What is trading
In this article, we will talk about trading — what kind of financial activity it is and how it works. We will also share information about what types of trading exist and what strategies are used by experienced traders. The information will be useful for everyone who wants to expand their earning potential and increase their capital.
Trading: what is it
The English word "trade" is translated as "trade", so trading is the sale and purchase of assets.
In the modern context, trading refers to short-term trading. Long-term trading is usually called investing. There are often cases when an unsuccessful short-term purchase transaction turns a trader into an investor.
The difference between trading and investing mainly consists in the approach to asset valuation. From the trader's point of view, the price of the asset is a number in the terminal that must be greater for the transaction to be successful. Intraday traders who follow minute Japanese candles and love volatile markets fall into this category. The greater the price fluctuations, the greater can be the profit of such a trader, if he guesses where the market will go.
The investor does not really like volatility (a statistical financial indicator that characterizes the variability of the price of something) and, in addition to the price itself, also looks at the fundamental value of the asset. Accordingly, the investor makes a purchase with the understanding that he will own this asset for a long period of time.
Trading lives on market liquidity. In Ukraine, the most liquid market is the domestic government bond market. For the whole of July 2023, transactions on OVHZ were carried out through stock market, there were 21,396 transactions . At the same time, 15,700,051 trades were conducted on the NASDAQ stock exchange in one day on August 7, 2023 .
This fact indicates that day trading within the framework of the Ukrainian market is practically impossible. Accordingly, the most effective method for interacting with the financial market in our country is the investor's approach.
However, our company Daliz-Finance provides an opportunity to use one of the few working strategies for speculative trading. As part of one of our service packages, we provide an opportunity for limit orders on the stock exchange — to become a client of Daliz-Finance, leave an application on our website.
How does it work? Imagine an exchange, you have a selling rate and a buying rate, you can come to the exchange and buy currency at the purchase price. We provide you with the opportunity to buy currency at the selling price. This approach can take a certain amount of time until someone decides to sell you the currency, but in this case, when someone sells it to you, you can sell it at the purchase price and earn on the difference between the purchase price and the sale price (spread).
Also, you can earn on the mechanics of the bonds due to the fact that the bond increases in price as it approaches maturity, both in terms of hryvnia units, and as the yield to maturity falls.
A well-known method of speculation is trading on news, although usually the elasticity of the bond market has a certain time lag and is stretched over time. Nevertheless, the market reacts to news and there is an opportunity to make money on it.
Read also: How to buy bonds in Ukraine
Types of trading
The following types of trading exist:
- medium-term trading;
- long-term trading;
- technical trading;
- swing trading;
- day trading;
Let's consider some types of trading in more detail.
Day trading is intraday trading. Possible only on highly liquid markets. In essence, it simply means to buy cheaper and sell more expensive within the same day. In modern developed markets, HFT — high-frequency trading (trading performed by robots) — has been replaced in its essence.
Scalping is the wholesale purchase of goods in high demand for retail sale at a markup. He doesn't really work in the financial markets. A very vivid example is the market of video cards: a large wholesaler buys up the entire volume of available video cards in advance on the date they go on sale, and then, artificially maintaining a deficit, sells these video cards at retail.
Swing trading is trading based on MA (moving average, which means "floating average"). A moving average is a mathematical parameter that can suggest an approaching trend.
Let's remind you what a moving average is. Let's consider 10 days and the price of the asset:
And now let's calculate a 5-day moving average, starting from the fifth day:
Moving average, starting from the sixth day:
By analogy, we will make calculations for all ten days, after which we will build a less volatile price chart based on this moving average. It is in such a strategy that you can hear such expressions as "resistance levels", "trend" and the like.
Competent trading is the use of certain rules and strategies. There are different trading strategies, for example:
- Arbitrage is risk-free trading, which is usually based on market distortions. For example, the exchange rate of a tugrik to beads is 1 to 10. For 1 tugrik, you can buy a share of the " Day and Night " corporation , and then you can sell it for 11 beads. In this case, there will be a profit from arbitrage in the amount of 1 bead.
- Technical analysis is, in fact, astrology for traders: someone believes and in the event of a mistake, it is not the analysis that is to blame, but the analyst; someone does not believe and does not use. It fundamentally analyzes the movements of supply and demand, and the main assumption of technical analysis is that the movements of supply and demand have certain patterns of behavior that repeat themselves. This allows you to predict in advance the further development of the price.
- News trading is essentially a bet in a casino on the price movement on the eve of some news. News can be different, starting from the release of annual reports, changes in the market situation for raw materials or the use of substances, and unfortunate comments on Twitter by the company's general director.
Frequently asked questions: what is trading
What are the disadvantages of trading
Financial risk (market and currency) is the main disadvantage of trading. With the correct approach and actions of the trader, risks can be minimized and thereby limit the potential size of the loss.
What is the difference between trading and investing
The main difference between trading and investing is the asset holding period. A trader buys an asset with the goal of selling it at a higher price in the near term, while the investor initially intends to hold the asset in the long term. There are often situations when a not very lucky trader becomes a long-term investor).
It is also worth noting that when making a decision to buy or sell, a trader pays more attention to the dynamics of the price than to the quality of the asset. The investor, in turn, pays more attention to the quality of the asset than to its price.