Each and every active online user probably came across with the term of “trading”. It’s quite difficult to find a topic on the Internet, which could cause such heated discussions and questionable reviews. Some think trading is another way to make money with unsuspecting people, while others gain considerably and avoid arguments. So, let’s make it clear: what is trading? Can it become a full-value income source? We are to give all the answers.
1. Trading: the term and a bit of history.First things first!
2. Advantages of tradiAny pitfalls?ng!
3. Classification criteria of trading
4. What do traders trade? IMPORTANT!
5. Analysis as the base for high profits!
What is trading: the essence and some history!
Trading is the process of purchasing securities with a view to further selling them to gain profits by means of the rate difference. A simple principle lies in the basement of a complex term: buying cheaper, selling at higher. However, one should not believe it’s all that simple. Trading constitutes a science field! Today, lots of universities have the “Exchange and Trading” specialties. Traders study for 5 years, while you have an opportunity to receive free training with us.
We need to note that online trading has been mostly commonly used for the last decade. First grounds of the stock-exchange industry appeared in far back in the past in 14th century, in Italy. Surely, we speak of no Internet. Deals with securities were made during trading sessions in the so-called exchange pit. It has always been the case before late 20th century. Of course, trading has always used the most advanced communication means, such as telephone or telegraph for quickest possible information transmitting from a trader to a broker. However, the emergence of the Internet dramatically modified the exchange business.
An exchange is the venue of a seller and buyer of trading assets (commodities, raw materials, currency). Previously, it was a place where concerned parties met and made trading deals. In today’s world, there is no need in personal meetings. Deals with securities are made immediately by means of the Internet and special software.
It was the worldwide distribution of the Internet that made trading accessible for everybody. This led to lots of advertisements that had never existed before. Just 20 years ago, speculations on securities were available either for major companies, or for extremely wealthy individual traders. Today, anyone who will take the trouble, can quickly get access to the exchange, make deals, form and cancel orders – as many times as they would desire, without calling a broker.
Pros and cons of trading!
As we already mentioned, opinions regarding trading are wide asunder as pole and pole. So, we will try to objectively assess advantages and drawbacks of such activity, in order to form the opinion based on impersonal facts.
- To start working, it’s enough to have an online-connected device and strong desire.
- A trader is not bound by any schedule or place of work.
- Diversity of trade assets: securities, currency pairs, commodities, raw materials, binary options.
- Income is not limited. How many a trader can earn, depends on them only, namely on persistency, knowledge, skills, time invested.
- This activity lacks disadvantages that a hired-labor job has: no boss, no collective (you probably know it’s difficult to get along with everybody sometimes), labor code regulations.
- High risks associated with the fact that it’s impossible to forecast an asset price with 100% accuracy.
- One must learn. Surely, we don’t speak of higher education. It would be sufficient to complete specific courses, or study materials provided by a broker, or find some literature.
- Not suitable for everybody. Gamblers must not engage in trading, as no-worry-next-time-luck attitude is inappropriate when working with securities, binary options, and other trade assets. Each and every decision must be elaborate and grounded.
- Initial investments required. Of course, the amount may be not extremely high, though, professionals insist on investing at least $200 to apply money management rules more efficiently. Read more in the article Money Management: All a Trader Needs to Know About Risk Control! Key Rules and Common Beginner’s Missteps!.
As you can see, it has something to do with. What is trading? It’s an activity that requires highest possible contribution of skills and time, because its outcome depends on efforts made!
What is trading: 3 classification criteria!
Usually, trading classification includes 3 parameters: party, term, and place. Let’s dive into each one!
Criterion 1. Deals may be made by corporations, individuals, and specialized companies. They are parties of the exchange industry. With reference to that, we have three types of trading.
Corporate trading is trading, where deals are made on behalf of a company (legal entity). Individual trading stands for making deals with securities or other assets by individuals through intermediaries (brokers) with a view to getting profits from the rate difference. Professional trading means mediatory activity subject to licensing. For instance, a broker is a market professional. It carries out its activities based on permissions and licenses.
Criterion 2. Here, we are to consider types of trading depending on the terms of order opening.
Daily trading is trading where deals are made within a day, i.e. an opened order is closed within 24 hours. Daily trading gives high profits, but it is unsuitable for beginners, as it requires high concentration, deep theoretical knowledge, and practical skills. The exception applies when we speak of novice traders that have perfectly honed their skills on demo accounts.
Extreme attractiveness of daily trading led to emergence of a separate field of its analysis and development of strategies showing high profitability when making deals within a one day.
Position trading stands for opening orders for no more than several days. This is the best way for beginner traders, as there is no need in rapid decision-making, one has time to analyze the situation thoroughly.
Middle-term trading assumes making a few deals per year. Curiously enough, this type is quite popular. In fact, it can provide good profits to make along with the main job or another activity!
The distinctive feature of investment trading is that deals are made too rarely – once in a few years. What’s the core? Money is invested in securities of successful companies excepted to gain their cost. For instance, people buy General Motors’ shares.
Criterion 3. The last classification characteristic is the place of trading!
It’s too simple with it! Deals can be made in the exchange pit (trading floor), or via the Internet. The latter is the modern way of trading, which has already mostly replaced the traditional one.
What to trade: 6 key trading instruments!
The subject of trading is a trading instrument. Individual traders mostly use securities, currency, or binary options.
Share is a security which confirms your right to issuing company’s interest according to this share (usually, this part is very small). In order to acquire the power in the company or become a member of the Board of Directors, it’s not enough to buy a one or several shares. Company’s Charter usually prescribes the number of shares to buy in order to acquire such authorities. However, just a few shares would be sufficient for making money through online trading.
Bonds are another type of securities. However, it proves the right not to the part of a company, but to claim the certain amount with interest from it. You previously contributed this amount to the company, while a bond was the confirmation of the fact.
Futures are more complicated. These securities constitute a contract for buying/selling an asset at the certain time and price. Don’t think a trader will truly have to sell or buy something. Futures are traded the same way as bonds. Profits are also formed from the price difference.
Options are the derivative of futures. The only difference is that they give the right to buy an asset, but not oblige to do it. They still argue whether options have the right to belong to securities. American traders qualify them as securities, while Russian traders do not.
Binary options are a kind of options. Actually, they are not an asset but a way of trading. Most call binary options as the simplified version of Forex. The main feature of such options is that they are traded not via exchanges, but through special trading platforms provided by brokers. Bintrader is one of today’s market leaders.
Why “simplified version”? Just because trading binary options, one has to forecast the price movement only, predicting whether it will grow or fall. A good deal can bring 65-90% profits from the amount invested. This video is to significantly help you in mastering the topic>>>
For beginner traders, the ultimate feature of binary options is that one doesn’t have to possess deep, deep knowledge to start trading. Binary options are one of the simplest instruments, that more and more traders prefer from year to year.
Currency pairs are the trade instrument reflecting the price of one currency expressed in terms of another. For instance, expressing euro through dollar, we get the EUR/USD currency pair. For these assets, there is a special trading platform – Forex. The name speaks for itself – foreign exchange.
It can be really tough for a novice to choose a trade instrument. On should consider two key characteristics: volatility and liquidity. Based on two of them, experienced traders make decisions on trading a certain asset.
Volatility is the level of asset price oscillation. The stronger and more often a price oscillates, the higher is the chance to make money with the rate difference. Especially if we speak of daily trading. Liquidity is the ability of an asset to be exchanged for money (be sold) at the price close to market average. If an asset price always changes and lots of deals are made on this asset, then it’s totally possible to make money with it.
Analysis as the essential of successful trading!
What is trading? It’s clear now. What to trade? It is as well. The only question left is HOW TO trade. As I told you, the principle of the matter is very simple: buy at a lower price, and sell at a higher. For instance, a trader bought 5 ROSN shares, $5.2 each, and sold them at $5.5 per share. The profit is ¢15 ((5.5-5.2)*5). However, it is quite different with binary options. A trader invests $200, opens a call order. If the forecast is correct and the price rises, a trader will gain at least $130. The picture illustrates a perfect situation to enter and quit the market.
Though, the delicacy of trading is to correctly forecast the price movement, because it may occur so that a trader would need to sell shares at $5.0 each. Thus, the loss would be ¢15! If the binary option price is incorrectly forecasted, the loss will equal the deal amount ($200).
Three types analysis are used to make correct forecasts:
All types of analysis fit either classic trade instruments or binary options, as they follow the same price movement laws.
- Technical analysis is a trader’s most important weapon. Technical analysis gives 80% information about the current market state and how a price will move in the nearest future. Some trading gurus state technical analysis is capable of replacing all other types of analysis. It uses lots of numerous indicators, levels, and indices. This topic is more thoroughly detailed in the article Technical Analysis: 3 Postulates, Types of Chart + TOP 8 Analysis Methods!
- Fundamental analysis stands for forecasting the market situation based on analysis of the internal and external environment of the company, securities of which a trader works with. The attention is paid to such information as the new top management, published reports, etc. Speaking of the macroenvironment, recently adopted laws that can affect company activity, economy, etc., do make sense. As for currency pairs, the note is taken on any news that may significantly affect the ratio between currencies. In the article Beginner Strategy #2: Watching News and Earning!, we have the end-to-end instruction for using financial news when trading binary options.
- Fundamental analysis dramatically simplifies decision-making and assists in correct interpreting data of price charts, indicators, and indices.
Intuitive analysis is the top class in trading. Only those traders are capable of performing it, who can extremely rapidly analyze the situation by virtue of their knowledge and experience.
Each trader chooses most preferable methods and ways of analyzing to apply in trading based on features of assets, deal terms, exchange type, and personal feelings. This is what we call a trading strategy. There are some ready-made strategies finished for a certain trading instrument or timeframe (period of time, for which a one price chart element is drawn). For instance, Trend Reversal Strategy for binary options.
Now you know what trading is. To finish the article, I would like to add that individual traders cannot get direct access to the exchange. According to legislation of most countries, trading is possible only through a broker to perform operations on your behalf. Trading binary options significantly simplifies trading, as deals are made without entering the exchange. In order to interact with a broker, one doesn’t have to open a bank account. Deposit replenishment and profit withdrawal are possible by means of any payment system.