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What is trading? – ForTrader.org financial magazine


If you have ever seen graphs of the dynamics of financial instruments for trading (currency pairs, stocks, futures, etc.), then you asked yourself: “How can you make money on this? Trading – what is it?“. The short answer to this question is: “Buy when the price starts to rise and sell when it starts to decline.” It would seem that everything is easy and simple!

But then the question arises: “How to understand that the price has started to rise or fall?“. And this, in fact, is one of the most important questions in trading.

Trading in simple wordsThanks to scientific and technological progress, the modern trader has a fairly solid arsenal of methods and technical devices for the operational analysis of the market situation. But if we put all computers or supercomputers into the background, then the bottom line is the trader-investor himself, his personal vision of the current situation and the need to make informed decisions on the deals being opened. But do all traders make decisions based on the analysis of events, macroeconomic indicators and charts? No, not all.

A certain part of forex traders can be called such only conditionally for the reason that their approach to trading in financial markets is more like gambling in a casino. Their trading is based on emotional impulses: thirst to play and win, greed, expectation of justification of their hopes and the desire to get rich quick… Thus, a natural question arises: “Can this approach be called trading?” Obviously, for them this is just another kind of gambling with trading elements.

What is Trading?

Trading - what is it

Without going into details, then in simple terms of trading (from English trading) can be called the process of making transactions to buy and sell in the financial markets in order to make a profit. In fact, it all comes down to choosing the most likely direction of the market movement. By pressing the “Buy” button, you select a buyer’s position and expect the instrument to rise in price, and by clicking the “Sell” button, you become a seller expecting a decrease in the price of the instrument. But trading is a multi-layered pie.

In addition to technical actions with buttons, the remaining 99.9% of the entire trading process falls on

  • selection of an instrument for trading,
  • consideration of the current market situation,
  • analysis of the accompanying factors developing around a trading instrument, taking into account long-term and short-term price dynamics,
  • determination of the tactics of opening a trade and target levels for exiting with a profit or for limiting losses,
  • as well as a banal expectation.

If there is nothing difficult with pressing buttons and waiting for the moments of entering and exiting a trade, then a lot of questions can arise with the development of a trading idea. Next, we will consider the most popular analysis methods, tactical techniques, risk and money management systems that are used by traders in their daily work. In order for beginners to understand the general picture of the trading world, we structure a number of its individual components.

Types of traders: predictors, stochastics, trend traders

Trading

All traders can be roughly divided into 2 separate camps: predictor traders (“stochastics”) and trend traders.

Predictor traders are investors who use in their trading various subjective methods of assessing and calculating future price movements. Their overconfidence in many situations makes them wishful thinking. This feature often plays a cruel joke with them, preventing them from completing a losing deal on time, and also prevents them from getting rid of their own “status quo”.

But be that as it may, stochastic traders make up the majority in the world of stock exchanges, as they are haloed with an aura of mystery, as if endowed with the gift of foreseeing market movements. The main secret of skilled stochastic traders lies in the ability to work correctly with the tools and indicators of statistical analysis and forecasting, honed by years of practice, but by no means a gift from above.

Almost the opposite picture is observed with trend traders – this is how speculators are called who open deals within the dominant trends and accompany them until the end of the intra-trend impulse. They are not inclined to resort to careful forecasting, trying to move along the market with the price and allowing profits to grow. The successes of their activities are little known, since they are not shrouded in myths, legends or mysterious phenomena. Their work may seem like a boring monotonous routine, but this is only in the eyes of a common man in the street. In fact, their trading skills are sometimes so perfect that one can involuntarily doubt the tremendous performance that they achieve with its help.

Time traders

In addition to these categories, traders can also be divided according to their time trading patterns, that is, according to the duration of their transactions. Here there is a division into speculative traders and investor traders.

Types of traders

  • Under the term “Trader-speculator” usually referring to a trader who plans and holds trades in the market for a period ranging from a few minutes to several weeks.
  • Investor traders, in turn, place their transactions on the exchange for a period from one to two months to several years.

Such a parameter as the holding time of transactions in the market can indicate the psychotype of a trader, his attitude to risks, and the ability to plan his trading activities. Traders-speculators can be roughly divided into scalpers, day traders and medium-term traders.

  • Scalper traders prefer to conclude a large number of transactions in a short trading period in order to make a profit on small (from 1 to 10 points) impulse price movements.
  • Day traders usually work exclusively within 1 trading day and make from one to several transactions in such a way that they are not carried over to the next trading session.
  • Medium term traders can open simultaneously from one to several transactions, keeping them in the market from several days to several weeks.

The time spent by the open deal in the market does not have a particular effect on the effectiveness of trading, since the effectiveness of such a trading strategy depends to a greater extent on the practical skills and skill of the trader.

Types and techniques of market analysis

Trading and forecasting

Fundamental analysis and technical analysis are the main popular market research methods.

Fundamental analysis is a method for predicting the further development of the price dynamics of a certain asset in the market by studying the micro- and macro-economic indicators associated with the asset.

They are:

  • GDP levels,
  • industrial production,
  • inflation,
  • unemployment,
  • business activity indices
  • other.

This method of analysis is mainly used by medium-term traders and investors, as it allows you to work more efficiently in a long-term time frame. In the short term, this trading method is most often used by day traders who are engaged in news trading. They track the publication of important economic statistics, trading volatile price movements at the time of publication of important data.

Other traders can also sometimes use some elements of fundamental analysis, but usually it comes down to tracking news and economic events. Many traders call the main disadvantages of fundamental analysis a high subjectivity in the assessment and interpretation of data, as well as a low predictability of the market reaction to news in the short term.

Concerning technical analysis, then many traders consider it a more convenient and effective way to organize market (price) data. Many traders work solely on the basis of technical analysis methods.

Technical analysis is called a method of predicting price dynamics in trading, based on the study of price movements in the past.

Thus, we can say that both technical and fundamental analysis are based on statistical patterns of repetitive movements in the market.

Today, the direction of technical analysis has a lot of branches. Its most popular varieties are:

  • graphic,
  • computer,
  • Elliott wave,
  • analysis according to the “Trading chaos” system.

The latter allows not only to determine the dominant trend of the long-term or short-term plan, but also can suggest a price level favorable for making buy or sell transactions. Computer or indicator analysis can boast of being the basis for a huge number of trading strategies – certain algorithms of actions performed by traders in the market. But it should also be noted that a trading strategy can be based not only on fundamental or technical analysis, but also on mathematical trading methods, so it is worth distinguishing between market analysis methods and trading methods.

What can a trading strategy consist of?

Trading strategy

Trading strategy in trading, it must determine the moment, price and circumstances for the transaction. It also determines the target zones for exiting a trade with a profit and a way to exit a losing trade. In this case, the strategy may provide for the conditions for maximizing the profit from investments in transactions, including the optimization of risks for each individual transaction or for the entire aggregate position. We can say that the main elements of a trading strategy that ensure the effectiveness of trading are money and risk management systems.

Perhaps many of you reading these lines have heard of such a concept as “Martingale”. Martingale is a model of mathematical management of trading positions, which came to the trading field from gambling establishments. It involves doubling the size of the trade after closing the previous one with a loss. Many traders use this approach, following the lead of “player psychology”. In our opinion, it is wrong to use gambling methods to work in financial markets without adapting to the conditions of a non-linear market environment.

But if you have already developed the skill of analyzing the market situation, you have studied all the technical indicators, mastered many trading strategies and developed your own system for managing trading funds and risks, then the only thing you still need to work well in the market is discipline. Perhaps this particular element is the main factor in a trader’s success.

So, what is trading? As you can see, this is a collective concept of Internet trading in markets and exchanges, where the decision to buy or sell an asset is made by a trader, relying on trading strategies and methods of analysis and forecasting in order to earn the maximum return on investment. It sounds simple, but it actually takes practice and knowledge.

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