What Is Trading: Beginner’s Guide For Financial Markets 2023

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So . . . you are thinking of becoming a trader? And you just thought you would Google the term What is trading? And maybe, just maybe, you want to know if you can make money trading even though 90%+ traders fail. Look no further, in this article, we are going to break down financial markets for beginners in such a simple way, that even a baby could become a successful trader after reading this article!

What Is Trading - Baby

We have written what we believe is the best guide on trading as well as the most comprehensive beginner’s guide for trading to answer the question “What is trading”? This beginners trading guide will go over everything from “What is Trading”, to the history of trading, to the different financial markets that you can trade, how to get started trading, then how to develop a trading strategy, and finally, some of the pros and cons of trying to make a living in trading.

Understanding financial markets will help you make better-informed decisions on whether you want to become a trader, what market(s) you want to trade in, and what type of trader you want to become.

If you want to learn about the ins and outs of understanding financial markets, as well as the journey YOU MUST take to become a successful trader, you’ve come to the right place. Grab your favorite mocha-cino-frappe-latte-whatsit, and Prepare yourself for The Best Trading Guide on Understanding the Markets.

What is Trading? The Very Best Guide on the Internet to Understanding Financial Markets Just a Little Bit Better (And Then Some!)

In today’s modern society, almost every one of us has been involved in trading in one way or another, possibly without even knowing. In the simplest example, every exchange of something of value, for something else of value, is considered trading.

Do you remember Pogs? If you were born before 1995, the chances are, of course, you do! In case you’re not familiar with them, or you’re just pretending you don’t remember to save embarrassment, see below for an example of Pogs:

What Is Trading - Alf Pog

Pogs were these round little discs that had different pictures on them, cartoon characters, companies, logos, and my personal favorite, Alf. They could be used to play games, compete with other kids, or . . . traded. Kids have been trading things for ages, race cars, marbles, baseball cards, even rocks and sticks, and so have adults. Now that we’ve had our fun down memory lane, let’s move on to what an adult considers trading.

But first, watch this hilarious 30-second clip from the Simpsons that sums up our point about pogs and trading:

What Is Trading For Adults

As you grow older, the things you do in your daily life have more of a priority for human survival and are more expensive too. Cars, electricity, groceries, boats, various goods, and services are all traded for something we all know very well. Money! Adults rarely have the privilege of trading their favorite Pokemon trading card for a pack of toilet paper.

The adult definition for what is trading can be defined as the exchange of money for goods and services. But beyond that, we need to go one step further to understand financial markets. When we talk about trading today, we are typically referring to trading, what we call, instruments.

What are Instruments

Instruments are simply just things that can be traded on financial markets, they can be a share of stock, cryptocurrency, futures contract, or foreign exchange currency pair. And if all those are unfamiliar to you don’t worry we are going to break all that down soon enough. But before doing that, there is just one question we have to ask ourselves. How do we begin trading these instruments? Once again, the answer is simple, MARKETS!

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What are Markets

Have you been to the grocery store? How about a hardware store? Those are basic forms of markets. A grocery store is a market where you look to exchange your money for the food that you need to eat. A hardware store is a market where you exchange your money for materials needed for building and fixing things.

Likewise, the stock market is the store where you can buy and sell shares of companies, and the futures market is the store where you go to buy and sell contracts on the right to own commodities. You may be asking, “Why do I need a separate market for trading stocks and futures”?

Let me put it this way: You wouldn’t go to a hardware store to buy milk, and you wouldn’t go to the grocery store to buy a bag of concrete (except Walmart, but let’s pretend that doesn’t exist). So why would you expect anything different when it comes to professional trading markets?

Before moving on let’s discuss briefly the history of “What Is Trading”.

What Is Trading — The History (A Very Brief History)

Now that you better understand how markets work, along with, some of the basic terminologies commonly used in trading, let’s take a look at a brief history of trading.

Trading has a dynamic history spanning thousands of years. Some of the earliest markets can be traced back to grain futures in Mesopotamia around 2000 BC. Later, around 200 BC, the Silk Road was used as a network of trade routes that enabled commerce between many Asian and Mediterranean countries.

By the 1860s, rapid market development began with the introduction of telegraphs. Stock prices could be rapidly shared, and in 1867 the first stock ticker was invented to allow real-time price tracking. The 1930s saw one of trading’s most notable events: The Great Depression crash led to stricter financial regulations being implemented by the Securities and Exchange Commission (SEC).

The Securities Act of 1933, and the Investment Company Act of 1940 allowed Mutual funds to be a truly regulated investment medium.  And by the 1970s electronic communication networks (ECNs) allowed traders to diversify their investments away from individual stocks and conduct transactions more easily. 1971 marked a major milestone when NASDAQ became the world’s first fully automated electronic stock exchange, completely revolutionizing trading.

The Volatility Index (VIX) introduced in 1993 enables traders to measure expected market volatility and sentiment. Today, online brokers have made it easier than ever for individual investors to pursue digital trades while algorithms are also playing an increasingly prevalent role in executing trades quickly and efficiently around the world.

Moving on we’re going to start to fill you in on the really fun stuff. Next up is all about, the different types of trading.

What is Trading — Different Types Of Trading

There are a variety of different financial instruments and asset classes that one can trade. You can trade anything from shares, bonds, Forex currencies, commodities, cryptocurrencies, and a whole host of other derivative instruments. Let’s briefly go over the most popular instruments to trade.

What is trading — stock:

Stock trading is probably the simplest form of trading to understand. Stocks are what most people think of when they think or hear about trading.

Understanding Financial Markets - New York Stock Exchange

Stocks are what you see on TV like CNBC, and Bloomberg, most people are familiar with the tickers scrolling by with quotes from various companies. In a nutshell stock trading is buying and selling shares of publicly traded companies on a stock exchange.

Further Reading: Single Stock Trading

What is trading — Forex:

Forex, short for foreign exchange, is buying and selling of the price of one currency against the price of another currency on the foreign exchange market. This is probably the form of trading that the average person knows the least about.

Understanding Financial Markets - Forex Currencies

It’s a little bit confusing for beginners because there is no central exchange, and no shares or contracts ever really change hands. Forex contracts are traded in lots, or units, using leverage and margin. In a nutshell, Forex trading is the exchange of one currency for another to profit from price fluctuations.

Further Reading: Forex Trading For Beginners

What is trading — Options:

Understanding options is probably the most difficult form of trading to understand. Instead of buying or selling an asset or security, you are purchasing a contract that gives you the right to buy a said instrument at a given price, also called the strike price. Trading options is very lucrative, most contracts allow you to control 100 shares for a fraction of the price, but if you don’t take the time to understand options trading, you can lose your shirt in a hurry, or the farm, or the kitchen sink.

What Is Trading - Options Calls And Puts
What is trading options

Options trading is not recommended for newbies, but don’t worry we have a ton of guides that can help you better understand what options are and how to trade them like a pro.

Buying and selling contracts that give the holder the right to buy or sell an asset at a certain price.

Further Reading: Options Trading System

What is trading — Futures:

What is trading in the future? Does that even sound possible? Are we on the Jetsons? Futures trading isn’t quite that complicated, here’s an example. Let’s imagine you are looking to buy a bunch of cattle. You find a seller, and you agree to a price with the seller. You also agree to a delivery date for the cattle that you just bought. On the delivery date, the seller delivers the cattle just as promised at the agreed price.

What Is Trading - Futures Instruments
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The futures market is essentially the same, except the traders are never really looking to own the product in mention. Futures traders speculate on price changes of commodities (or other assets) over different periods of time, it could be days, weeks, months, or even years.

Using our example of a cattle buyer. Let’s say you agree to buy a lot of cattle for $100, and you hold on to it for a few days, and the price goes up to $110. You can turn around and sell the contract back to someone else for a higher profit. That’s basically how trading futures works.

There’s a lot more to the futures market, and if you think that the futures market is right for you, then check out our other content on the subject.

Further Reading: Trading Futures For Dummies

What is trading — Cryptocurrencies:

We’re going to spend a little extra time on cryptocurrency because it’s one of the topics that people may be most unfamiliar with, and need the most education to understand.

It’s funny that you can mention cryptocurrencies (or crypto for short) and people have no clue what you’re talking about, but then you mention Bitcoin and a lightbulb turns on. Bitcoin is one of many cryptocurrencies.

A Cryptocurrency Trading Strategy involves buying and selling cryptocurrencies such as Bitcoin, Ethereum, Litecoin, etc. It’s also funny to me how people can be so confused with the fact that digital currencies can exist, and more importantly, that they can have value. If a pog (which we mentioned earlier in this article) can have value, I think it’s just as believable that a digital asset could have value as well.

What Is Trading - Cryptocurrencies

To go a little deeper into the subject while attempting to stay brief, let’s explain what cryptocurrency is. It must be cryptographically hashed, and be visible on the blockchain. Got it? Easy right? Just kidding I’ll try to explain as simply as possible. Have you ever looked at a US one-dollar bill? Have you seen a little code, and have you noticed the watermarks on the bills?

Those are identifiers that let people know that the currency they possess is unique and not duplicatable. So just like the serial code on a dollar bill, each cryptocurrency has a unique code that is generated through a complex algorithm that prevents it from being duplicated.

Many cryptocurrencies have a finite amount of tokens that can be obtained. For example, Bitcoin currently has only 19 + Million tokens available worldwide, with only 21 million that will ever be available. That means cryptocurrency has the potential to be quite valuable, especially given today’s demand for online trade and commerce.

In addition to cryptographic hashing, cryptos are transacted through the blockchain. I know we’re going into a lot of heavy stuff, just bear with me one more minute. The blockchain is a sort of online ledger. Think about balancing a checkbook. You post every transaction you make on your tiny ledger and make sure that all of the transactions that you make on your bank account are correctly added up. The blockchain is essentially the same thing… except it’s visible to the whole world!

Don’t worry, everyone isn’t able to see how much crypto you have, your balance, or even identify who the transaction is from. Instead, each crypto or fraction of crypto is traced back to the ledger (or blockchain) to ensure that records are accurate and executed successfully. And it is all done by a network of computers that are decentralized, or have no central point of control, meaning that it is extremely secure and free from manipulation.

Still, having a hard time understanding? Don’t worry, we have a lot more content to help you understand cryptocurrency, this is just a quick rundown. Keep on educating yourself and you will better understand financial markets related to crypto.

The whole point of the above information is just to say that cryptos trade similarly to both stocks, and Forex. You can either choose to own the underlying asset by itself like you would owning a stock, or you can trade the digital currency against another digital currency such as ETH/BTC (Ethereum against Bitcoin).

Further Reading: Best Beginners Crypto Guide, Crypto Charts For Beginners

How To Get Started Trading.

At Trading Strategy Guides, we want to make sure that you make informed decisions when it comes to trading. We also are aware that since you are reading this article, you are most likely a beginner. There’s nothing wrong with being a beginner and we want to make sure that you are getting started on the right foot. So from this point on you need to be thinking about some hard choices.

Some of these choices include: what financial market do you want to focus on? Do you want to be an algorithmic trader or a manual trader? A day trader or a swing trader? You don’t have to make a definite choice now, but as you are learning more about the different markets and strategies out there, you should be thinking about how you would like to define yourself as a trader.

Now that you understand financial markets a little better, it’s time to learn about the process of trading, or executing trades. The main topics we will be going over in this section include Online Trading/Brokers, Trade Execution, and Technical Vs Fundamental analysis.

What is Trading Online?What Is Trading - Online Trading

We live in the age of the internet. Online trading is almost exclusively the only way to trade now. There are still a handful of brokers taking over-the-phone orders now and then, but Online is King. Even though you are most likely familiar with online trading we’ll touch briefly on, “what is trading online”.

Simply put, online trading is buying and selling any financial instruments through the Internet. This is typically done through different trading platforms, and online brokers, which are connected to in-person exchanges. Thanks to modern technology, access to the financial markets is right at your fingertips. It has never been easier to have access to the financial markets. Anyone who has a computer and enough money to open a trading account can access the markets through these online trading platforms.

These online trading platforms are offered to you by a Brokerage trading firm. A Broker is simply a firm that conducts transactions on behalf of their clients and in exchange for their service they are paid a small amount of fee or the spread in the case of some of the Forex brokers.

Online Trading — Alternative Ways To trade

Social trading:

Social trading is an online trading strategy that enables traders to follow and replicate the trading strategies of other, more experienced traders.

Understanding Financial Market - Social Trading Network
Understanding financial market social trading network

Through a social network platform, traders can view the trading activities of others in real-time and can ‘copy’ successful traders. This allows less experienced traders to learn from more experienced ones and potentially make money through their trades.

Further Reading: Best Social Trading Platforms

Algorithmic trading:

Algorithmic (also known as algo) trading is automated investing, you may have heard the term trading robot. This is it. A trading robot uses algorithms and mathematical models to execute trades. This type of trading is based on predetermined rules and instructions set by the trader. Algo trading is advantageous as it allows for faster and more efficient trade execution and more consistent and accurate decisions that can potentially result in enhanced performance and reduced risk.

What Is Trading - Algorithmic Trading
What is trading algorithmic trading

Examples of algorithmic trading strategies include high-frequency trading (HFT), statistical arbitrage, momentum trading, mean reversion, and automated market making. These strategies can be used across numerous markets and asset classes including stocks, bonds, futures, options, and currencies- however, success requires in-depth technical knowledge as well as strict risk management techniques.

Further Reading: What is Algorithmic Trading

Manual Trading:

Manual Trading is just as it sounds, YOU do all the work. Everything covered in this guide is supposed to give you an idea of how manual trading works. Even if you want to become an automated trader, you still need to know the principles of manual trading.

Further Reading:  Manual Vs. Automated Trading

Brokers

Alright, so you’ve decided you want to start trading. Great! Now what?! How do you make trades in a financial market? Easy, remember our grocery store example from earlier? Let’s say that you have decided you want to buy some bacon and eggs to make for breakfast. You’ve selected your items, where do you go from here? To the cashier. The cashier is there to facilitate the transaction between you and the grocery store you’re purchasing from.

What Is Trading - Broker Like Trading Cashier
Brokers like trading cashiers

In professional trading jargon, instead of a cashier, we use the term broker. A broker is someone or some kind of medium that executes trades on your behalf through the market of your choice. Most brokers today are online; digital platforms where we do most of the trading ourselves. But back in the day, my broker would have likely been a person that I would call on the phone and direct to make purchases on my behalf.

Brokers come in all different markets, some brokers cover multiple markets and some only cover one market. So before you decide on the broker you’re going to need to be sure that you’re trading the market of your desire. If you’re still interested in learning about brokers, especially how to choose a broker, don’t worry, we’ve got you covered with some more amazing content.

Further Reading: Ultimate Broker Guide

Trade Execution

Now that you’re using a broker it’s time for you to start taking trades. Trade execution is the process of transacting trades in a financial market. To execute a trade you must place with trade with your broker. For example, let’s say you want to buy 100 shares of ABC stock. You are specifying the instrument you want to purchase, and the size of the contract.

There are three main types of trade execution, market, limit, and stop orders. Now to understand the different types of trade execution let’s say you want to buy ABC stock at a certain price.

What Is Trading - Different Order Types
Different order types in trading pdf infographic free 1

First, let’s say you want to buy ABC now, and you don’t care what the price is, you think it’s going to start going higher so you want to get your shares right away. You would place a market order, meaning, whatever price the market gives you

Second, let’s say you want to wait for the price to fall to a certain price before entering your trade. If the price is $10 you want to get a better price at $9.50. This would be a limit order, you are limiting the amount of money you are willing to pay per share.

Finally, a stop order means that you are waiting for the price to go up to a higher price above the current price before entering a trade. The price is at $10 but you won’t enter until the price hits $10.50.

There is a lot more to go over regarding trade execution. This is just a sample of how it works. We have a ton of content that will help you get up to speed and understand trade execution better. Let’s move on to Technical VS Fundamental analysis.

Further Reading: https://tradingstrategyguides.com/order-types-in-trading/

Technical Analysis VS Fundamental Analysis

Technical analysis and fundamental analysis are two trading approaches used to analyze and better understand financial markets. Fundamental analysis assesses the underlying instrument’s intrinsic value and potential for growth by analyzing its financial statements and economic indicators. Technical analysis looks at past market data to help predict future price movements.

For example, looking at price and volume, to find patterns for taking trades. There is no right or wrong answer in determining which approach is better. Many traders prefer one over the other, while still, many others incorporate both into their trading strategies.

Let’s take a little closer look at some of the tactics that each approach tends to use.

Technical AnalysisWhat Is Trading - Technical Analysis

Technical analysis is the study and speculation of price movement using technical factors that are working behind the scenes to cause prices to move in a certain way.

Further Reading: How To Apply Technical Analysis

Charting

If you’re not familiar with charts, you’re going to want to do a deep dive into reading and understanding financial charts. Charts are probably one of the greatest tools out there for today’s retail traders who prefer technical analysis. Most of the charts plot financial data. But there is so much information that can be plotted. You can track price changes over various periods, the average prices can be tracked, and volume can be tracked.

Anything that creates a piece of data can be plotted onto a chart. Every piece of data tells us a story about the financial instrument that we are trading. Breakouts can be spotted. Patterns can be found. Key levels.

Charts come in various styles that different traders use to read the market:

  1. Line charts: These are the simplest type of chart, showing a line connecting the closing prices over a specified period.
  2. Bar charts: These charts display the open, high, low, and closing prices for each period as a vertical bar, with the top representing the high and the bottom representing the low. A horizontal line on the left side of the bar shows the opening price, while a line on the right shows the closing price.
  3. Candlestick charts: These charts display the same information as bar charts but use candlestick-shaped bars to better illustrate the relationship between opening and closing prices. Each bar represents a specified period and has a body showing the opening and closing prices, as well as “wicks” (also called “shadows”) showing the high and low prices.
  4. Area charts: These charts display the same information as line charts but fill the area below the line with color, making it easier to visualize changes in volume and price.
  5. Renko charts: These charts focus solely on price movements, and are not concerned with time. They display price movements as “bricks” that only move up or down if the price exceeds a certain level, as specified by the user.
  6. Point and figure charts: These charts use X’s and O’s to represent price movements, and only change direction when the price movement exceeds a certain threshold, as specified by the user.
  7. Heikin-Ashi charts: These charts use modified candlesticks that use averaging to filter out market noise and provide a smoother view of price trends.

Further Reading: Best Candlestick Guide, Crypto Charts Beginners Guide, Renko Strategy

Indicators

Indicators are algorithms that are created to display in conjunction with financial charts to assist traders with making more informed trading decisions. Typically, they draw lines or symbols over the tops of financial charts or create separate charts to be read alongside the primary financial chart. Indicators can be algorithms as simple as a moving average (plots the average price over a specified period) or as complex as the Ichimoku Kinko Hyo (which is an indicator that can also be an entire trading system).

Further Reading: Best Indicator Combinations, Best Forex Indicators To Profit

Price Action

Price action trading is a form of technical analysis that looks at the natural behavior of market prices to predict future trends. It has become popular with traders due to its ability to interpret and act on price movements without relying on lagging indicators. This type of trading is based on identifying certain patterns or setups, such as specific candlestick formations, trend lines, breakouts, and support/resistance levels.

To be successful in price action trading requires deep market knowledge and strong technical analysis skills to interpret price movements correctly.

Further Reading: Price Action Essential Guide

Chart Patterns

Chart patterns are formations on financial charts that are used to predict potential trading opportunities. There are two main categories: reversal patterns, which indicate that the price is likely to reverse direction, and continuation patterns, which indicate that the trend is likely to persist. Popular chart patterns include head and shoulders, flags, pennants, double tops and bottoms, triangles, and doji candlestick patterns.

Price action traders may use these chart formations in combination with technical indicators such as moving averages and the relative strength index (RSI) to identify potential trade scenarios. Candlestick charts display open, high, low, and closing prices over a specified period in price action analysis. Additionally, traders should always remember to use sound money management and stick to their trading plan when trading based on chart patterns.

Further Reading: Candlestick Patterns,

Fundamental Analysis

Fundamental analysis is a method of analyzing financial markets by examining underlying economic, financial, and other qualitative and quantitative factors that affect the value of an instrument or security. The four main types of fundamental analysis are economic analysis, industry analysis, company analysis, and social sentiment. Overall, fundamental analysis is an important tool for investors seeking to make informed decisions about better understanding financial markets.

Further Reading: Fundamental Analysis of Stocks

Economic Analysis

Economic analysis involves studying macroeconomic indicators. GDP, inflation, employment rates, interest rates, and many others, to assess their impact on financial markets. By analyzing such data, investors can gain insight into the present economic situation and predict potential future trends. Thus, economic analysis assists in making wise asset-investment choices like which assets to invest in and when to buy or sell them.

The scope of economic analysis can be global, national, or regional. It may also involve forecasting future economic trends based on past data and current influences. Economic analysis is a powerful tool for investors allowing them to comprehend the wider economic environment they are functioning within and accordingly plan their investments

Further Reading: Global Macro Trading Strategies

Industry Analysis

What is industry analysis? It is a form of fundamental analysis where the focus is placed on comprehending the trends and dynamics of a distinct industry. Its objective is to determine the overall health, potential future development, and factors that are likely to impact the performance of companies in that industry.

Using different analytical methods such as Porter’s Five Forces framework, SWOT analysis, researching and analyzing distinct sector-specific variables like market size, growth rate, competitive environment, technological progressive developments, and consumer behavior are just some tools an analyst utilizes to judge a sector’s strengths or weaknesses. This data will help investors interested in investing in particular sectors or industries understand its wider economic situation and make sound investment decisions.

Further Reading: High Net Worth Strategies

Social Sentiment

Social sentiment analysis is a market analysis strategy that utilizes language processing and machine learning to inspect large volumes of social media data. This method considers public opinion expressed through comments, posts, and mentions on platforms such as Twitter and Reddit to identify trends, sentiment shifts, and other information that could help investors make better decisions.

Further Reading: Meme Stock Strategy

How to develop a successful trading strategy?

Now that you are a little more familiar with how to get started trading it’s going to be most beneficial for you to begin to develop a strategy. It’s best to start with something simple that has easy rules that you can follow in your sleep. Developing a trading strategy is mandatory to becoming successful at trading and understanding the markets. We have created a 5 Step approach to help you become a successful trader.

In Step 1, you will start by deciding what type of trader you want to be, such as a day trader, swing trader, or position trader. This will help narrow your focus and allow you to develop an effective strategy that fits the time frame you prefer.

Next, is Step 2, choosing a trading strategy. To do this you may conduct a thorough market analysis, using technical and fundamental analysis to identify potential trades and make a trading plan.

Step 3 walks through the benefits of testing the developed strategy with a demo account or paper trading before risking real money, allowing for necessary adjustments without losses. In this step, it is also important to define your financial goals and risk tolerance before beginning trades.

Step 4 is evaluating performance over time, which is essential to continually refine your trading methods.

Lastly, Step 5 will talk about maintaining discipline when risking capital on each trade – stick with your predetermined plan and avoid emotional responses that could jeopardize gains.

What is Trading — Step 1: Choose a Trading Style/Time-Frame

Different traders adopt different types of trading styles. Some may invest in only one asset or instrument while others’ portfolios are more diversified. News and financial report analysis is yet another form of the trading style adopted by many traders. Besides this, some traders rely on statistical trends to make their decisions, and some open and close a lot of positions quickly for day trading and scalping.

On the other hand, some prefer a longer-term view which involves investing for months and even years. Whatever a trader’s strategy, it should fit their personality as this will help them to become successful in the markets.

Further Reading: Time-Based Trading

Day trading:

Day trading involves trading securities, commodities, or other financial instruments within the same day. Traders who take part in day trading are known as ‘day traders’. They attempt to capitalize on short-term price movements in highly liquid markets. Day traders commonly use technical analysis and chart patterns, along with leverage to increase their buying power. Day trading can be lucrative, but it also exposes traders to high risk if they don’t understand financial markets correctly.

Proficiency in day trading requires skill, knowledge, and discipline to make timely decisions based on dynamic market conditions. There are various day trading strategies used by traders such as scalping, momentum trading, range trading, news trading, and algorithmic trading. Traders must carefully consider the pros and cons when selecting their preferred approach.

Additionally, in certain markets, stringent rules imposed by official bodies must be followed by day traders including minimum equity requirements and limitations on the number of trades that can be made per day.

Further Reading: Day Trading For beginners

Swing trading:

Swing trading is a trading style that enables traders to capitalize on short and medium-term price movements in financial markets. Unlike day trading, swing traders may keep an open position from one day up to several weeks. This type of trading requires less time compared to day trading and this fact makes it popular with those who have limited time to actively trade the markets.

Further Reading: Swing Trading Strategy

Position trading:

Positional trading is a method of investing in financial markets where positions are held for weeks, months, or even years. It looks to take advantage of large price fluctuations and relies on the combination of fundamental and technical analysis to identify good opportunities. There are different strategies under positional trading, such as value investing, growth investing, and income investing.

Value investors look for stocks that have the potential to increase their market value over time whereas growth investors focus on companies with high growth prospects despite being currently overvalued. Income investors search for stocks providing them with regular dividends. Entailing patience, discipline, and a long-term investment mentality, this type of trading isn’t suitable for traders seeking short-term profits or not accustomed to volatile markets.

Nevertheless, it can be a lucrative strategy amenable to investors ready to embrace long-term market views and invest in shares featuring robust fundamentals.

Further Reading: Buy And Hold Strategy

Moving on, we’ll go over Step 2 – Choosing a Trading Strategy.

What is Trading — Step 2: Choose A Trading Strategy

This means that there are a lot of trading opportunities for buying and selling these financial instruments. With an average daily volume of more than $5 trillion, the Forex currency market is becoming one of the most popular forms of trading.

Whatever the financial instrument you want to trade, the main idea is always the same: to benefit from movements in price. If you buy low and sell high, you profit. However, if you sell lower than where you bought you will incur a loss. Conversely, if you sell high you need to buy lower to make a profit.

This might sound simple enough, but there are millions of private individuals, hedge funds, and different institutions all trying to profit at the same time. This means you’ll be trading against fierce competition and against the brightest minds which is one of the reasons why trading is such a hard business.

Further Reading: Best Trading Strategy

In step three we will walk you through evaluating a trading strategy.

What is Trading — Step 3: Test Your Chosen Trading Strategy

Backtest

Backtesting is the initial test right after choosing a trading strategy. It is used to evaluate the profitability of a trading strategy over a certain period. It involves simulating trades with historical price data according to the rules and parameters of the strategy. With appropriate software, traders can generate reports that show the performance of their strategies in terms of profit and loss, drawdowns, win rates, and other metrics.

Quality data and factors such as transaction costs can be taken into account when backtesting, while sufficient time must be dedicated to ensuring accurate results.

Once backtested, strategies can be further improved by refining their parameters or testing them under live market conditions. Ultimately, backtesting allows traders to create effective strategies they can confidently use in real-world trading scenarios.

Further Reading: How to Backtest a Trading Strategy

What is Trading — Step 4: Evaluate Trading Strategy

Forward Testing/Demo/Paper Trade

Demo, or paper trading, might sound similar to backtesting, but not quite. In forward testing, you have already completed the backtesting phase, you now need to test in live markets to see if your strategy will work with real-time data, but you don’t want to risk any money in the process, because it has not yet been proven.

It involves trying out the strategy on real-time market data to determine its efficacy and reliability. To do this, traders can either open a demo account or a live account with a small sum of money. During the whole process, it is important to closely monitor the performance of the strategy and create records of all the trades. This includes recording statistics like risk-to-reward ratio and win rate for each trade, as well as analyzing any changes in effectiveness or profitability.

As forward testing requires time and patience, it is important to remember that necessary adjustments may need to be made based on the performance in real-time market conditions.

Set Risk Parameters

Risk Management is a key element of trading, as it enables traders to regulate their risk exposure and potential losses. Risk parameters should be tailored to the trader’s risk tolerance, approach to trading, and financial objectives. Stop-loss orders are one popular way of setting up these parameters, which indicate when a security should be sold off when reaching a certain price point.

Allocating a maximum portion of the portfolio towards any trade is another great method for controlling risk – this is known as Risk Management. Position sizing allows traders to adjust their trade sizes according to the level of risk they’re comfortable with as well.

Additionally, traders can also monitor their total exposure in markets or assets and diversify accordingly to reduce overall risks. Finally, by constantly assessing and modifying risk parameters based on current market conditions and changing financial goals, traders can stay disciplined while minimizing losses and boosting their chances of long-term success.

Further Reading: Risk Management

Evaluate Performance

What is Trading — Step 5: Maintain Discipline (AKA Trading Psychology)

Trading success requires discipline, money management skills, and a keen understanding of trading psychology. Discipline involves having a plan of action, following it consistently, and avoiding emotional trades.

Money management strategies should take into account the amount of risk traders are willing to take and have rules around capital allocation. Properly managing emotions is also critical; investors must remain focused and rational when making decisions so as not to be swayed by fear, greed, or hyperactivity.

Various techniques can help with this such as goal setting, creating a trading journal, or seeking guidance from experienced traders. Utilizing trading software or tools can also help with decision-making and risk management. All of these aspects combined will help traders increase their chances of success in the financial markets.

Further Reading: Trading Discipline

What is Trading — Advantages and Disadvantages

Disadvantages

It’s probably pretty easy to see some of the disadvantages of trading financial markets but just for fun, let’s take a look at a couple of the potential pitfalls of trading, especially when you don’t understand the markets.

Losing money

What Is Trading - Losing Money

Nobody likes to lose their money. I had a friend one time that told me “if you want to teach people a lesson all you have to do is take away one of two things: their time, or their MONEY. If you decide to become a trader you must realize, you will lose money. Just don’t be one of the traders that end up sounding like a bad country song, you know the song! Sing it with me:

— The Bad Trade Blues

~I lost my money,~

~I lost my house,~

~and I lost my pickup truck,~

~all because I made One (or a hundred) Bad Trade(s)~

Sung by — Too many traders

Too many people start trading because they want to get rich quickly, but as one of Casey’s podcast guests said, “The best way to get rich quick, is to get rich slow”. Financial markets are not Vegas, they are very complicated, dynamic entities with lots and lots of moving pieces.

Large Learning Curve

What Is Trading - Learning Curve

Trading takes years and years to master, and even when you think you’ve mastered it, there’s still so much more to learn. Ask any professional trader out there, and they’ll tell you if you are looking for a career to get rich, become a doctor, or a lawyer because the chances of you becoming successful are much higher. It sounds lucrative, and it sure can be, but it can also be very disappointing, and frustrating to fail over and over again.

Lose More Than You Invest

The markets have indeed become more accessible but there is a high risk involved with any type of financial instrument. If you don’t have a good ability to read the markets or a proven backtested strategy, there is a danger of losing more than just your initial deposit. Trading with leverage and margin may seem like a good idea at first, but if you are not educated on doing so you could potentially lose more money than you invested. Creating an added debt.

Advantages

Flexibility

What Is Trading - Flexible Schedule

Trading allows you to work as much or as little as you need to succeed. Some traders only trade the first hour of the day, some don’t trade after lunch. As long as the market is open, you can trade whenever you’d like.

Lucrative

What Is Trading - Lucrative

Trading and understanding the markets have the potential to make you tons of money. Warning: see the disadvantages above, and don’t forget, you can also lose it just as fast as you can make it. But, if you are willing to put in the hard work and educate yourself on every aspect of the market you want to trade, you can and will succeed. Don’t let the figure scare you, you know the one that says 99% of traders fail. Let that be a motivating factor that drives you to want to succeed even more.

Accessibility

Another advantage of trading the financial markets is accessibility. Depending on the financial market you want to trade there can be no minimum amount required to open a trading account. Most Forex brokers offer leverage and trading on margin, you can start trading large amounts of money with only $500 to start.

Compounding

You can reinvest all your profits in an attempt to make even more profits. In the financial world, this process is called compounding. Just like compounding interest in a savings account.

What Is Trading - Compound Interest

Moving on, we’ll discuss some of the trading terms that can be helpful for your journey to becoming a trader.

What Is Trading — Trading Terms You Should Know (So That You Can Sound Cool at Parties)

Now that we have a basic understanding of trading, here are a few key terms that we believe you should know:

Trading: Buying and selling instruments to make a profit.

Stock: A type of instrument that represents ownership in a company.

Commodity: A raw material or primary agricultural product that can be bought and sold, such as gold or wheat.

Currency: A unit of exchange that is used as a medium to trade for goods and services.

Option: A contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price within a specified period.

Futures: A financial contract that obligates the buyer to purchase an asset or the seller to sell an asset at a predetermined price and date.

Bonds: A debt security that represents a loan made by an investor to a borrower.

Bull Market: A financial market in which prices are rising or are expected to rise.

Bear Market: A financial market in which prices are falling or are expected to fall.

Financial Charts: Visual representations of financial data used to analyze price trends and make informed trading decisions.

Broker: An individual or firm that acts as an intermediary between buyers and sellers in a financial market.

HLOC: An acronym for High, Low, Open, and Close, which are the four prices represented in a financial chart.

Exchange: A marketplace where financial assets are bought and sold.

High and Low: The highest and lowest prices reached for a financial asset within a given period.

Indicators: Tools used by traders to analyze price trends and make informed trading decisions.

Volume: The number of shares or contracts traded in a financial market during a given period.

Volatility: A measure of the degree of variation of a financial asset’s price over time.

Symbols: A series of characters used to identify a financial asset.

Japanese Candlesticks: A type of financial chart used to represent the price movements of an instrument. Japanese candlesticks display the open, high, low, and close (OHLC) prices for a given period, usually one day. Each candlestick is comprised of a rectangular body, which represents the difference between the open and close prices, and two wicks, or shadows, which represent the high and low prices for the period.

Market Order: A type of order to buy or sell an instrument at the current market price.

Limit Order: A type of order to buy or sell an instrument at a specified price or better.

Stop Order: A type of order to buy or sell an instrument asset once the market reaches a specified price, known as the stop price.

Stop-Limit Order: A type of order that combines the features of stop and limit orders.

Trailing Stop Order: A type of order that automatically adjusts the stop price as the market price moves in favor of the trade.

Fill or Kill Order: A type of order that must be executed immediately in its entirety, or not at all.

All or None Order: A type of order that must be executed in its entirety, but not necessarily immediately.

Don’t worry about memorizing all of these definitions right away, just be aware that they exist, refer back to them as you need, and eventually, as you become a more educated trader, you will know them all.

What is Trading — Conclusion

In summary, we answered the question, “What is trading?” by defining it as “The process of buying and selling financial instruments”. We took you on a journey of discovering what trading is all about, its history, and what it takes to better understand financial markets.

We also gave you an overview of the different financial markets out there and how you can better educate yourselves, ultimately learning the niche market of your choice. We also discussed how you can get started trading, by signing up for a broker, and learning whether you want to take trades manually, have a robot do it for you, or try something in between with social trading.

Next, we talked about what it takes to develop a trading strategy. We gave you our 5 step process that will help you define yourself as a trader, develop a trading strategy, test out your strategy, refine it, and finally keep your composure by staying disciplined.

Finally, we gave you a few extra tips, going over the pros and cons of becoming a trader to make sure you are well-informed about the pitfalls that most traders experience. We also touched on some of the terminologies that you should familiarize yourself with.

Trading has the potential to make you wealthy, but the hard reality is that only a few people will ever achieve financial freedom through trading. However, if you believe in yourself, study hard, practice sound risk management principles, and discover your edge in the market, the sky is the limit. Understanding financial markets requires a lot of hard work and dedication.

As a trader, you’re trying to profit from the buying and selling of different financial instruments. You’re dealing with probabilities, never certainties. This means that when you’re trading there is always the possibility of a loss and there is no such thing as 100% winning in trading.

Ultimately, understanding financial markets is a skill that can be acquired by anyone who puts in the time and practice. There is a boatload of information to learn about what is trading, but you’ll get better by educating yourself, practicing more, constantly improving, and doing more of what works and less of what doesn’t.

What Is Trading Video

Please watch the following video to add to your training on better understanding financial markets.

Further Reading:

You can also check out our podcast episode where we provide you with a great beginner’s guide to trading.

Thank you for reading!

Please leave a comment below if you have any questions about What is Trading and Understanding Financial Markets!

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Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. No information or opinion contained on this site should be taken as a solicitation or offer to buy or sell any currency, equity or other financial instruments or services. Past performance is no indication or guarantee of future performance.