Where and how to start? It may seem like a trivial question, but I can assure you that especially beginners may have several doubts before starting this trading activity.
In this article we will try to clarify things a bit.
Let’s see the first question that many ask themselves.
Often the first question is about the platform, not so much intended as which platform to use, but rather whether to trade via a simulated platform or a real platform.
Starting from a simulated platform we have the possibility of trading with fake money. So basically we have no risk and we can approach this first step with greater peace of mind.
On the other hand, of course, there is certainly a certain imprecision in the orders executed. Because a simulated platform can’t actually know if that order you are going to place would have been delivered and filled by the market.
Moreover, even with regard to slippage we will have completely unrealistic values. Often then these platforms have bugs in the functioning. They are not updated as frequently as the real platforms so there may be some technical problems that in reality you would not encounter.
And above all, the simulated trading experience is very different from a live experience, especially from an emotional point of view. By not really risking capital, the whole psychological aspect, therefore fear, greed, insecurity, are missing and therefore we inevitably speak of an experience that is different.
And this is why I believe that choosing a real platform is the optimal choice to start systematic trading, because it gives us the most realistic picture possible.
So a single problem arises: how to minimize the economic risk, because at the time of departure, the ideal would be to start live but risk little.
This allows us to approach systematic trading as truly as possible, while putting a small amount of capital at risk.
How can this result be achieved? Choosing the right markets.
Let’s see together what are the characteristics that these markets must have that make them particularly attractive to start systematic trading.
1) Surely they must have good liquidity. This is a general requirement, starting trading in an illiquid market is highly inadvisable.
2) The other feature is that they have low entry barriers, so they must actually allow you to trade with modest capital. And this can basically be achieved in two ways: through financial leverage or through a high granularity of the market itself.
- Through financial leverage, it is possible to trade on instruments with a capital lower than the notional that would be necessary to invest the sum covered by the contract.
- High granularity, on the other hand, allows us to go to tools that actually have a low cost, such as an action for example. A share can typically cost from $5 to $500, so we’re talking about capital within everyone’s reach.
What are these markets? Let’s see them together..
As I said, shares, CFDs which are basically derivatives that are contracted directly with the reference broker.
Micro futures, which are the new ones, which allow you to replicate operations on a larger contract, such as the Mini S&P for example, but with 1/10 of the notional.
So effectively this barrier to entry has been lowered which allows many traders to start with low capital.
Definitely Forex, which has very high liquidity and high granularity.
And then the cryptocurrency market, which from a certain point of view is very similar to Forex.
So let’s analyze the characteristics of these different markets in more detail, with a focus on liquidity and their financial leverage.
Let’s start with the shares, in the graph we see that the shares can be considered a definitely liquid instrument (remaining within the main lists such as the Nasdaq and S&P). We will have highly liquid underlyings, but which typically offer low leverage but which however have a low cost and therefore allow trading with low capital.
Then there are CFDs, Contracts for difference, they can differ from broker to broker. They generally have good leverage, so you can move much more than your capital.
But on the cash scale you placed them at a much lower value than stocks. This is also not true in general. There are brokers like Interactive Brokers who also offer good liquidity on these instruments.
But the negative aspect is that often some brokers who are a bit crafty in phases of high volatility and tend to widen the spreads.
Moving on to the next tool, we have microfutures, which we can place between these two different asset classes, let’s say. We certainly have good liquidity. Some microfutures are highly liquid like the Micro on the Mini S&P 500. Others a little less like the one on gold. So, averaging the liquidity of these instruments we can say that they still have good liquidity and offer good leverage.
As a negative aspect, the commission aspect can be highlighted, because obviously the commission impact on these instruments is certainly greater than in trading on larger futures.
Finally we have Forex. From the graph, Forex would certainly seem like the ideal market from which to start. Because? Because it has very high liquidity. It is one of the most liquid markets in the world.
However, I would like to remind everyone that it is not a market with official quotations, so also in this case the broker you are using is absolutely important.
The choice of broker is absolutely important because even in this case, as with CFDs, there may be less reliable minor brokers who do not represent you true prices or who keep excessively wide spreads.
At the same time, in addition to having very good liquidity, it also has a high financial leverage and therefore this allows you to trade with little capital.
It also has very high granularity, so from that point of view it would be the ideal market.
If I had to choose two markets to recommend for starting and systematic trading, I would choose the cryptocurrency market or I would switch to microfutures. Both of these markets, in my opinion, are optimal for starting systematic trading by risking low capital.