A financial market is a market in which people trade financial securities (like stocks and bonds) and commodities (like precious metals or agricultural products) at low transaction costs. Prices reflect the supply and demand of the underlying assets.
Financial markets have two roles: they allow governments and companies to recruit capital through the issuance of stock and financial instruments and they allow people to invest funds in these securities and make profit through trading.
How to invest in the financial markets
Successful investments need personal experience or specialists experience in the area of investment and needs to use personal money or bring capital to use in trading.
There are two main options for trading the financial markets:
First option: you buy a certain amount of shares in a given stock, you keep these shares for a while and then sell them when the price is higher than the initial price, so you make some profit which is the difference between the buying price and selling price.
Second Option: it is an investment option called digital or binary option. Here you can invest independently through an investment platform like DerayOption. You are basically trading contracts with a set price and an end time. You as a trader you have to forecast if the price will increase or decrease at the contract expiry time.
Why do prices change?
Prices mainly change due to supply and demand. For example, if for any reason European people want to convert their money into US Dollars, the EUR/USD ratio will increase while if European people prefer to keep their funds in EUR the EUR/USD will decrease.
The same applies for stocks: if Facebook buys new companies or launches new successful products, more people would be interested in acquiring Facebook stocks and its price will automatically increase; while if there are any incidents that may cause a risk to Facebook, stock holders would start selling their stocks and Facebook’s stock price will automatically decrease.
People’s rush to sell a given stock will make its price decrease while people’s rush to buy a certain stock will make its price increase.
The above was a simplified example: Supply and demand is affected by different factors:
Profitability of the company: the more a company is profitable, the higher its shares are.
Development and innovation: companies that introduce new ideas, innovative patents, and technological advancements will have their shares increase automatically.
Country stability: economic and political stability of a country directly affects the shares’ values of companies in that country. Security, economic boosts and political stability will make shares value increase while political problems, inflation and instability will make shares value decrease.
Tips for Successful Trading
DerayOption strives to offer you a successful trading experience. Here are some tips that all novice traders need to take into consideration before starting their trading journey.
- Trading is not gambling, don’t approach it as such. Make sure to study the market before you trade.
- Do your homework and be a well-informed trader: learn about your chosen asset, its trends and how it is affected by global fluctuations and different financial markets. Try to trade on clear market trends or clear announcements like stock prices decreasing in Asia or unemployment rate in the US.
- Try, learn, and try again: start trading with small amount of money so you can learn about your asset.
- As a beginner, focus on a limited number of assets or even one asset so you can learn its trends and fluctuations and rhythm - there are slow markets and highly volatile markets. Being a specialized trader gives you higher probability to make successful trades.
- Timing is crucial: don’t get confused between weekly charts and daily charts, you need to consult both and keep time in sync before making decisions.
- Keep calm and focus in all cases, try to deal with losses and gains with equal calmness, always breathe, take the time to make sound decisions and don’t make loss or gain affect your next trade. You can see your trading money as vacation money: once the vacation is over, your money is spent and you are ok with that - same goes for trading, this will help you deal with the small losses and manage your risk wisely in this business.
- Have realistic goals: write down daily, weekly and monthly goals where you set clear goals on tolerated gains and losses so you avoid greed and don’t fall in the fear of trading.
- Global financial markets are open from Sunday midnight to Friday midnight. Avoid trading Friday midnight to Sunday because of the lack of liquidity in these times - large trades move the market trends randomly and unexpectedly.
- Greed is the enemy of traders, don’t be greedy and accept to close trades even on small earnings.
- VERY IMPORTANT: do not trade with money you cannot afford to lose and do not take loans and debt to trade. It is very important to be comfortable with the amount of money you are trading. Consider it as any business investment that might bring you profit or loss. You should be easilty able to compensate your loss if they happen.
- Do not risk more than 10% of the volume of your balance. For example, if the size of your balance is $1,000; the upper limit of the total daily trades will be $100 only.
- Avoid opening multiple trades at the same time; the more trades you open, the higher the risk is. Do not open more than 2 or 3 trades at the same time.
- Avoid opening multiple trades on the same asset and if you are an experienced trader, try opening trades in several separate markets.
- Start your trading session at the opening of European markets at approximately 12:30 KSA, and the U.S. markets, which opens at approximately 17:30 KSA - there is usually high liquidity at this time, and the profit opportunities are numerous.
- Inform yourself: check trusted financial and economic websites. Read the economic news and the global statements; learn market analysis and indicators, and follow world events. The markets are closed on the weekend - take this opportunity to analyse the markets and the trends of your preferred assets.
- Measure your expectancy: there are many formulas you can use to calculate the profitability and reliability of your system. One formula you can use is:
E= [1+ (W/L)] x P – 1
W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio
Let’s say you made 10 trades out of which six were winning and four were losing. Your win ratio would be 6/10 - or 60%. If your six trades made $2,400, then your average win would be $2,400/6 = $400. If with those four trades you were $1,200 down, then your average loss would be $1,200/4 = $300. Enter this data to the formula and you get; E= [1+ (400/300)] x 0.6 - 1 = 0.40 or 40%. A positive 40% expectancy means that your system will return you 40 cents per dollar in the long run.