Online Trading Explained
Reading time: 12 minutes
Today traders are able to buy and sell from a wide range of financial instruments with just a click of the mouse button. In fact, online trading literally offers a world of opportunities as traders can access global financial markets from their own computer. This article explores the benefits of trading online, the instruments available, the markets that can be traded, what to look for when trading online, and steps for how to get started.
What Is Online Trading?
Online trading is, simply put, trading performed on the internet. Traders and investors buy and sell financial instruments via a web based trading platform offered by a broker or a bank. Trading decisions are made on the trading platform and then instantly sent to the broker, which is why an internet connection is needed (hence the reference to online trading).
Online trading has grown substantially since the 1990's due to the advances in affordable high-speed computers and internet connections:
- Internet: the growth of the internet is staggering, as the global statistics show. People are now using the internet for trading purposes as well.
- Computers: Moore's law indicates that the overall processing power for computers will double every two years, which allows traders to connect quickly to the internet, and allows them to conduct analysis on their own personal computer.
These two trends have facilitated a rapid growth of online trading, and have democratized access to the financial markets in a way that we have never seen before. More and more people are now able to trade online, and this trend seems like it will only increase exponentially in the future, when you consider the fact that over 1.7 billion people with mobile phones remain excluded from the financial system. Online trading offers a long list of benefits when compared to the pre-internet era of telephones, telegrams, and faxes.
Now let's review the benefits of trading Forex and CFD online:
Source: Admiral Markets MetaTrader 5 (MT5) with MetaTrader Supreme Edition MT5SE Add-on - EUR/USD Daily chart (Data range: between 1 May 2017 to 5 October 2018) - Performed on 5 October September 2018 at 6:00 AM GMT
Benefits Of Online Trading
Before the arrival of the internet, traders and investors had to take care of all their transactions and requests via mail, telephone, and fax machines. Most often traders made a buy or sell decision via the telephone with their broker. The process was slow, as brokers needed to confirm the transaction details such as price, quantity, type of trade, length of trade, exit price, the account specification, and more. The digital era has impacted trading in a dramatic fashion. The difference between the past and today couldn't be larger.
- Transaction costs are substantially lower when trades are placed online rather than via the phone.
- The speed of the transactions is faster and more efficient.
- There are more financial instruments available.
- The platform can always execute your trading decisions, as long as you have an internet connection.
- Traders have access to a wide range of tools and indicators.
- No manual work is needed as (almost) all tools can be calculated automatically and instantly.
- Even trend lines are semi automated, in the sense that traders just can add a line to the chart by simply clicking twice.
- Moving, removing, adding lines, tools and indicators is also completed within seconds.
- More accessible online trading services, education, analysis, trading courses, and online trading sites.
As you can see, it is not only the ease of trading that has substantially improved, but also the simplicity and quality of tools, indicators, and methods of analysis. In the past, traders needed to construct a chart on paper, and even when computers became more accessible, traders needed to manually calculate many of the indicator levels and values. Online trading platforms also allow for a wide range of order types, which can all be set up by yourself instantly, with the broker of your choice.
The wide variety of order types is a benefit because it allows traders to prepare a precise trading plan:
- Buy entry orders:
- Buy limit order (buying below current market price)
- Buy market order (buying at current market price)
- Buy stop order (buying above currency market price)
- Sell entry orders:
- Sell limit order (selling above current market price)
- Sell market order (selling at current market price)
- Sell stop order (selling below currency market price)
- Exit orders:
Source: Admiral Markets MT5 with MT5SE Add-on - Performed on 5 October September 2018 at 6:00 AM GMT
The last important benefit is that there are no restrictions on how traders trade. They can choose any trading strategy they prefer. When trading online, there are no limits to any trading style. Here is a summary of trading styles:
- Scalping - short term trading
- Intra-day trading
- Intra-week trading
- Swing trading
- Long-term trading
- Renko bars and other chart types
- Expert advisors
Some of these trading styles seemed unimaginable a few decades ago when a call to the broker was still needed. Online trading has truly revolutionised the world of trading and has made more financial instruments accessible to an increasing part of the globe's population.
Let's take a look at the list of instruments that traders can usually access:
Instruments And Markets That Can Be Traded
Nowadays, brokers are able to offer a wide range of financial instruments and markets. Let's use Admiral Markets as our example broker and review their products:
- Forex (Foreign Exchange) market
- CFDs on Commodities
- CFDs on Indices
- CFDS on Shares
- Bond CFDs
- Cryptocurrency CFDs
As you can see, there are seven different categories. Each segment has a list of instruments that traders can analyse and trade.
- The Forex market (or FX), for instance, consists of dozens of currency pairs, which are split into 'Forex Majors' - like the EURUSD currency pair, the GBPUSD currency pair, and the USDJPY currency pair. Then there are 'Forex Minors' (or minor currency crosses) like the EURJPY currency pair, the GBPAUD currency pair, and the GBP/JPY currency pair. Finally, there are also 'Exotic Pairs' (also known as local pairs) such as the EURNOK currency pair, the NZDSGD currency pair, and the USDHUF currency pair. Of course, these are just a few examples, and there are many, many more available to trade on!
- Other popular financial instruments are Gold CFD, Oil (WTI) CFD, DAX 30 CFD, and share CFDs such as Facebook, Google, and BMW.
You can freely discover which instruments are available by using an online trading platform. In fact, the best way to discover all of the available financial markets and instruments it to download the MetaTrader Supreme Edition platform, or by using the MetaTrader WebTrader version, and checking them out for yourself. Trading platforms are a very important tool for creating the best online trading environment.
Now let's review what traders should look for in an online trading platform:
Source: Screenshot displaying some of the products available to trade with on Admiral Markets' website - Performed on 5 October September 2018 at 6:00 AM GMT
What To Look For In An Online Trading Platform
An online trading platform should offer traders a simple way to trade and access the financial markets. Traders also need the platform for other tasks too. Here is an overview of the tasks professional traders will need to carry out:
- Entering setups
- Exiting setups
- Managing setups
- Performing chart analysis
- Using indicators
- Changing or adding instruments for analysis
- Using Expert Advisors
- Using the strategy tester
- Monitoring the news
- Keeping track of open and close trades
- Switching to multiple accounts quickly
- Using multiple profiles for different types of analysis
As you can see, it's not only about trading. A good trading platform will offer much more than that. It is important to review a platform prior to using it, to make sure that it offers what you expect and what you need to make your trading life as efficient and successful as possible. Two good examples of online trading platforms that offer the features listed above are MetaTrader 4 (MT4) and MetaTrader 5 (MT5). These platforms are especially good for Forex and CFD trading. The MetaTrader platform offers a charting platform that is not only easy to use, but also simple to navigate. If you want to learn more about trading, trading strategies, how to use trading platforms and more, we would recommend checking out our articles & tutorials.
The Best Platform For Forex And CFD Trading
A good option for trading Forex and CFD instruments is the MetaTrader Supreme Edition (SE) plugin for MetaTrader 4 and MetaTrader 5, which offers a wide range of financial instruments including Forex, CFDs, CFDs on commodities, and stock indices. Some brokers even go a step further and offer their own customized tools on top of the standard features and items offered by MT4 and MT5.
The SE offers a wide range of extras such as:
- Mini terminal
- Trade terminal
- Global opinion
- Indicator package offering pivot points, renko and the keltner channel
- Tick chart trader
- Trading simulator
- Mini charts
- and much more.
Source: Admiral Markets MT5 with MT5SE Add-on EUR/USD Weekly chart (Data range: between 19 October 2014 to 5 October 2018) - Performed on 5 October September 2018 at 6:00 AM GMT
Tips How To Start Online Trading
There is no shortage of trading advice available when you browse the internet. Almost everyone has an opinion on what the most important steps and critical tips for succeeding as a beginner trader are. It is difficult to bundle all of that wisdom, experience, and knowledge into just a few tips, but we made an attempt to highlight the ones that are mentioned frequently.
Tip 1: Create a Trading System and Plan.
The first step is to develop a trading system and plan. A trading method helps you to understand when to trade and when not to trade. It also helps you to organise your thoughts and your approach, so that you can become more consistent. Keeping track of your trading ideas, how your analysis worked out, and how your trade setups performed in general is a vital way of collecting feedback. This in turn allows you to learn from your mistakes and improve your methods.
Tip 2: Setup Proper Risk Management.
The second step is understand the benefits of using risk management. After you finish testing your systems and trades on a free Demo trading account, you can then take the next step, and trade with real money. Traders are sometimes unaware of the risks when they start trading. For instance, some traders do not use a stop loss, which is critical because it allows traders to limit the risk per trade.
Another problem is that traders take too much risk, and may potentially use too much leverage for their setups. Traders who use low levels of risk are better equipped to survive drawdowns (losing streaks) when their systems go through weaker periods. Smaller losses may lead traders back into positive territory quicker when their strategy starts to perform better again.
Tip 3: Match your System with Your Style and Preferences.
Traders tend to be unsure which methods suit them the best. They tend to switch trading styles and try out different methods. This is fine at the beginning because traders need time to find a style and approach that connects well with them. It is important to realise that a strategy that works well for 'Trader A' is not necessarily suitable for 'Trader B'. For instance, 'Trader A' might get the best results with scalping but 'Trader B' could have too little time to trade in the same way.
When trading the markets, keep in mind that it is important to know the following things:
- Your financial goals in the short and the long-term
- Which risk appetite you feel comfortable with
- How much time you can allocate to trading
- How many strategies you can monitor and implement
- Why and how are you motivated by trading
- Which trading style, which tools, and which indicators you like to work with
Tip 4: Try Trading with a Demo Account
Traders do not need to take risk from the very start. They can test and try out all kinds of trading ideas, analysis, strategies, indicators and methods via a simple Forex Demo account, which allows you to experience the financial markets and trade with no risk on your side. It's a useful first step for beginner traders.risks.