Trading is an activity that consists of buying and selling financial assets in the markets with the objective of obtaining profits.
It can be a way to generate extra income, diversify your wealth or become an investment professional.
Algo Global explains what trading is, what types of trading exist, what financial products you can trade, how to choose a good broker, how to manage your risk and how to start trading in the real market.
What is trading and how does it work?
Trading is the exchange of financial assets traded on the markets, such as stocks, currencies, commodities, indices, cryptocurrencies, etc.
Trading is based on the law of supply and demand, i.e. the relationship between buyers and sellers of a given asset. When there are more buyers than sellers, the price goes up and when there are more sellers than buyers, the price goes down.
The objective of trading is to take advantage of price movements to make profits. To do this, the trader must anticipate market trends, analyze the factors that influence prices and execute buy and sell orders at the right time.
Traders can trade short, medium or long term, depending on their style, risk profile and objectives.
It is carried out through an intermediary called a broker, who is in charge of facilitating access to the market, executing the trader’s orders and charging a commission for his services.
The broker can be a financial entity, a specialized company or an online platform. The trader must choose a broker that adapts to his needs, that offers security, transparency, variety of products, analysis tools, training and customer service.
What types of trading are there?
Trading can be classified according to the time frame in which it is traded, i.e. the length of time a position is held open in the market.that is to say, according to the time a position is kept open in the market.
The main types of trading are:
- Intraday trading or day tradingIntraday trading: This is the shortest type of trading, in which positions are opened and closed within the same day, without leaving them open from one day to the next. Intraday trading requires more dedication, a greater speed of reaction and greater risk management, but it also allows you to take advantage of opportunities that arise in the market throughout the day.
- Short-term trading or swing tradingThis is where positions are held open for several days or weeks, seeking to capture price movements in the short term. Short-term trading requires less trading frequency, less risk exposure and greater time flexibility, but also involves higher financing and position holding costs.
- Long-term trading or position tradingLong-term trading is the type of trading in which open positions are held for months or years, seeking to profit from price trends over the long term. Long-term trading requires less market monitoring, less psychological pressure and higher potential profitability, but it also involves greater patience, higher initial investment and greater exposure to market changes.
What financial products can I negotiate?
Financial products are assets that can be traded in the markets.Each one with its own characteristics, advantages and disadvantages. The main financial products that you can negotiate are:
Shares
These are the parts into which a company’s capital stock is divided. When you buy a share, you become the owner of a part of the company and are entitled to receive a share of its profits (dividends) and to participate in its decisions (voting). Shares are traded on stock exchanges, such as the IBEX 35, the Dow Jones or the Nasdaq.
Stocks have a high potential for profitability, but also a high risk, as they depend on the situation of the company and the market.
Currencies
These are the currencies of different countries or regions. When you buy a currency, you are exchanging one currency for another, hoping that the one you buy will appreciate against the one you sell.
Currencies are traded on the foreign exchange market or Forex, which is the largest and most liquid market in the world, with 24-hour trading. Currencies have high volatility, but also high liquidity, which allows for easy market entry and exit.
Raw materials
These are natural resources that are extracted or produced, such as gold, oil, wheat or coffee. When you buy a commodity, you are speculating on its price, expecting it to go up or down.
Commodities are traded in the futures and options markets, which are contracts that establish the price and delivery date of a given asset. Commodities have a high correlation with the economy, but also a high sensitivity to geopolitical, climatic and supply and demand factors.
Indexes
They are indicators that reflect the performance of a set of assets, such as the shares of a country, a sector or a region. When you buy an index, you are investing in the evolution of that set of assets, expecting it to go up or down.
Indices are traded through derivative products, such as futures, options or CFDs, which are contracts that replicate the price of an underlying asset. Indices are highly diversified, but also highly complex, as they depend on multiple factors.
Cryptocurrencies
They are digital currencies that operate in a decentralized manner, without the intervention of any agency or authority. When you buy a cryptocurrency, you are acquiring an asset that is based on blockchain technology, which guarantees the security, transparency and speed of transactions.
Cryptocurrencies are traded on exchange platforms or exchanges, which are websites that allow buying and selling cryptocurrencies with other currencies or other assets. Cryptocurrencies have high growth, but also high uncertainty, as they are subject to regulation, competition and innovation.
How much money is needed to invest in trading?
The amount of money required to invest in the market is not fixed, but varies according to your financial condition and level of savings.
However, as in any other type of investment, when you start trading you should not risk more than 30% of your total savings.
How to choose a good broker?
A broker is the intermediary that allows you to access the market, execute your orders and charge you a commission for its services. Choosing a good broker is fundamental to be successful in trading, since the security, quality and profitability of your operations depend on it.
To choose it, you should take into account the following aspects:
RegulationThe broker must be regulated by a reputable and trustworthy entity that guarantees compliance with legal regulations, protection of client funds and resolution of possible conflicts.
CommissionsIt must offer competitive and transparent commissions, which fit your profile and your trading strategy. Commissions can be of different types, such as the spread, which is the difference between the buying and selling price of an asset, the swap, which is the interest charged or paid for maintaining an open position from one day to the next, or fixed fees, which are the charges applied for each operation or for the use of certain services.
ProductsIt should offer a wide variety of financial products, allowing you to diversify your portfolio and take advantage of the opportunities offered by the market. The main financial products you can trade are stocks, currencies, commodities, indices and cryptocurrencies, each with its own characteristics, advantages and disadvantages.
Platform: The broker should offer a trading platform that is easy to use, has a good interface, has the necessary tools to analyze the market and execute orders, and is compatible with your device and operating system.
ServiceYou must offer a quality service, including good customer service, good training, good technical support and good security. Customer support should be fast, efficient and available in your language, preferably through multiple channels such as phone, email or chat.
How to manage your risk?
Risk is the possibility of losing money when trading. Risk is inherent in trading and cannot be eliminated, but it can be managed and reduced.
To manage your risk, you should consider the following aspects:
- CapitalCapital is the money you have available to invest. You should use a capital that you can afford to lose, without affecting your personal economy or your emotional state. You should not risk more than you can afford, nor borrow money for trading.
- LeverageLeverage is the ability to trade with more money than you have, thanks to a loan offered by the broker. Leverage allows you to increase your potential profitability, but also your risk, as you can lose more than you have invested.
- Stop lossThe stop loss is an order that allows you to close a position automatically when the price reaches a certain level, which you have previously set. The stop loss allows you to limit your losses, protect your profits and prevent a trade from turning against you.
- DiversificationDiversification is the strategy of investing in different financial products, markets or sectors in order to reduce the overall risk of your portfolio. Diversification allows you to offset losses in some assets with gains in others, and to take advantage of market opportunities.
How to start trading in the real market?
Once you have learned the basics of trading, known the financial products you can trade, chosen a good broker and managed your risk, you are ready to start trading in the real market. To do this, you must follow these steps:
- Open a live account with the broker of your choice, following the instructions provided. Normally, you will have to fill in a form with your personal details, verify your identity and deposit the capital you want to invest.
- Download and install the trading platform offered by the broker, or access it from your web browser or mobile device. Familiarize yourself with the interface, tools and functions offered by the platform, and configure it according to your preferences.
- Analyze the market, using the methods you have learned, such as technical analysis, fundamental analysis or sentiment analysis. Identify trends, supports, resistances, patterns, indicators, news and events that may affect the price of the assets you are interested in.
- Choose the financial product you want to trade, according to your profile, your strategy and your objective. Check the conditions offered by the broker, such as spread, swap, leverage, minimum and maximum trade size, etc.
- Execute the buy or sell order, depending on the direction you expect the price to take. Set the stop loss and take profit, which are the orders that allow you to close the position automatically when the price reaches a loss or profit level that you have previously set.
- Monitor the position, following the evolution of the price and the market. Adjust the stop loss and take profit if necessary, or close the position manually if you consider that you have reached your target or that the market has changed trend.
By following these steps, you will be able to trade from scratch, in a gradual, orderly and effective way. Remember that trading is a continuous learning process, which requires training, practice and experience.
