However, trading online also means taking a lot of risks. That's why every aspiring trader needs to establish a foolproof strategy to help them survive the market.
What Is Online Trading?
Online trading refers to the buying and selling of financial securities, such as stocks, through an electronic network that links a buyer from one location to a seller in another. Years ago, before online trading became available, brokers and dealers acted as the go-betweens so traders could buy or sell assets. This process is fairly time-consuming, and the same can be said for the account opening procedure and all the documents that needed to be signed and submitted.
Today, online trading has allowed individual traders to open a trading account online, sign documents with their electronic signature, and submit everything in the comfort of their own homes.
How To Create An Online Trading Strategy
Coming up with a proper and effective online trading strategy isn’t just about relying on tools to pick entries and exits. A good trading strategy depends on other important aspects of trading like discipline, money management, and other technical tools as well as the personal experience of individual traders.
- Identify Your Investment Objectives
To craft a foolproof strategy for online trading, you must first establish an investment objective. Establishing a sound investment objective is the foundation of every trading strategy.
For example, your goal is to grow a certain amount within a given period or make a small income from short-term trades. These objectives will act as your benchmark to determine if the trades you take are already profitable or if they’re setting you up to lose your total investment.
- Define Your Trading Time Frame
After identifying your goals, the next step is to figure out the time frame you’ll utilize. Trading short term will require a different strategy compared to long-term investments.
For instance, if your time horizon is six months, then it's relatively safe for you to focus on buying stocks with strong fundamentals because those firms are unlikely to fail within that given time frame. On the other hand, if your investment horizon is one week or less, you want to consider trades where you’ll be trading on price movement for quick gains.
- Study Technical Analysis Charts And Indicators
Keeping an eye on the charts and analyzing indicators will help you make the right decision when it comes to trading. You can look into many indicators, but the most popular ones include stochastic oscillators, moving averages, relative strength index, and Bollinger Bands, among many others.
Every aspiring trader should study and understand the basics of these technical analysis tools, their properties, and how to use them. These are going to be your tools in determining whether a particular trade is promising or not.
- Learn To Control Your Emotions
No matter how good your technical analysis is, if you can't control your emotions, it'll be difficult to make the right decision every time.
Controlling your emotions while trading is perhaps one of the most difficult things to do for any trader. It's easy to get caught up with fear and greed, especially during fast-moving market trends, where it's normal for an asset to drop or climb by a double-digit percentage within a few minutes.
But learning how to control your emotions will give you an edge in the market and make you a more effective online trader. Remember that trading is only a game of probabilities, and there's no such thing as an absolute certainty. What's certain is how much you can afford to lose on each trade. So learn to control your emotions, and know when to take a loss.
- Develop A Trading Plan And Stick To It
Developing and sticking to a trading plan is perhaps one of the most critical steps to crafting a foolproof strategy. A trading plan tells you exactly what to do every time the market moves in your favor or out of it. Your trading plan must include your criteria before entering a trade and the signals to exit the trade.
Trading without a clearly defined plan at best will result in random trades and losses, while at worst it can lead you toward bankruptcy.
In the end, having a well-executed trading plan is what separates successful traders from those who lose money over and over again. The bottom line is that your objectives should always dictate your actions as a trader. By doing the steps above, you’ll be well on your way to building a foolproof investment strategy that’ll help you do better in the market.