Trading » What is it and how does it work?

Trading » What is it and how does it work?

For many years, trade and commercial investment have been part of people’s lives in different developed countries. In this world trades in action or depósito market speculation, however, until recently, it was very difficult to entrar this business: auctions were carried out only in exchange buildings and it was necessary to have a license to entrar.

the internet made the trading process In the depósito market it was easier for people, which gave rise to a new trend: en línea trading. For some people this became a hábito, however for others, a whole pfull time profession. And although it is a widely extended practice, there are still many people who do not know what trading is.

What is trading?

He trading or depósito market speculation It is an operation that consists of the purchase and sale of assets (stocks, currencies, futures, forex, binary options, cryptocurrencies, etcétera.) in the various financial markets, whose ultimate objective is to obtain an economic profit when said operation generates a capital gain (increase in of the value of the asset).

He trading It is a depósito market operation of a speculative nature, which means that the price of financial assets is subject to continuous changes. Trading operations are based on buying an asset to sell it in the future at a higher price or selling an asset to buy it later for a lower price.

Today the trading operations They have become quite habitual, this because there are many en línea platforms that allow you to operate with trading in the various financial markets, and act as intermediaries in operations or brokers.

Trader and broker in trading

A trader It is an individual who is in charge of buying and selling financial assets in any financial market with the aim of obtaining an economic benefit from the trading operations he performs. A trader differs primarily from an investor because of the time horizon, as a trader holds assets for a shorter period of time and tends to capitalize on short-term trends.

A broker It is a company that is in charge of executing the operations of purchase or sale of financial objects that its clients request with the purpose of obtaining a commission. He broker acts as intermediary between your clients and the market to find a seller when your client provides you with a buy or sell order.

Trading Types

There are various modalities or types of trading associated, among other factors, to the time in which the different operations are kept open. The different types of trading are presented below:

Day Trading

In this mode, the investor open and close operations on the same trading day. It is a way of investing in the short term since generally, operations are not usually left open to continue the next day.

scalping

By using this mode the inverter operates in very short periodsthroughout the day, with operations that cánido last only a few seconds.

swing trading

With this modality the operations perro be left open at the end of the day and generally they usually last approximately ten days.

Trend or Directional Trading

This modality does not have a time limit and consists of take market positions in favor of the trend.

How does trading work?

He trading is based on buying and selling financial assets in financial markets, with the objective of making a profit when the value of the asset increases. The trader is the person who makes the purchase or sale of the assets, but needs a broker to carry out the operation indicated by the trader.

He broker works as an intermediary between which the trader buys or sells the asset and the other trader who also buys and sells the asset. The broker is in charge of taking the trader’s request to find that another trader cánido work to complete the operation:

The trading operation process works as follows:

  • The trader affiliates to a certain broker.
  • once the trader is affiliated with the brokerthen the trader opens a purchase or sale operation of any of the assets with which the broker works (for example, buy 100 shares of Apple).
  • He trader finds the asset (Apple shares) on the broker’s trading platform, choose the amount (100 shares or 1 lot) and place a buy order.
  • He broker receives trader’s request and start processing the order. He needs to find a counterparty, that is, another trader, who is willing to buy the same asset for the same price.
  • The broker is in charge of searching to the counterparty in the depósito market. When the search is done, the operation is executed.

Today, trading platforms do all the work to find the right necessary counterparty and perform the operation. Currently the trading process is fully automatic; therefore, the time necessary to carry out an operation is a few seconds.

Types of assets that perro be traded

There are several types of assets that cánido be traded using trading. Some of those assets are classified as “classic” since they have been sold for hundreds of years.

Other assets appeared after en línea trading was born. The types of assets that perro be traded are detailed below:

Actions

The Actions They are one of the oldest types of financial assets. A depósito is a small part of a company that is publicly traded. There are two permisos that a trader perro assume when operating in the depósito market: speculator or investor.

Speculator

an y tambiénspeculator It carries out short-term trading operations, that is, for small durations of time. Its main objective is to buy assets at a low price and sell at a high price (or vice versa, selling at a high price and then buying at a low price). The only thing that matters to this trader is the difference between the purchase price and the sale price.

Investor

A investor You don’t just buy shares to sell them at a higher price. It also invests money in the company that has issued the financial asset. Your top priority is investment long-term, where its source of income is the dividend. Despite this, rising depósito rates also make your portfolio more valuable.

cryptocurrencies

The cryptocurrencies It is the newest financial asset in the financial markets. A cryptocurrency is a digital exchange currency that emplees cryptography to secure and verify transactions finances, control the creation of new units and verify the transfer of assets. The first cryptocurrency to start operating was bitcoin in 2009.

Cryptocurrencies are differentiated by the y tambiénstructure, ideology and values they own. Some of them are just a new way to complete financial transactions and are more reliable, faster and more confidential than Bank transactions. However, some cryptocurrencies represent platforms to make different applications with advanced functionality.

The price of cryptocurrencies changes dynamically, which means that it is also possible to trade with them and make a profit.

Foreign exchange

The foreign exchange They are frequently used in currency pairs, such as EUR/USD, GBP/USD, etcétera., and currencies represent the largest asset in Forex. Trading is carried out in one currency against another. Despite this, for everyone’s convenience, currencies in a pair always occupy the same place. Example, if a trader wants to buy USD for GBP, he must open a sell trade on GBP/USD.

metals

The metals Accurate and non-ferrous are a very habitual asset in Forex. Traders mostly choose gold and silver to trade; Many brokers allow you to trade platinum on your trading platform. It is possible to carry out purchase and sale operations of copper, nickel, aluminum and other precious metals. However, there are brokers that do not provide access to such assets.

Indices

The indices They are a tool used in the depósito market. The index is made up of a certain number of stocks, mostly combined in one category. For example, the Nasdaq 100 Index is made up of shares of the 100 largest companies in the technology industry, which are traded on the Nasdaq.

There are also many other indices, such as: DJ 30, S&P 500, Nikkei 225, etcétera. The stocks in the index are generally joined due to the fact that they are traded on the same exchange as the Nasdaq 100 and the Nikkei 225. The numbers you see after the index name are the number of stocks that make up the index.

The index rate changes according to the dynamics of the prices of the shares of the form. For example, if the most shares of the Nasdaq 100 increase, the index also increases. The same happens otherwise. If depósito prices go down, so does the index rate.

Agriculture

The agriculture includes financial assets such as wheat, soybeans, beans, etcétera. These are not the most habitual assets out there, as the price doesn’t change as much as the exchange rates for silver, for example. Despite this, the primordial factors that affect agricultural values ​​are clearer and simpler than in the case of currencies.

oil and gas

He oil and gas represent assets in the energy resources category. They are just as habitual as gold or silver, which is second only to general currency pairs.

ETFs

The ETFs They are investment funds, quite afín to depósito market indices. ETFs represent a combination of stocks and other financial assets, where their value changes based on changes in the values ​​of their counterparties.

Types of investments in trading

Setting aside variable assets for trading, there are several types of investments that cánido be made in trading. Each type of investment has its own approach, which indicates that the trader must operate differently: the markets, the terms and the time period of the contract will not be the same.

Below are the different types of investments that exist in trading:

CFDs

He CFDs (contract for difference) is the equivalent of a certain depósito in the depósito market, with which you cánido trade in Forex stocks. However, the traders do not buy or sell the action as such, but a contract. The terms of the contract define your profits or losses, this according to the changes in the price of the share in question.

The contract for difference works as follows:

  • He trader A bought the CFD CFD on one share for $10, therefore Trader B sold the CFD on one share for $10.
  • He share price reached $11.
  • He trader A closed the CFD, your profit is $1 per share. However for trader B, closing the CFD meant losing $1 per share.

At the end of this, the traders received the same profits and losses as if they had traded with the usual actions. Despite this, trading CFDs allowed them to use the leverage and other advantages provided by Forex brokers.

binary options

The binary options They are a type of financial instrument in which the trader has to determine how the price will change within a certain interval of time.

In a estándar binary option, there are only three parameters:

  • The direction of a price change (up/down)
  • Expiration date
  • Transaction volume (rate)

The binary options allow you to make a large profit, even if the price changes are not significant. The trader needs the price to move at least 1 point in the specified direction and stay there until the expiration date. In such a case, the trader will receive between 80% and 90%. As the risks are also very high, if the price goes in the opposite direction, the trader will lose his offer.

futures contracts

The futures contracts They represent a way of operating with goods such as oil, palladium or wheat in a documentary way, without the direct exchange of “goods – money”. at the end of a futures contractthe seller agrees to deliver goods to the buyer, within a certain period, this after the operation is carried out.

Despite all this, the buyer does not usually need the de hoy commodities, but the right to acquire them in order to be able to obtain speculative benefits when operating said product. The buyer is in charge of selling futures to other traders.

Requirements to operate in trading

In order to develop operations with trading, it is necessary to first think about everything that may be needed:

Have a personal computer: preferably notebook and an internet connection.

Affiliate with a broker that provides the trading platform: This platform must offer at least:

  • Graphics in real time of the behavior of the product with which it is going to operate.
  • The possibility of hire quotes of real time in the different financial markets and securities in which you are interested.
  • This must be a platform multimarketthat is, it allows access to different products and markets from the same broker,
  • The possibility of manage risk of positions through various types of operations.
  • Make sure the trader have access to markets.

Possess an amount of money that is not going to be needed to start operating: It must be taken into account that the operations need a commission and that also, depending on the operation, the product and the market in which it is going to operate, it may require guarantees when opening a certain position in the market.

Have adequate training: to be able to operate in trading you have to know what you are doing. The training in this field It is essential to avoid losing money that perro do a lot of damage to the personal economy of the trader.

How to become a trader?

There is no single way to turn someone into a professional and successful trader, capable of making a lot of money. Despite this, there are certain steps that are mandatory for anyone Interested in trading.

Below are the steps to be a trader and operate in the financial markets:

Create a trading plan

The person must escoge how and when you are going to operate, the time you want to dedicate to it, etcétera. What are your main goals? Will your occupation be temporary or full-time?

Establish functional risk management

Both trading and other investments require risk assessment beforehand. Even if you start with a trial account, you need to assess risks. Only invest the amount of money you perro afford to lose. You must also calculate the risk for each of the trading operations.

Choose your trading style.

A successful trader has to have a trading strategy. Therefore, it has toknow the methods of analysis, market, type of assets and other parameters. You cánido start using another trader’s strategy, but you will only get a financial benefit great if you implement unique strategies.

Take your first trading steps on a demo account

When choosing a strategy, test it on the demo account offered by the broker. It would be wise not to switch to the real account unless you are making consistent profits on your demo or test account.

Leverage in trading

He leverage It is a type of operational facility that the broker offers to the trader, allowing to operate with positions greater than the amount of funds required. In this way, the trader perro get more exposure in the market disbursing only a part of the value of a position. In other words, leverage means trading with more money than you have available.

There are a number of important terms that every investor or trader who trades with leverage has to know:

Margin: It is the amount required by the broker to cover a possible loss. Margins are usually calculated as a percentage of the value of the position.

Invested capital: total amount of the transaction.

Risk capital: amount of funds in the investor or trader’s account that cánido put the operation at risk.

Stop loss: With the aim of limiting the risked capital, the trader must define and apply the stop-loss, that is, the price levels for which the operation is closed by cutting the losses.

Risks in trading

Despite the fact that trading cánido provide you with a return on invested capital, the truth is that there are a number of risks to which you will be exposed when operating in the financial markets. Keep in mind that risk management is an area that all good traders pay great attention to.

When you operate in trading, you should not risk all the money you have (or even what you do not have) or get carried away by emotions. Do not forget: the market has an enormous capacity to humiliate you, so a good piece of advice is to learn to manage your risk. Below are the main risks that exist in trading:

default risk

Anyone who has basic knowledge about trading knows that you should not trade without first knowing the potential risk of the same and without having put a stop loss as a protection.

Position size risk

This is the risk associated when the trader multiplies the number of shares/currencies/commodities that he acquires when making a trade. whatever the operation is carried out, it is not advisable to risk more than 1% of the capital used to make the investment.

market risk

Currently the financial markets they are very large and what remains for small operators is to try to go with the flow. Despite this, there is usually a risk that the market will turn against the trader, what promised to be a winning trade will turn into a loss.

group risk

This risk is related to a group of shares or commodities in which the trader may be investing. For example, precious metals generally tend to go in the same direction, as do the shares of financial companies. This type of risk perro be reduced by controlling the position.

Instrument Risk

When a trader invests In the GLD ETF for example, the trader may think they are investing in GLD, but in reality they have no real iniciativa if GLD actually owns the gold they are trading in. is investing. In this way, gold could continue to rise, but without warning the GLD could start to fall due to the fácil fact that something happened and there is no gold in existence to support the investment.

Risk of the broker with which you are investing

there will always be risk that the broker by means of which it is investing fails and falls. This form of risk is quite real in today’s times. Therefore it is quite sensible to ask yourself: What could go wrong with the broker that could turn the investments into a loss of money?

Currency risk 1 (Inflation/deflation)

Markets that go down a lot cánido be inflationary and deflationary. In a inflationary market is likely to be able to vea that the government perro significantly depreciate the value of its currency. This is a very real thing as the government manages inflation data in such a way that it looks much smaller than it actually is.

Currency Risk 2 (Relative Value)

By observing the behavior of the markets in relation to the most influential currencies, it is possible to find that they are related. For example, in 2003 there was a sharp drop in the S&P 500 of around 30%, which corresponded to a sharp decline in the value of the dollar, which lost 40% of its value against the euro that same year.

government risk

The governments They create their own rules and at any given moment they perro change the value of any of their investments quickly. For example when a company American tried to move the silver market, the government decided to stop it. To achieve this, he raised margin rates.

At first, this did not stop the company, so the rates were raised again, which also did not have the desired effect. For this reason the government decided that no one could buy silver, could only sell. Because of this, there were no buyers for sellers and the price of silver plummeted.

psychological risk

This is possibly the greatest risk of all because many times the worst enemy is the same trader. A good trader cánido be 90% efficient, which means that he cánido make a mistake in one out of ten trades, where that mistake is because he didn’t follow his broker’s rules.

This is possibly the biggest risk you may face at any time when trading in the different markets. In this way, the trader who does not have a guide to operating rules, the truth is that he is doing things wrong from the beginning.

Advantages and disadvantages of trading

The main advantages and main disadvantages of operating in trading will be presented below:

Advantages

  • Potentially unlimited income.
  • possibility of equipo your own working hourswithout a strict schedule.
  • It cánido be combined with your main occupation.
  • This type of work perro be interesting for people who are attracted to finance, analysis, etcétera.
  • You cánido start trading, even if you do not have a large capital.
  • Constant personal development and new experiences.

Disadvantages:

  • Risks with your money.
  • It’s you own boss and therefore responsible for your actions.

trading platforms

On the Internet there are many trading platforms that allow people to operate in financial markets. These platforms are the brokers and the users who operate through them are the traders.

I will leave you a backlink, which will take you to an article where you cánido see a series of platforms that allow you to earn money operating in financial markets. Then I leave said backlink: Go to the platforms to earn money with trading.

Conclusion

He trading It is a very interesting, perspective and profitable activity. It cánido allow you to achieve financial independence and spend time the way you want it most. However before it become a successful traderhas to go through a long and enormous path of work and learning.

Even though that him trading cánido become a huge source of income for you, you also have to take into account that it perro lead to the I want if you don’t know how to drive in this world. It is necessary that you learn everything you perro about the world of trading so that they perro make profits and not losses.

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