What is trading

What is trading: Definition of trading

If you’re not familiar with the concept you might ask your self: What is trading. It can be translated to other words, “trading” or “making a deal”. In the stock market, currency market, cryptocurrency market or any other market, it means the execution of financial operations of buying or selling assets in order to gain profit by changing their value. Simply put, the main purpose of trading is to buy something cheaper in order to sell it later at a higher price and earn a profit.

Globally, it’s is a much more complex process, which includes fundamental (predictions based on current events and news) and technical (predictions based on charts and indicators) market analyses. The deals are made by traders — market participants. They analyze the market situation and make decisions about purchasing or selling assets basing on their forecasts. Successful deals are determined by how well analyzed they are and what trading strategy is chosen by a trader.

An example of currency pairs trading. 

A trader does market analysis and sees that the probability of the dollar going up against the euro is increasing. Based on his data he buys the dollar and at the peak of its growth he sells the asset. The trader earns profit — the difference between the buy price and the sell price.

What assets can traders trade?

It all depends on the market in which the trader decided to earn. The following assets are available for trading. 

1. Currency. Currency quotations on Forex are changing very often, which is an attractive option for making profit. If a trader understands the situation well, he will be able to buy an asset at the most convenient moment and then sell it at the most favorable price.  

2. Securities. The object of trading may be shares of companies, the price of which also changes. Besides that, when buying shares, the investor may earn not only on price differences, but also receive dividends.  

3. Derivatives (futures contracts). Futures are contracts which state in advance when the purchased assets will be sold. Binary options are another type of securities that will make money by predicting the exchange rate.  

For example, an investor makes a contract specifying a forecast of growth or fall of a certain currency at a selected time. If the forecast is correct, the investor receives a return with interest. If the forecast is incorrect, the investor loses the bet.  

4. Cryptocurrency. The volatility of the crypto market is even higher than that of the currency market. During one hour, the price of the cryptoasset can change dozens of times, that gives an opportunity to make many deals in a short period of time. 

Trading strategies

Trading strategies can be divided into two categories: by duration and trading method.

Strategies according to the duration of trades

Depending on the duration of trading, we can distinguish between the following strategies.

1. Short-term trading. In short term trading a deal is opened for one day maximum. There are two subspecies of short-term strategy: scalping and day-trading.

– Scalping implies closing of the deal when even the smallest profit is achieved. There may be up to a hundred or even more such deals per day.

– Day-trading implies closing of deals after a couple of hours of opening.

2. Medium-term trading. Means opening of transactions for several days, but not more than for a week. Most frequently, this strategy is used in the currency market, as it is open round-the-clock and only closes on week-ends.

3. Long term trading. Long-term strategy involves opening deals for a long period of time: a week, a month, or even years. As a rule, this strategy is used by central banks, insurance, or pension funds.

Depending on the way of trading, the following strategies are distinguished.

1. Manual trading. The trader registers with the broker and opens deals independently. Using this strategy, the trader independently selects the strategy and does the market analysis. Thus, to make the deals successful, the trader must have a strong knowledge and understanding of how the market works and the factors which influence it.

2. Automated trading. Such trading is carried out by means of robots. In other words, a special program is running which makes decisions independently on the basis of the current market situation.

When choosing a strategy, you should pay attention to the market trends. All strategies are based upon market trends. Market trends are determined by the objectives of the prevailing number of other traders: bulls or bears.  

Bulls are traders who trade for higher prices and open long-term trades to buy an asset because they believe it is rising. If the market is dominated by bulls, it becomes bullish. In that case, it is more profitable to buy an asset than to sell it.  

Bears are traders, who forecast a decline in exchange rates and sell assets en masse. If bears prevail in the market, it becomes bearish. In that case, traders sell in masses, opening short-term sell trades. 

Trading Principles: What you need for successful trading

We have prepared some rules to remember for successful trading.  

1. Have an in-depth knowledge of the market 

For successful trading, you need expert knowledge and clear understanding of how the market operates and what factors influence it. You can gain such knowledge by reading books on stock trading, taking courses and continually developing. Many brokers offer training sessions for new traders, providing you with the skills you need to become a professional trader. 

2. Choosing a broker 

It is not possible for individuals to engage in trading and become involved in international trading. Therefore, to become a trader you will need a broker — an intermediary between buyer and seller, who is authorized and licensed to do so. A broker will charge you a commission for their work, usually a percentage of the transaction.  

It is important to choose a broker responsibly as they provide a comfortable environment for new traders and help you choose a strategy as well as conduct fundamental and technical analysis.  

In addition, you should be careful to avoid fraudulent organizations. That’s why when selecting a broker, pay attention to its reputation and licenses. 

3. Start-up capital 

The optimal initial capital to start trading is between $100 and $500. If a trader just starting out in this field, it is not advisable to enter the market with large sums of money at once.  

4. Do not trade on the news 

It is very important to keep an eye on the market news, but at the moment of news release the market situation can turn in any direction. It is best to use the news and the way the market reacts to it for fundamental analysis. 

5. Remember about money management rules 

The maximum risk of loss in a transaction should not exceed 2% — this is the main rule. If you follow this rule, then in the case of a losing trade, you will lose only 2% of your funds, while the remaining 98% remain intact.

Trading Risks

There are two major risks in trading — losing money and running into scammers. To be protected from the risk of losing money it is important to have an in-depth knowledge of the financial game, to follow a strategy and not to trade with large amounts of money.

Trading scammers are illegal brokers who steal clients’ funds after they have deposited their balances. To secure yourself from the risk of cooperation with swindlers, carefully check the information about the broker company when choosing it: clients’ reviews, existence of the license, number of years on the market.

Conclusions

Trading provides excellent opportunities to earn and multiply your capital. But along with great earning opportunities come risks. You will need good theoretical knowledge, reliable broker, well-thought-out strategy, which will be perfect and adjustable to the situation on the market. 

And, of course, you should not forget about continuous education of trading on financial markets. The absolute understanding of all nuances of trading will help you not only to be protected from losses, but also to earn good sums.