Trading for Beginners: The Basics

Trading means buying and selling things like company shares, currencies or gold, hoping to profit from changes in price.

If you buy and the price rises, you can sell for more than you paid. This is called going long.

You can also try to profit from a fall. This is called going short. You borrow something, sell it, then buy it back later, hopefully for less³. If the price rises instead, you lose money. Because a price can keep rising, the possible loss on a short has no fixed limit³.

Traders usually hold a position for minutes, days or weeks. Investors usually hold for years.

Shares (stocks) are small pieces of ownership in a company.

An index tracks the prices of a group of shares as one number. The FTSE 100 follows 100 large UK companies; the S&P 500 follows 500 large US companies.

An ETF (exchange-traded fund) is a fund you can buy and sell like a share. Many ETFs simply follow an index⁷.

Forex is trading currencies in pairs, such as EUR/USD: the price of one euro in US dollars. Forex moves are counted in pips. For most pairs, one pip is 0.0001⁹.

Commodities are raw materials such as gold or oil. Bonds are loans to governments or companies that pay interest.

Futures are contracts to buy or sell something at an agreed price on a future date⁸. A CFD (contract for difference) is a contract with a broker that pays you, or charges you, the change in price, without you owning the asset.

Futures and CFDs use leverage: you control a large position with a small deposit. Leverage makes gains and losses bigger. When the UK regulator, the FCA, reviewed CFD accounts in 2016, 82% of clients in its sample had lost money¹⁰.

Shares on the London Stock Exchange are usually priced in pence (p), not pounds. There are 100 pence in £1.

So a share price of 250p is the same as £2.50. To turn pence into pounds, divide by 100. To turn pounds into pence, multiply by 100.

Websites may show the same price as 250p, 250 or GBX 250. All three mean 250 pence. In our quizzes we use pounds, unless a question says it is in pence.

A price chart shows how price has moved over time. Each step on the chart is called a bar or candle. Each candle covers one period of time, such as one minute, one hour or one day. That period is the chart’s timeframe.

Every candle shows four prices⁵: the open (the first price in that period), the high, the low, and the close (the last price).

The thick part of the candle, the body, runs from the open to the close. The thin lines above and below, called wicks, reach up to the high and down to the low.

A green candle closed higher than it opened. A red candle closed lower. Some platforms use other colours, such as hollow and filled candles.

Volume is how much was traded during the candle. Volatility means how much, and how fast, prices move. A volatile market makes big swings.

Prices move in waves. The peaks are called swing highs and the dips are called swing lows.

In an uptrend, price makes higher highs and higher lows: each peak and each dip is above the one before⁶.

In a downtrend, price makes lower highs and lower lows.

In a sideways market, also called a range, price moves back and forth between roughly the same high and low.

Sometimes price opens well above or below the previous close, leaving an empty space on the chart. This is called a gap. Gaps often happen after news while the market was closed.

A market order buys or sells straight away at the best price available. You will get filled, but the price isn’t guaranteed¹.

A limit order buys only at your price or lower, or sells only at your price or higher. The price is guaranteed, but the order may never fill¹.

A stop order waits until price reaches a level you choose. Then it becomes a market order².

A stop loss is a stop order that closes your trade if price moves against you to a level you picked in advance. It limits the loss on that trade. A target (or take-profit level) is the price where you plan to take your profit.

Spread: you buy at the ask price and sell at the slightly lower bid price. The gap between them is the spread⁴, and you pay it on every trade.

Commission: a fee some brokers charge per trade.

Slippage: being filled at a worse price than you expected. A stop order becomes a market order when it triggers, so the price you get can be noticeably different from your stop level². This is most likely when price gaps.

Costs add up fast if you trade often.

Your profit or loss on a trade is the price difference times the number of shares. Buy 10 shares at £20 and sell them at £22: the difference is £2, so you make 10 × £2 = £20.

A short trade works the other way round. You make money if you buy back lower than you sold, and lose money if you buy back higher. Short 10 shares at £30 and buy them back at £32: you lose 10 × £2 = £20.

A percentage change shows how big a move is compared with where it started. Take the change, divide it by the starting price, then multiply by 100. A rise from £200 to £220 is a change of £20. £20 ÷ £200 = 0.1, and 0.1 × 100 = 10%.

Percentages let you compare moves fairly. A £1 rise on a £10 share is 10%. A £1 rise on a £100 share is only 1%.

An indicator is a calculation based on past prices, and sometimes volume, that is drawn on the chart. An average of recent prices is a simple example. Later lessons teach several indicators¹¹.

A backtest checks how a strategy’s rules would have done on past price data. Good past results don’t guarantee good future results.

A demo account lets you practise with pretend money. Use one before you risk real money.