When crude oil is trading at below $20 you know that your stocks and shares are not likely to be doing so well unless you’ve invested in typical safe havens such as gold, the impact of the current chill in the manufacturing sector is expected to result in a sizeable slowdown in other sectors. Given the state of the market traditional investments tend to be less lucrative, interest rates are generally non-existent as banks try to encourage spending. Consequently all eyes are turning towards trading as the ability to make huge profits on a downward trend becomes more interesting.

When people picture trading and traders the uninitiated tend to imagine the exceptionally wealthy putting their money into bonds and trusts with super returns or buying and selling currency in huge amounts from day to day, this is in no small part because trading has historically been limited to those with access to financial brokers. This is no longer the case as CFD and Spread betting providers now make it possible for virtually anyone to trade currency, commodities or similar.

What is Trading

While investments tend to be long term in nature, taking years to realise a profit trading is far closer to gambling in nature as the trader never actually owns the underlying asset which they trade. Instead they enter into an agreement to exchange the difference in price between the opening and closing price of the currency, commodity or asset being traded.

For example based on the current GBP/USD performance one trader assumes that the GBP has reached its lowest possible point, he then go’s long (or “buys”) at 1.4178, if the price climbs to 1.5203 and the trader sells then the profit would be 0.1025 X the cost of the initial outlay. Conversely if the price falls to 1.21733 then the loss would be 0.2005 X the initial outlay.

Trading on Margin

Obviously making money from such a small price change would require a considerable amount of money to be laid down upfront which is exclusionary for all but the extremely rich, which is where margin trading comes in and to a degree the risk associated with trading.

High Risk & Reward

Put simply CFD providers such as CMC will provide a margin often around 2%, this allows you to speculate using considerably more than the value of your account, with a margin of only 2% you could speculate up to the value of $10,000 with an investment of as little as $200, put down a $2,000 and you can trade $100,000. Obviously this means your rewards, and conversely your risks can far exceed your deposit. Based on the previous trade examples a $2,000 balance could result in a profit of $10,250 conversely the above losses would total $20,050.

Start with a Paper Trading Account

There are two main types of brokers available Dealing Desks and No Dealing Desks, the former bet directly against the trader, the later simply pair two or more traders to bet against each other. Regardless both should offer a free demo account and many have rich educational sections, only once you’re sure you know what you’re doing should you put your money on the line, and even then never more than you can afford to lose!