What is Trading? A Comprehensive Trading Guide for Beginners

Mian
9 Min Read

Trading refers to the buying and selling of financial instruments, such as stocks or commodities, to capitalize on price movements. It involves making informed decisions based on market analysis and other factors that influence the supply and demand dynamics of the chosen financial instruments.

This article covers every realm of trading; key terminologies, types and categories of trading, trading strategies, prerequisites, and risk management. Overall it is a brief and comprehensive trading guide for beginners looking to start trading.

What is Trading and How it Works?

At its core, trading revolves around the concept of exchanging one asset for another. The goal is simple: to buy low and sell high (or selling high and buying low), capturing price differentials for financial gain. However, the execution of this goal requires careful consideration of market dynamics, economic indicators, and investor sentiment.

How Trading Works?

Various equity instruments are listed in equity exchanges. When a person (having a trading account at the exchange) intends to buy some equity, he/she places a buy order for the equity at a certain price. Meanwhile, sellers place sell orders at specific prices. When a buyer and seller price matches, the trade is executed, and the equity is transferred to the account of the buyer.

Various Instruments for Trading

  1. Stock Trading (Shares of companies like Tesla, Amazon, Microsoft, etc.)
  2. Forex Trading (Euro, Pound, Yen, etc.)
  3. Commodity Trading (Gold, Silver, Crude Oil, etc.)
  4. Crypto Trading (Bitcoin, Ethereum, Ripple, etc.)

Key Terminologies of Trading:

  • Bid;  A price at which buyers are willing to purchase a financial instrument.
  • Ask; A price at which sellers are willing to sell a financial instrument.
  • Spread; Difference between Bid and Ask price in the market.
  • Leverage; Loan taken from broker for increasing position size.

Market Types for Trading:

There are two types of markets available for trading;

  1. Spot Market
  2. Futures Market

Categories of Trading:

Based on the order of buying/selling, trading is categorized into these 2 sides;

  • Long-side Trading; Buying low and selling high.
  • Short Side Trading; Selling high first and buying low later on.

Types of Trading:

Trading is classified into 3 types;

  1. Short Term trading also termed intraday trading
  2. Medium Term Trading; a few days to a few weeks
  3. Long-term Trading or Investing; From a few months to years.
  1. Position Trading: Position trading is the easiest trading strategy for beginners. It involves buying/selling equity and holding the position for more extended periods to capitalize on long-term trends.
  2. Swing Trading: It involves capturing intermediate trends or price swings i.e. few days.
  3. Scalping: Taking a large position for a very short period to capture a smaller chunk of price movement.
  4. Day Trading: Involves executing multiple trades within a single day, aiming to profit from short-term price movements

Various Order Types in Trading:

  • Market Orders; The order is executed at any price available in the market.
  • Limit Orders; Executed at specific price.
  • Stop Orders; Close position at mentioned price.
  • Trailing Stop Orders; If the market goes in favor, revise the stop loss step by step.

Prerequisite of Trading: Market Analysis

Trading revolves around the principles of supply and demand, market participants, and the interplay of various factors that influence asset prices. Analysis of the market is necessary for successful trading. There are two types of market analysis;

What is the Difference between Trading and Investing?

Trading involves buying and selling of equity for a short duration i.e. from a few days to weeks whereas investing is buying and holding equity over a long term, say, months or years.

The Most Crucial Part of Trading for Beginner: Risk Management

Risk Management is the most important element of trading for beginners. Equity markets are highly volatile and no one can 100% predict upcoming movement. The only way to deal with the uncertainty of financial markets is risk management. The easiest way to manage risk in trading is through;

  1. Development of a robust trading strategy after a thorough analysis of the market.
  2. Maintain risk-to-reward ratio (1:3) by setting optimum stop loss in each trade.

Trading Psychology

Developing the right psychology is an important aspect of trading for beginners. Emotions like fear and greed can cloud judgment and lead to impulsive decisions. Mastering trading psychology is crucial for maintaining a disciplined and rational approach to trading. Techniques such as meditation, risk management, and maintaining a trading journal can help traders stay focused and emotionally balanced.

End Note:

In conclusion, trading is a multifaceted journey that intertwines economic principles, market dynamics, and human behavior. It’s a space where knowledge, strategy, and discipline converge to create opportunities for financial growth. Whether you’re a novice or an experienced trader, understanding the intricacies of trading is a continuous endeavor that empowers you to navigate equity markets effectively.

Risk management and trading psychology are two crucial challenges in trading for beginners. By developing a robust trading plan and strictly following discipline to execute the plan, you can successfully deal with the trading challenges and make it a profitable venture.

FAQs:

How do I start Trading?

Open an account with a registered broker and install your broker’s trading application. Deposit funds into your trading account and place a buy/sell order to start trading.

What is Trading in Stock Market?

It is the buying and selling of the shares of companies listed on stock market. For buying or selling, shares are quoted on the stock exchange of a country. You can open an account with a broker offering trading services in that stock market to start trading.

What is Forex Trading?

Forex trading refers to buying and selling currencies to gain profit from price differences. Say, you buy a pound and sell after appreciation and earn the difference.

What is the Concept of CFD Trading?

The concept of trading is based on Contracts for Difference (CFD). Contracts for Difference are financial derivatives that enable traders to speculate on the price fluctuations of various assets without actually owning the underlying asset. This versatile instrument allows for trading across a wide spectrum of assets, including stocks, commodities, indices, and cryptocurrencies.

What is Paper Trading?

Paper trading is a practice that allows traders to simulate the process of buying and selling financial instruments at real-time market prices without using real money. Instead of risking actual capital, traders use virtual funds to execute trades and monitor their performance.

What is Trading on Margins?

Borrowing money from your broker to take a trading position greater than your actual capital in account is termed margin trading. The broker charges interest on the amount borrowed but the profit/loss is attributed to the trader.

What’s Copy Trading?

Copy trading is a social trading method that enables investors to follow and replicate the trading actions of seasoned traders, often referred to as “leaders” or “gurus.”

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