In this article, we are going to answer the question of what is trading this is the start of a new article series that teaches you how to trade the financial markets using price action I will start with the basics and progress step by step
Let’s get started what is trading and how does it work trading is relatively easy to understand fundamentally we are simply buying and selling things if we look at four random items a bicycle a scooter a truck and a car then we can see that they all have a value that is what they would cost if you wanted to buy them we can say the bike is 100 pounds the scooter at 1000 pounds the truck 20,000 pounds and the car 75,000 pounds let’s look at the bank in more detail from a traitorous perspective.
There is always a buyer and the seller of the good and both parties think that they are getting a good deal otherwise they wouldn’t pay the price or accept the offer respectively as a trader we try and profit off of any buying and selling we do the simplest way to think of this is in terms of buying or going long as you would say in trading you simply buy at price X and hold on to your position you do this because you think the market in whatever you have bought is going to rise if that happens you can then sell at price Y and make a nice profit think back to our bike example we buy the bike for 100 pounds we do this because we think that the price of a bike is going to rise after we buy the bike there are suddenly a lot of interested buyers there are more buyers than there are available bikes,
So the price rises to 110 pounds you make a nice tempo profit as you sell the bike there are lots of ways you can trade as a retail trader one of the most common is through a CFD account or contract for difference accounts let’s look at our bike example in a way that would be more realistic to a trader we will use the footsie 100 indexes for our example, but it is the same for any market forex crypto commodities stocks and shares or whatever now you think that the foot seat is going to rise in price you buy into the market at the level 7000 the foot C then rises to 7010, and you sell for a 10-point profit now let’s say you are risking 10 pounds per point which would be spread betting, or you had bought 5 mini contracts at 2 pounds per contract and that would be CFDs which is contract for difference these are two widely available instruments you can use to trade as a retail trader this would mean you made 100 pound profits in both instances a 10 point increase seven thousand to seven thousand
And ten x your 10 pound Pro point is equal to 100 pounds profit or the 10 points increase multiplied by 5 mini contracts which cost you 2 pounds per contracts is equal to 100 pounds also because it’s 10 multiplied by 10 but what happens if the market falls when you are hoping for it to rise now you buy the bike for 100 pounds, and you expect it to increase in price however there are suddenly way more sellers of bikes than buyers the cost of a bike subsequently Falls to 90 pounds you know lose 10 pounds on the trade let’s look at our a previous example where you bought the foot seat at 7,000 instead of rising it falls to six thousand nine hundred and ninety which is a 10 point drop, and you decide to exit the trade in this example you lose ten points we are still wrong ten pound four points with spread betting, or we had bought five mini contracts at two point four contracts and that would be CFDs in both instances you know lose 100 pounds as traders we can also profit from selling or going short as it is called in trading when we short the market we enter into an agreement with another party we say that we will sell to them at the current price sometime in the future they agree in their minds they are protecting themselves they believe that the market is going to increase in price and want to buy at the current price
However, you believe the market is going to fall if the market does fall you can buy at a lower price say five pound you already agreed to sell to the previous party for a ten pound, so you fulfil the agreement and make a nice five pound profit I want to buy a bike how about we say 100 pounds that sounds like a fair deal now I know I can buy the bike for 100 pounds which is a fair price I can afford and since I think the price of bikes is going to increase I’ve done some good business here I’m pretty sure I’m going to be able to pick up a bike for less than 100 pounds now if the price of bikes does drop to seem 90 pounds you can still sell it for the agreed price of 100 pounds and make a 10 pound profit however if the price of baek’s increases to say 110 pounds you have agreed to sell it for 100 that means you will make a 10 pound loss on the trade let’s look at our footsie 100 example again but now instead of buying going long you sell go short the market at 7000 the foot see then falls to 6990 a 10 point drop in this example you ten points we were short 10-pound four point spread betting or we had shorted five mini contracts at two pounds per contract which would be CFDs in both instances you make 100 pounds when you short or sale.
The markets you lose money when the market increases in price so if the market had instead risen by ten points to seven thousand and ten you would have lost 100 pounds as you can see there is always a winner and the loser when trading your aim as a trader is to more often be on the winning side of the trade and thus profit there are many other reasons why people buy and sell with banks companies pension funds hedge funds etc all involved in the financial markets however for the purpose of retail trading those are the main components we need to understand hopefully you can now answer the question of what is trading.