Getting Started: How to Choose Your Trading Instrument





To think of it, becoming a trader is a relatively easy choice, but choosing a trading instrument is very difficult. While placing your bet on selecting a trading instrument you must keep in mind two very important factors. The capital you have at your disposal and the volatility within the very instrument of trade. It is these two factors that help you choose the trading instrument that suits you best.

The Role of Capital in Trading:

Capital is very base with which you carry on the purchase or sale of your desired instrument. Sufficient capital helps you place your orders on time and without any slippages. Capital flow also insures that you can carry on your transactions with immediate effect. Sufficient capital helps you to trade your instrument at desired prices and in the process achieves profitability.

Market Volatility and its Effects:

Next is the volatility of the market in which you’re trading instrument is placed. A volatile market is definitely risky to trade in, but at the same time it is where the money is to be made. If the markets are volatile, this indicates the prices of the instrument will rise or fall constantly. This will help you to earn profits by selling at higher prices and short selling the very instrument when the prices are due to crash. If you look at stable markets on the other hand, the risk factor is definitely lesser but at the same time the return on investment is low.

Track the Markets to see where each Instrument Stands:

The way to begin is to start tracking the market in which your instrument trades. Along with this you also need to track the trading volumes and price of the very instrument. Let us take stocks for an instance, a trader is looking to invest in a particular stock but needs to have some surety before she/he place the bet. A trader will first need to analyze the trading volumes of the very exchange and look at the highs and lows of the previous week till date. The next step would be to analyze the highs and lows of the script (instrument) she/he finds suitable to invest in.

The final step would be to analyze the volume of sales and purchase. If the volume of transaction is high, a trader will be able to assert capital flow in the instrument of his choice. At the same time if the instrument has been on an overall positive trajectory, the trader can place his bet to purchase the instrument and vice-versa (short sell) if the instrument is on a negative trajectory. In both circumstances a trader will want the capital flow to be good; this would ensure a smooth finish to the transaction whether it is a buy or sell.

The Exchange as a Whole:

The importance of the market or exchange in which the instrument is trading has its own effect on the price flow of the instrument. A negative sentiment within the exchange can also be responsible to bring down the price of an instrument which is performing well and enjoys investor confidence and vice-versa.

Investment companies and funds have dedicated teams studying every move and track prices of their trading instruments on a minute to minute basis. This is in addition to a historical back up of data available to them, which would help them identify market behavior. For an individual looking to choose their own trading instrument, one must at least resort to some research and only then decide to choose their instrument of trade. A trader should always factor the liquidity available and the volatility of the market before selecting the trading instrument, to increase the chance to gain profit.