What is Trading?
In today’s modern society almost everybody of us has been involved in trading in one way or the other without even knowing that we have done so. In reality, every process of exchanging money for the goods and services you want is essentially called “trading.” Trading the financial market is more or less the same thing.
Take for example the process of exchanging one currency to another. You might not be looking to speculate on the Forex exchange fluctuation but you might need to buy some euros for your Paris trip. In essence, you’ll need to sell your US dollars in exchange for euros. If you have foreign cash left, respectively euros, at the end of your Paris trip you might want to exchange them back into US dollar.
By the time your Paris trip ends, the EUR/USD exchange rate has been increasing considerably, which means that your euros can buy more US dollars than it was possible at the beginning of your Paris trip. This is good news as you have not just enjoyed a wonderful vacation, but at the same time, you have also profited from the Forex exchange rate fluctuation.
In essence, this is what Forex trading is all about, buying and selling currencies in the hope to make a profit from these exchange rate fluctuations.
When you buy shares of a company you’re engaging in another type of trading activity. Basically, you buy a part of that company and if the company’s stock price rise the shares you bought will become more valuable. If you decide to sell the share you bought, now that the company’s stock price has risen substantially, you can make a nice profit from this transaction.
By now, it’s quite obvious that the main incentive for any type of trading activity is primarily to make a profit. The majority of the trading activity that goes in all markets is purely speculative because the opportunity to make big money draws millions of people into trading the financial markets.
What Financial Instruments You Can Trade?
There is a variety of different financial instruments and asset classes that one can trade. You can trade anything from shares, bonds, Forex currencies, commodities and much more derivative instruments. This means that there are a lot of trading opportunities by 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 in order 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 a fierce competition and against the brightest minds which is one of the reasons why trading is such a hard business.
What is online trading?
Thanks to the modern technology everybody can now have access to the financial market at one’s fingertips. It has never been that easy to have access to the financial markets and anyone who has a computer and enough money to open a trading account can access the markets through online trading platforms.
It’s true that the markets have become more accessible but there is a high risk involved with any type of financial instruments. If you don’t have a good ability to read the markets or a proven backtested strategy, at least in the Forex market, there is a danger of losing more than just your initial deposit.
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 case of some of the Forex brokers.
Different Types of Trading Styles
There are different types of trading styles. Some traders only stick to a particular instrument or asset class, while others have a more diverse portfolio. Trading the news and financial reports is another form of trading style adopted by many traders.
Other traders based their decision based on statistical trends. Some take lots of trading positions, opening and closing trades in a matter of hours and even minutes, this is called day trading and scalping. There are also people who take a more long-term view, and hold assets for months and years, which is more of a form of investing.
No matter of what trading style you adopt you want to make sure your trading style suits your personality. If you’re impatient that seeks instant gratification adopting a short-term style will probably work best for you. However, if you’re a slow thinker probably a swing trading approach will work better for you as it will give you enough time to plan your trades.
Advantages of Trading the Financial Markets
The main 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 like it is the case with many of the Forex brokers who offer leverage and trading on margin, or you can open a stock trading account with as low as $5000.
You can reinvest all your profits in an attempt to make even more profits. In the financial world, this process is called compounding. So, generating profits from previous profits refers to compounding.
Trading has the potential to make you very rich, but the hard reality is that only a few people will ever achieve financial freedom through trading. However, if you believe in yourself and you’re able to discover an edge in the market, the sky is the limit. Trading requires a lot of hard work and dedication and last but not least a unique way to tackle the market.
Markets like the Forex exchange market offers even greater advantages. Just to name a few you have leverage which gives you the power to control bigger positions; the FX market is open around the clock 24 hours per day, five days per week; high liquidity and lower transaction cost.
The process of buying and selling different financial instruments, it’s what we simply call Trading. AS a trader you’re trying to profit from the buying and selling of the different financial instruments. In trading 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, trading is a skill that can be acquired by anyone who puts in the time and practice. You’ll get better at trading by trading more; constantly improving; doing more of what works and doing less of what doesn’t work.
Thank you for reading!