Have you ever wondered how people make money by buying and selling without actually holding any physical goods? What is a trade, really?
Trading is the act of buying and selling financial assets within financial markets. It’s a way to potentially earn profits by predicting market movements. Unlike traditional investing, trading focuses on short-term opportunities in the market.
Reflecting this trend, as of January 2023, there’s a notable increase in market participation in India, with an estimated 110 million demat account holders.
Why Trade?
Trading is the practice of buying and selling assets within a short timeframe to capitalise on market fluctuations. The aim is to secure quick profits from these short-term changes in price.
For instance, if a government policy is anticipated to favour renewable energy companies, a trader might buy shares in these companies predicting a rise in stock value. If the stock value increases as expected, selling those shares would result in a profit.
Who Should Trade & Who Should Invest
Trading and investing are accessible to anyone with internet access and a bank account. This democratisation of financial markets means that individuals no longer require substantial capital or specialised knowledge to start.
Trading can help you make profits, but it’s also risky, particularly for those unfamiliar with market volatility. Conversely, investing takes a long-term perspective, focusing on gradual wealth accumulation through the sustained growth of assets.
The latter approach is generally less risky and more suitable for beginners, as it relies on the historical tendency of markets to grow over time.
Financial Assets You Can Trade
- Shares: Ownership in a company
- Commodities: Physical goods like gold, oil, or agricultural products
- Derivative Contracts: Future and option contracts on stocks, indices and commodities
Analytical Approaches: Technical Vs Fundamental
Traders rely on different methods to make decisions:
| Aspect | Technical Analysis | Fundamental Analysis |
| Focus | Price movements and patterns | Company’s financial health and market environment |
| Tools | Charts, indicators, volume | Financial statements, economic reports |
| Timeframe | Short-term or long term | Long-term |
| Data Used | Historical price and volume | Economic, financial, and other qualitative data |
| Common Techniques | Trend lines, moving averages | Earnings analysis, P/E ratio |
| Suitability | Day traders, scalpers | Long-term investors |
Trading Tools & Platforms
Traders use various tools and platforms to analyse markets, execute trades, and manage risk.
- TradingView: Offers advanced charting tools, real-time data, and social networking features for traders to share insights
- Appreciate: Appreciate is a digital platform for trading and investing, allowing easy access to US equities, fixed deposits, ETFs, bonds, and digital gold.
- Economic Calendar: Tracks important economic events that can affect market movements
- Yahoo Finance: A widely used tool for free stock quotes, news, and financial information
- Moneycontrol: Specifically popular in India, it provides news, data, and analysis for stock market investors and traders.
Types Of Trading
- Day Trading
Day trading is like a quick game of chess where every move is made within a single day. A trader buys and sells stocks or other financial instruments within the same trading day, aiming to capitalise on small price movements.
For example, a day trader might purchase shares in a technology company in the morning, predicting that the price will rise due to a positive news announcement. If the stock price goes up by the afternoon, the trader sells the shares for a profit, all before the market closes.
- Swing Trading
Swing trading is similar to taking a short journey. You must hold onto your positions for several days or weeks to take advantage of expected market shifts. Swing traders look for trends or patterns that suggest a stock is about to experience a significant price movement.
For instance, if a trader notices that a particular stock has been steadily increasing and believes this trend will continue for the next few days, they might buy shares and then sell them when the stock reaches a higher price a week later.
- Position Trading
Position trading is a long-term strategy that involves holding onto stocks or other assets for years, based on extensive research and analysis of fundamental factors.
A position trader might invest in a company with strong growth potential, like an innovative renewable energy firm. This approach requires patience and a deep understanding of market trends.
- Scalping
Scalping is the trading world’s version of a fast-paced video game, where the player makes many quick moves to score points. Scalpers make a large number of trades each day, taking advantage of very small price changes.
For example, a scalper might buy shares in a company and sell them minutes later for a slight profit, repeating this process throughout the day to accumulate gains. This strategy requires constant attention to the markets and quick decision-making.
How Trading Works?
Analyse the Market
The first step in trading is to analyse the market carefully. Traders look at trends, which are the general directions in which prices move. They also examine key levels, which are specific prices where a lot of buying or selling happened in the past and might happen again.
Some of the most popular tools are:
- Fibonacci Retracement: This is a tool based on a series of numbers called Fibonacci numbers. Traders use it to predict where prices might stop falling or rising and reverse direction.
- EMAs (Exponential Moving Averages): These are averages of past prices, but they give more weight to recent prices. EMAs help traders understand if the price of an asset is moving up or down over time.
Place Trades
After analysing the market, traders decide whether to buy (if they think the price will go up) or sell (if they think the price will go down). When they place orders, they also set rules to help manage risk, such as:
- Stop Loss: This is an order to sell an asset when it reaches a certain price, limiting how much money the trader can lose if the price goes down.
- Targets: Traders might have a specific price in mind where they want to take profits and exit the trade.
These orders help traders control their potential losses and lock in profits.
Monitor and Close
Once a trade is placed, traders need to keep an eye on the market and decide the best time to exit, either to take profits or to cut losses. Discipline is key here.
Traders must stick to their original plan and avoid letting emotions like greed or fear make them stay in a trade too long or exit too early. Knowing when to close a trade, often at predetermined key levels or based on market changes is crucial.
How To Start Trading
- Educate Yourself: Learn about the markets, trading strategies, and financial instruments.
- Market Selection: Opt for trading in stocks, commodities, forex, or other financial instruments based on your interests and research.
- Broker Selection: Find a broker that offers the tools, platform, and support you need.
- Open a Trading Account: Complete the application process with your chosen broker.
- Fund Your Account: In India, you can start trading with an initial capital as low as ₹5,000 to ₹10,000, allowing you to explore various markets.
- Develop a Trading Plan: Set clear goals, strategies, and risk management rules.
Pros & Cons Of Trading
Pros
- Trading isn’t limited to your local market. You can invest in international markets, opening up a world of opportunities across various economies and industries.
- Many trading platforms allow you to trade on margin, meaning you can control a large position with a relatively small amount of capital.
- Certain markets, like the forex and stock markets, are highly liquid. This means you can quickly enter and exit trades at your desired price without a significant impact on the market price.
- You can trade a wide range of instruments, including stocks, bonds, forex, commodities, and cryptocurrencies. This variety lets you find opportunities that align with your knowledge and interests.
- Potential for passive income: Through strategies like dividend stock trading or trading in markets with overnight interest swaps (like forex), you can potentially earn passive income, adding an additional stream of revenue beyond just trade profits.
Cons
- Potential for significant losses.
- Requires time to monitor and research markets.
- The highs and lows can be challenging to manage.
Final Thoughts
As we wrap up this beginner’s guide, remember that trading offers a path to potentially grow your wealth by making informed decisions and navigating market changes.
With the right tools and resources, anyone can start trading, but it takes patience and learning. Visit our website Appreciate Wealth, to learn more and begin your journey towards financial success.
FAQs
1. What can you trade on?
You can trade on stocks, commodities, forex, and more, diversifying your portfolio across various asset classes.
2. What should beginners trade in?
Start with less volatile markets or simulators to practise.
3. What is trading for beginners?
It’s about learning market basics and starting with small investments.
4. What is the 1 rule in trading?
Never invest more than you can afford to lose.
5. How much money do I need to invest to make $1000 a month?
It depends on the market, your strategy, and the risk involved.
6. Do beginner traders lose money?
Many do, primarily due to a lack of experience and risk management.
7. What is the 80% rule in trading?
In futures trading, if the market opens above or below the value area and moves back into it, there’s an 80% chance it will reach the other side.
