What is Trading and how does it work

Legend has it that Joseph Kennedy sold all the stock he owned the day before "Black Thursday," the start of the catastrophic 1929 stock market crash. Many investors suffered enormous losses in the crash, which became one of the hallmarks of the Great Depression.

What made Kennedy sell? According to the story, he got a trading tip from a shoeshine boy. In the 1920s, the stock market was the realm of the rich and powerful. Kennedy thought that if a shoeshine boy could trade, something must have gone terribly wrong.

Now, plenty of "common" people at least know what trading is. Online trading has given anyone who has a computer, enough money to open an account and a reasonably good financial history the ability to invest in the market. You don't have to have a personal broker or a disposable fortune to do it, and most analysts agree that average people trading stock is no longer a sign of impending doom.

The market has become more accessible, but that doesn't mean you should take online trading lightly. Let's start by understanding what is trading and how does it work. 

What is Trading

Trading is buying and selling of stocks, commodities, currency pairs, cryptocurrencies or other instruments available. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10 percent to 15 percent, traders might seek a 10 percent return each month. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period of time. The reverse also is true: trading profits can be made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets.

While buy-and-hold investors wait out less profitable positions, traders seek to make profits within a specified period of time and often use a protective stop-loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

Whether you want to start trade forex actively, or just want to invest in stocks for the long-term, there are things you need to know before starting. Knowing what to expect, and what tools you need, will help prepare you so your entry into online trading goes as smoothly as possible. 

Continue reading or play around in a risk-free demo account and understand what is trading in real-time. 


Acquaint Yourself With the Markets

Stock Trading Is

Stocks are small pieces of a company. The stock price (also called a "share") reflects the value of the company, and its outlook, as determined by the people trading the stock (traders and investors). Stocks don't have a set price, they continually fluctuate, each second of each day.

Stocks trade on a stock exchange, such as the New York Stocks Exchange (NYSE). Most buying and selling of stocks takes place during these hours, although some trading does occur outside these hours; it's called pre-market and after-hours trading.

To make a trade you'll need the stock's "ticker" symbol. Type the company name on Google Finance or other major financial portals, and the ticker symbol is provided. Tickers are a one to five letter code used to trade the stock.

You can buy stocks and then try to sell them at a higher price to make a profit or you sell first and try to buy it back at a lower price to make a profit. This latter is process is called short selling; short-term traders do it all the time, while longer-term investors tend to shy away from it. Before you begin, acquaint yourself with the Bid/Ask Spread, as this is how prices move. Also, learn the basics of reading a candlestick chart.​

>> Start Stock Trading

Forex Trading Is

The best short answer to what si forex and how does it work is this: simultaneous buying of one currency and selling another for capital gains and/or steady income.

Forex Trading includes all speculative trades, or profiting on floating exchange rate between two currencies (eg. EurUsd) by either:

  • Buying low and selling high a currency pair anticipating that the base currency (the one on the left) will appreciate against the counter currency (the one on the right);
  • Selling high and buying low a pair anticipating that the base currency will depreciate against the counter currency.

In either case, the forex trader could earn an amount of money on the difference between the opening and closing price of the trade.

>> Start Forex Trading

Cryptocurrency Trading Is

Only those with specialized, high-powered machinery are able to profitably extract bitcoins nowadays. While mining is still technically possible for anyone, those with underpowered setups will find more money is spent on electricity that is generated through mining. In other words, mining won’t be profitable on a small scale unless you have access to free or really cheap electricity.

Instead of time-consuming, high costs mining unsuited for most people, there is an alternative way that doesn’t require dedicated hardware or virtual wallet, nor investing in bitcoin hyips or bitcoin cloud mining.

The most popular form of cryptocurrency trading - CFD trading - enables you to speculate on the rising or falling prices of the fast-moving global cryptocurrency market (or instruments) such as Bitcoin, Ethereum, Litecoin or Ripple.

Contracts for difference (CFDs) let you go long or short on cryptocurrencies, without needing large amounts of money to get started.

>> Start Cryptocurrency Trading

Establish Your Purpose For Trading

Establish what you want out of your trading. Is it something you want to do every day? Do you want to trade a couple of times per week? Possibly doing research at night if you have a full-time job during the day. Or do you want to buy stocks and hold them for the long-term?

There is no right or wrong here. Do all of them or one of them. 

Manual Trading

  • Scalping technique is getting in and out fast for some bucks. 
  • Day trading is taking trades that last less than a day and trades often only last minutes. 
  • Swing trading is taking trades that last from a day to several weeks. 

Automated Trading

  • Expert Advisors are automated trading strategies to do the job for you. Most require coding skills but there are also EAs Builders that can generate trading robots in a couple of clicks.

Copy Trading

  • The Money-Managing system brings investors and traders together, allowing investors to earn on the Forex and Stock market without trading on their own and managers to receive additional income through efficiently managing investor funds.

Trading Example

GBP/USD has a sell price of 1.3554, and a buy price of 1.3556. You think the US Dollar may gain value against the pound, because the Federal Reserve might raise interest rates, so you decide to sell five standard lots at 1.3554.

Each contract is equal to 1 forex lot or 100,000 of the base currency of the pair. In this case, selling a single GBP/USD standard contract is equivalent to trading £100,000 for $135,540 so your total position is worth $677,700 (£500,000).

CFDs are a leveraged products, so you don’t have to put down the full value of your position upfront. A deal of this size on GBP/USD has a margin requirement of 0.50% or forex leverage of 1:200, so your margin would be 0.50% of the total exposure of your trade, which is $3,388.50 (£2,500).

1. If your prediction is correct

The pound falls as you predicted. You decide to close your position when the buy price reaches 1.35440.

To calculate your profit, you multiply the difference between the closing price and the opening price of your position by its size. 1.35540 – 1.35440 = 10 points, which you multiply by five CFDs to get a profit of $500.00 (minus any overnight charges or forex swap). Another way to think about it is that your $677,700.00 is now worth £500,369.17 ($677,700/1.35440), so your profit is £369.17 (£500,369.17 – £500,000.00).

Calculating the profit from your FX CFD

1.35540 – 1.35440 = 10 points, which you multiply by five CFDs to get a profit of $500.00.

Just remember that you only need to pay overnight funding charges if your position is held overnight. Commission fees apply only if you're trading FX direct.

2. If your prediction is wrong

GBP/USD rises instead. You decide to stop your losses and reverse your trade when the buy price is 1.35700.

Your position has moved 16 points against you, meaning you make a loss of $800.00 (in addition to any overnight charges).

Calculating loss from your FX CFD

1.35540 – 1.35700 = -16 points, which you multiply by $50.00 to give you a loss of $800.00.

Find a Broker and Trading Platform

A broker facilities trading between market participants, allowing you to buy currencies or stocks from sellers and sell stock to buyers (there is a buyer and seller for every transaction). As a trader you want a broker that is:

  • low cost (low commissions and fees)
  • reliable (can trade when you want, with minimal system outages)
  • honest (won't steal your money, or engage in risky behaviors with it)
  • gives you tools for research (least important, since there are loads of free tools available online)

If you want to day trade, there are a couple of extra requirements:

  • The broker must execute orders instantly. No intervention on their part. Even a one-second delay is too much."Trade from chart" capabilities, and/or ability to rapidly place, adjust and cancel orders.
  • There are loads of brokers, some of which are better for investors and some which are better for day traders or swing traders. Picking a broker is the biggest trade of all; all your capital is given to this company. Spend time researching the above factors before choosing a forex broker.
  • Each broker offers a trading platform, known as stock trading app or stock simulator. This is the technology that allows you to view stock quotes, see charts, do research and most importantly place orders. Test out various platforms by opening demo accounts with various brokers.

Successful traders from around the world have chosen the MetaTrader 5 multi-asset platform for trading Forex, exchange instruments, and futures. MT5 is an award-winning trading platform that puts you in charge, whether you are a long-term investor or actively trading global markets. It is the most popular trading platform in the last 20 years and it is offered by most of the online trading providers.

>> Download MT5 for desktop, mobile and web browser. 

Practice Before Depositing Money

As you narrow your selection of brokers by playing around in their demo accounts, practice placing trades. Get used to the various order types available. Begin formulating forex trading strategies and testing them on historical price charts. Place fake money trades based on those strategies and analyze the findings with statistics to see if the strategy is likely to produce a profit.

If you can't make a profit trading fake money there is little purpose in wasting real money. On the other hand, producing fake money returns doesn't necessarily mean real money profits will come just as easily. There are differences between demo trading and real trading. Demo trading is still a very valuable tool, though.

In the demo account practice proper risk management. Risk management is where you only risk a small amount of the account on any single trade.

>> Open a demo account and start trading without risks or obligations.

In sum, what is Trading

Trading is exciting because it involves risk and reward. Going through this list will give you access to the stock market, but doesn't teach you how to trade. Starting to trade is the easy part, being successful is another story. Follow the guide above to get set up. You'll then be in a position to research strategies for the time frame you want to trade on (long-term or short-term).

To understand what is trading and how does it work is important, but if you need some help MetaTrader 5 AM Broker provides the best trading tools available today in one single account accessible from any device and operating system.


Categories:  Education