How do you recognize an overpriced asset

Learn to become a trader

Especially for newbies to trading, it is easy to get overwhelmed by all of the information about markets, different strategies, and ways to make a profit.

However, the reality is different: your path to becoming a successful trader should be unique; as well as your goals and your attitude to risk.

However, there are a few important steps that anyone entering trading should follow. This ensures that the basic principles of the markets and how to trade on them are understood.

Step one: market research

A solid foundation of knowledge of financial markets should be built as the level of risk and strategy required can vary between markets. It is also a very good practice to first research the markets available to you and make sure you understand the key differences between them.

For example, you can trade a wide variety of asset classes with IG:

Stocks are one of the most popular financial instruments. When placing a stock position, it is important to analyze the company, the industry, and the exchange on which it is listed. If your provider does not offer markets outside of trading hours, your trading activity will be limited to the opening times of the exchange.

Trading on indices might be of interest to you if you want to bet on the performance of a group of stocks rather than just one company. Because there are many factors that can affect the market, stock indices tend to be more volatile than individual stocks.

Forex (FX) is the most liquid market in the world due to the large number of forex traders. It is also the most volatile market and creates a unique combination of risks for traders. For example, FX markets are traded 24 hours a day. So the market can move even at the time when the [BW5] you are not there to follow it.

Trading commodities is popular because it offers enormous profit opportunities, but market conditions bring a high level of risk with them. The raw material price can be subject to constant fluctuations because the production and consumption rates are dynamic.

You can speculate on crypto currencies as well as on physical currencies. The crypto market is not influenced by traditional factors, but represents a new area of ​​knowledge with new terminology (e.g. scalability and blockchain) that traders need to familiarize themselves with.

Learn more about the markets you can trade with IG

Step two: building a trading strategy

The next step is to establish a trading strategy. Its purpose is to help you make a profit on the market you have chosen and to determine exactly when you will open and close your trades. A trading strategy is the driving force behind your trading plan - it should help quantify your goals and most importantly, ensure that you are consistent and not making decisions based on emotions.

Trading styles

There are a variety of styles that you can use when trading.

These are four of the most common:

Day trading is the practice of buying and selling assets within a single trading day in order to make quick profits from small price movements.

Scalping is a form of day trading in which positions are opened and closed quickly - within seconds or at most a few minutes - in order to benefit from small changes in the price of the asset.

Swing trading is the practice of initiating trades at the point where the market is expected to change direction and taking advantage of those movements in the price of the asset.

In position trading, on the other hand, a position is held for a longer period of time, be it weeks, months or even years, in order to benefit from large price changes.

The goal of any style of trading is the same - to profit from the development of the price of an asset. The difference is how often you want to trade and how long you want to keep each individual trade. There is no "one size fits all" solution as the right style for you will depend on your lifestyle, personality and the amount of time you want to spend trading.

Once you have decided on your trading style, you can start building your trading plan. This should include the steps you will take to fulfill your trading strategy, your motivations, goals, and how much equity you can raise to invest.

Market analysis

An important part of creating a trading strategy is market analysis. The attempt is made to use available information in order to predict the behavior of the markets and to develop a methodology for identifying entry and exit points.

These methods of market analysis can be divided into two broad categories:

Technical analysis is based on the principle that past events can provide information about what could happen in the future. Traders can analyze charts and use price-based indicators to develop their trading strategy, creating a system that uses price patterns and tendencies to generate profits.

The fundamental analysis is based on an asset with a so-called Fair value. By identifying under- and over-priced assets, a trader can potentially benefit from the market correction. Traders use macroeconomic data - including gross domestic product (GDP) figures and labor market statistics - as well as news reports and political commentary to identify trading opportunities.

It is important to note that markets can be extremely volatile, making it impossible to fully predict their behavior. However, a good trading strategy can help you prepare for any outcome.

Risk management

In trading, "risk" refers to the possibility that your decisions will not lead to the desired outcome. This can have a variety of consequences, but most often the trade will result in a loss. When trading leverage products, losses can exceed your initial investment. Taking a loss is an inevitable part of trading and a fact that traders need to be prepared for when participating in the markets. However, possible losses can be minimized through an appropriate strategy. You can take control of your trading activities by learning more about the individual risks of each market and using risk management tools such as stops and limits. Learn more about trading strategies and risk management.

Step three: gain trading experience

The last step in becoming a trader is taking the crucial step and trading itself. But there are no limits here: you can always do more to expand your knowledge of the markets and refine your trading strategy. The best approach to find out what works best is to implement the trading strategy and then back-test the results. Gaining experience doesn't have to mean risking your capital in live markets. You can practice risk-free with an IG demo account as you develop your skills and put your theory into practice.