What is trading in general?
In general, trading is a basic economic concept that involves the buying and selling of goods or services, with the buyer providing compensation to the seller, or the exchange of goods or services between the two parties. Trade can occur within an economy between producers and consumers. International trade allows countries to expand markets for goods and services that otherwise might not have been available. This is why, for example, a consumer can choose between an American, Japanese, or European car. As a result of this freedom, there is more competition in the market and therefore more competitive prices, so the consumer usually gets a cheaper product.
In financial markets, trading refers to the buying and selling of securities, such as buying stocks on the New York Stock Exchange (NYSE), NASDAQ, or exchanging one currency for another.
The most important aspects of trading
It's trading, not investing!
Investing means you buy stocks or other assets to hold for the long term. In (day)trading, you buy the biggest stocks in the world and other popular markets, usually through different assets and the holding time is anywhere between a few seconds and and a few weeks.
What assets can you trade?
When trading, you can open positions in many different asset classes, such as stocks, indices, bonds, currencies, commodities and cryptocurrencies.
You profit from rising and falling prices!
With trading, you can profit from rising or falling prices. You can make money on both sides. Buy an asset to go long (when you think the price will rise) or sell an asset to go short (when you think the price will fall).
Use leverage to your advantage!
Some of the trading methods are leveraged. This means that you can take larger positions with a small amount of capital. You only have to put up a fraction of the total cost of the assets. You “borrow” the rest of the capital from your broker and have to pay fees for holding the position overnight, these overnight fees are also called swaps.
What's the deal with risk?
Trading, investing and everything related to it is risky. That’s a simple fact. While trading with leverage means that your potential profit increases, it also means that your chances of suffering major losses are increased.
What is a stop loss (SL)?
A stop loss order is one of the most important elements of being a profitable trader. If a trade moves in a direction opposite to the one you predicted, the position will be closed when a certain price is reached. Stop losses are used mainly for two reasons. Firstly, to protect your capital from heavy losses and secondly, to lock in profits.
Stop losses can be very useful to lock in profits when a position moves in your favor. Also, the stop loss saves you from losing too much when the trend changes direction and goes against you. When the markets get choppy, stop losses help you limit your risks.
What does margin mean?
Trading with leverage is also known as trading on margin. This is because the funds used to open and maintain a position are only a fraction of the total cost.
You only pay a small portion of the actual price. For example, a margin requirement of 5% means that you only have to deposit 5% of the value of the trade you want to open and the rest is taken care of by your broker.
Margin requirements differ depending on the asset and authority you wish to trade with. The lowest margin requirement I have seen with a reputable and reliable broker was 3.33% (maximum leverage 1:30). But that depends entirely on what country you are in and where the broker is licensed. Anything over 1:30 should make you suspicious and you should check the broker and its regulator.
What is a margin call?
When trading goes against you and the value of your account falls below a certain level, you will receive a margin call asking you to increase your account or reduce positions. In extreme cases, the broker may be forced to close your positions.
Fortunately, reputable brokers offer negative balance protection for all clients, so you can never lose more than you invested. You can also protect your trades and your capital with stop loss orders. These stops protect you from unforeseen events in the market.