these movements. Every company has a certain market value (similar to a footballer and other athletes). There are then X shares of the company that have the value Y. If you now multiply X by Y, you get the market capitalization of a company and thus its value. This market capitalization makes a statement about the equity of the company.

For example, if there are 10 million shares of ABC Trading AG, each with a share value of 10 euros, this company has a market capitalization of 100 million euros. The better one estimates the future success of this stock corporation, the greater the demand for its shares. So if enough investors are convinced that ABC Trading AG could be worth twice as much in a year, then significantly more investors will buy shares in the company. Supply and demand then regulate the price not only on the weekly market and flea market, but also on the stock market.

Factors influencing share prices

However, the demand for the shares depends on various factors. The first factor is the overall economic environment. In times of crisis, this can be rather poorly shaped and one does not really know whether a company will make profits in the long term in the poor market situation. In most cases, crises result in higher unemployment figures and therefore fewer investors and demanders. However, if the market situation is very good, such as in the years 2010 – 2019, there are fewer unemployed and the consumer mood is usually much better. Then it is easier for most companies to make profits.

Another factor is company-related aspects. For example, what about the competition in the respective market segment or the future prospects of the company. An automotive group that refuses to embrace e-mobility will certainly be rated worse here than pioneers like Tesla.

However, by 2020 we can clearly see that other events that are politically driven (e.g. wars or trade wars) or natural disasters (such as major earthquakes or the existing corona pandemic) can also have an impact on demand.

Online Trading Basic Rules

A first basic rule of online trading is to set yourself realistic goals as described above. Furthermore, you should ask yourself how well you can emotionally deal with a loss of 20, 30 or even 50 percent and more. Because when emotions play a role, decisions are often made hastily and without reason. But trading rationally is very important for online trading.

Decisions about buying and selling shares, CFDs or options should always be based on a meaningful analysis. Just because one knows a company or its products well, does not mean that it is a sensible investment. Therefore always work with rationality and not emotionality. Analyses are not exactly easy to perform and for beginners the mass of information is often a problem. Here, a tool such as the share finder or the quality score of AlleAktien is recommended.

Employee shares of a company are perhaps more likely to be excluded if you get them at a preferential price.

All money that is used for stock trading should not be used immediately. In the worst case, one should be able to accept a complete loss. Online trading should therefore only be done with money that you don’t need for other things right now or in the near future. Therefore, it is advisable to always have an appropriate financial cushion of two to three net monthly salaries in your account and leave it there. Because if the washing machine suddenly breaks down or the car needs repair, it could be very bad if you had to sell shares for it. If you are not under financial pressure and therefore have to sell your shares, you act more rationally and are less emotionally bound in your decisions.

Basic rules at a glance

  • set realistic goals
  • make rational decisions and not invest emotionally or according to gut feeling
  • carry out sound analyses before a purchase
  • deal only in money that can be dispensed with in the worst case
  • keep a financial cushion of several monthly salaries on the account for emergencies
  • do not invest every free Euro

Long-term trading vs. short-term trading

Anyone who engages in trading, regardless of the type of trading and the strategy used, must ask himself whether this should be done in the long term or in the short term. For long-term trading, of course, you have to have the appropriate breath, whereas short-term trading requires a lot of attention and time.

Trading for the long term and with little time

If you don’t want to constantly deal with analyses, key company figures or market developments, you should rather trade long-term. The most important factor here is the company’s economic environment and its fundamentals. Anyone with a long-term orientation must therefore work primarily with fundamental data analysis. But to be prepared for anything, it would be just as important to keep an eye on current economic trends or economic developments.

In most cases, long-term investment is suitable for those who have little or no time at all. Then you can save the analysed companies through one-off investments or savings plans. Those who have little or no time to analyse market events can also follow professional traders and trading signals. Another possibility would be the mirror or copy trading, which you follow in social trading. Typical providers would be eToro or Wikifolio.

Short to medium term trading

If you can or want to spend more time and desire, you can also dedicate yourself to short-term trading. This sometimes also becomes a medium-term trading, especially if this trading is not day trading. In this way, shorter trends can be traded and profits increased. Nevertheless, this short-term or medium-term trading requires much more attention and advance analysis than long-term trading. And it does not have to lead to a better success. If you have mastered the chart technique or are willing to learn it, you can certainly achieve success in short-term trading.

To get to know this kind of trading, there is the possibility to learn simpler chart patterns and to recognize new patterns based on these. Three simple chart patterns can be learned in a small and free webinar with us, for example.

Nowadays, some online brokers and banks also offer apps that allow you to access your portfolio from almost anywhere and at any time. This allows you to trade at much shorter notice than just a few years ago. Some providers are based purely on this principle and only have an app connection. So for beginners a Trade Republic account is recommended because of the constant accessibility via smartphone and the low transaction costs. Newcomers will find their way around here and can learn a lot. However, the asset classes are rather limited and the spreads outside trading hours are very high. Then other providers offer better opportunities.

Asset classes

Anyone who is new to online trading quickly loses the overview. Because there are so many asset classes (also called asset classes) that you no longer know which of them are the best. In general, shares, bonds, commodities and foreign exchange are the most traded.

Equities

The normal stock trading is for beginners in online trading certainly the most sensible way. Here you buy shares in a company and then get the right to dividends (profit distributions) and to participate in the annual general meeting. The goal of stock trading is to profit from rising prices or to receive a corresponding return on the dividends. Diversification is important when trading in shares, as you should not be dependent on just one or a few companies.

Share indices

In order to achieve a faster diversification, so-called stock indices are an option. Here an entire index such as the DAX or Nasdaq is represented by equity funds or ETFs (Exchange Traded Funds). However, there are also sector ETFs that are then dedicated to the healthcare sector or the technology industry. This asset class is particularly suitable for long-term investment. Typically, stock indices can also be traded on the DAX30, the Nasdaq, the Eurostoxx 50 or 500 or the FTSE 100. Most providers offer a wide range of products in this area.

Options and warrants

In this asset class, you can work with a so-called lever, through which you move a larger amount of capital than you actually use. This increases the opportunities but also the risks of a total loss. This asset class is therefore particularly suitable for experienced traders.

Here one trades the possibility to buy or sell shares and this reminds in the whole of a short sale. For a more detailed explanation we recommend our article on trading options.

Bonds

Bonds are usually debt securities issued by governments and companies. The respective bond buyer gives the seller a loan, so to speak, and the buyer receives interest payments in return. The interest rate is higher or lower depending on the creditworthiness of the state or company. At present, however, bonds rarely offer really good trading opportunities for beginners.

Commodities and precious metals

Raw materials are goods of the manufacturing industry. Here, output and stockholding or storage quantity determine the supply, while demand is met by industrial companies. Typical commodities are, for example, oil and lithium or, to a certain extent, with precious metals gold and silver. Commodities and precious metals can be an alternative investment, for example to hedge risks due to currency fluctuations etc.

Foreign exchange and Forex

Foreign exchange trading or Forex trading (Foreign Exchange) is about trading with foreign currencies and their fluctuations. This asset class is particularly popular with experienced traders, as Forex can be traded almost 24 hours a day.

In foreign exchange trading, there are rarely very strong fluctuations, which is why trading is usually done with a lever. This is why this asset class is usually opaque for beginners and should only become an investment focus with appropriate experience.

Crypto Currencies

Crypto-currencies are in vogue and Bitcoin is a household name to almost everyone these days. But of course there are some more of these currencies. But trading can be similar to Forex trading. However, before buying a crypto currency you should be well informed about what it is good for, what the future chances are and how or where you can buy and sell it. Here too, it is very important to obtain the appropriate information and analysis.

Order types in online trading

Online trading offers the possibility to use innumerable types of orders in order to always follow the best strategy. But not every provider offers a colourful variety of order types. Therefore, when choosing the appropriate broker, you should think about which order types you need and which you do not use anyway.

Here is a short overview of the different types of orders:

Buy entrances

  • the Buy Limit Order: a buy below the current share price or market price
  • the Buy Market Order: immediate purchase at the current share price or market price
  • the Buy Stop Order: a buy above the current share price or market price

Sell entrances

  • Sell Limit Order: a sale only takes place when the share price reaches a certain value
  • Sell Market Order: immediate sale at the current share price or market price
  • Sell Stop Order: a sale takes place when the share price reaches a certain (lower) value

exit orders

  • Stop Loss: a sale takes place at a predetermined price with losses
  • Take Profit: a sale takes place at a predetermined price with profit
  • Trailing stop order: the stop loss is measured as a percentage of the price development and is adjusted again and again

trading strategies

When trading online, one should not be overwhelmed by the multitude of asset classes and order types. As with all trading strategies, you should first think about what the goal is, whether you are short-term or long-term oriented and with which asset classes you want to achieve this goal. Then the trading strategy can look very different.

On the trading strategy you should then adjust the provider, because, for example, not every broker allows trading with CFDs. A beginner in the field of (online) trading should always make sure that he develops a strategy that he also understands and pursue this with a broker who offers a wide selection of asset classes at the lowest possible transaction costs. It is also important, for example, that the selection of stocks and stock indices or ETFs is as large as possible, as beginners will mainly be trading in these classes.

Those who are already more experienced will probably find what they are looking for mainly on platforms that operate in the CFDs area. Here, for example, the Meta Trader or Plus500 would be an option.

Advantages of Online Trading

Online trading offers many advantages. First and foremost, the possibility to trade in real time while keeping transaction costs as low as possible. Those who accumulate sufficient knowledge and experience in advance can earn a good return in both the short and long term. However, the shorter the investment period, the more difficult it is to trade successfully and the more you have to deal with it.

Disadvantages of online trading

As described above, stock trading is a zero-sum game. What you win, someone else loses and vice versa. So even as a very good online trader you can make losses and it does not always go steeply uphill. Depending on the risk or through a leverage product, this can lead to a total loss of the invested capital. If you lose a corresponding amount of money, there is also the danger that you link this strongly with your own emotions and this can cause stress or insomnia. Even an addiction cannot be ruled out. If one is successful, one quickly becomes greedy and wants more and more, if one loses a lot, the desire to retrieve the lost money could arise. Wanting to bear losses again usually leads to even more losses.

Advantages and disadvantages at a glance

Advantages of Online TradingDisadvantages of Online Trading
low transaction costslow transaction costs encourage short-circuit decisions
Real-time trading possiblelarge selection can be overwhelming
wide range of financial instrumentsconstant trading opportunities lead to emotional decisions
possible via smartphone, computer and tablet
an internet connection is sufficient
Tools and software confuse beginners
possible from anywhere in the worldEmotions sometimes take precedence over rational decisions
many tools and software for online tradingAnalyzes should nevertheless be carried out
most tools can be used automatically
nowadays it is very easy to access
Online trading, platforms, social media exchange, tools, analyzes, etc.

Online Trading – how and where?

Online trading usually works with all well-known banks and brokers. Hardly any of them today still rely on direct customer contact and only allow stock trading via telephone or in direct on-site discussions with the customer advisor. That is why online trading is possible with very many providers.

The only important thing when choosing is that the costs and benefits are in proportion to each other and that you choose the right provider for your personal strategy. A simple internet search can then be enough to find a provider. Otherwise, some websites also offer an insight into the most common platforms and report on experiences. Almost all platforms have already been presented in our Trader Blog and new ideas are constantly being added. So a look there is recommended in any case. Also a look at shares with head or financial flow can help with the selection.

Which online trading platform is the right one?

The right trading platform is always the one that offers you everything you need with the lowest possible transaction costs. Of course, quick and easy access to online trading and stock markets is also important. In general, a good online trading platform should meet all or at least a large part of the following requirements.

  • offer access to different asset classes
  • offer setup management
  • Provide data and charts for corresponding chart analyses
  • ensure the use of indicators
  • offer various analysis tools
  • Offer access to important stock market news
  • enable the tracking and tracing of open and closed trades
  • offer multiple accounts and a quick change of accounts
  • Allow sample portfolios or multiple profiles to test different strategies

Step by step to online trading

Finally, we would like to present four small steps with which especially beginners in the field of online trading should gain a foothold step by step.

Step 1: Never trade without a plan

The first thing to do is to make a plan that will be used for future trading. You should ask yourself when you want to trade and how much time you can or must spend on it. Which asset classes should be traded and how much money will be invested per position or trade. Only those who know in advance what and how they want to achieve and then stick to it will be successful in the long run.

  1. Step 2: Become aware of risks

Every good online trading platform offers the possibility to minimize certain risks by using order types. Once a trading strategy has been designed, it is all the more important to be aware of the risks involved and, if necessary, to protect yourself by means of appropriate risk management. This can be practiced very well with sample portfolios.

If you are aware of all risks from the beginning, then you approach online trading rationally and not emotionally. This is one of the most important basics. Therefore, hedging options such as a trailing stop or stop loss are also very important. Likewise, you should only trade money that you could do without in an emergency.

3rd step: Find your own trading style

What can be very successful for one person, does not have to work for everyone else. Therefore it makes little sense to learn from the daytraders and act like one if you can only spend ten minutes a day for online trading. Therefore you should find your own style and adjust the platform as well as the settings to your own trading style and strategy.

Step 4: Gain experience, learn and train

Gain experience by running sample portfolios with different strategies and in this way find out which strategy is yours. Learn from experienced traders and take what helps you. Forget everything that doesn’t help you with your own strategy. Because you are not copying another trader, you are a trader. Continually educate yourself and do not shy away from a stock market education. There are professionals at work who can teach you much more in a short time than is possible by dealing with sample portfolios or reading books and forum discussions.

The money you invest in stock market training or further education at the beginning is not lost capital, but the most sensible investment you can make at the beginning of online trading. So be sure to take a look at the educational opportunities and take advantage of the offers.

Conclusion on Online Trading

Online trading has become the norm today and everyone can find their way around it in some way for their goals. As a beginner, however, it is important to first think about your goals and strategy, otherwise you will quickly be overwhelmed by the many possibilities with asset classes and order types. A first investment should therefore always be made in stock market knowledge and not start with headless trading. You can gain additional experience through sample portfolios.

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