There are two main ways to make a profit in the financial markets. One of them is investment, which aims to buy and hold an asset for a long time to earn profit. Another method is asset trading, where traders choose to buy and sell assets in shorter periods of time. If you plan to work as a trader in the financial markets, you need certain skills. Skills that cannot be acquired except through training and experience. In this post, I will examine the concept of trade and its features.
What is the concept of trade?
Trading means buying and selling assets in a certain period of time with the aim of making a profit. It is natural that a trader needs more presence in the market compared to an investor and spends a lot of time for this purpose. Therefore, it should seek to earn more profit compared to long-term investment. Otherwise, the activity as a trader is not justified.
What can be said for sure is that the time to buy and sell cryptocurrency or other assets is shorter in trading than in investing. In investment, people usually deal with the direct purchase of assets. For this reason, they only benefit from their price increase.
Other methods for trading such as futures, CFD and option trading are also available to traders. In these transactions, which are known as derivatives, in addition to price increases, you can also profit from asset price decreases. Of course, in derivative transactions, the ownership of assets is not transferred. Rather, the two parties make a deal based on the prediction of the direction of the contract price.
Who is the trader?
A trader is someone who uses the strategy of buying and selling assets in a certain period of time to make a profit. Traders have completely different personality traits compared to investors. When you are going to work as a trader in a market, you should look at it as a job. Therefore, you must allocate time for trading. But in investment, people usually buy an asset once and have nothing to do with it for a long time.
This issue is the turning point of the differences between traders and investors. The type of trader's activity is such that he suffers more stress and mental pressure. For this reason, it is necessary to have the appropriate capacity to accept the conditions. On the other hand, the risk tolerance of traders is much higher compared to investors. Because periodic fluctuations in asset prices in the market always threaten their capital.
I mentioned that the trade is executed with the aim of profiting from changes in asset prices in the short term. You must be asking this question, what is meant by short term in the previous sentence? The fact is that based on the duration of opening and closing trading positions, trade types can be divided into 4 main categories.
Scalpers keep each trading position open for a few seconds to a few minutes. In fact, scalp trading trading strategy is to earn small and numerous profits. For this reason, during a trading session, the trader may open and close more than 100 trading positions. The greatest amount of pressure and stress among traders is on scalpers. In addition, it requires high skill and you should practically choose trade as your main job.
A day trader closes each trading position on the same day it is opened. Obviously, the pressure of this trading method is much lower compared to scalping. Because traders can control the existing risks more easily.
At the same time, the opportunity to gain profit from the daily price fluctuations of assets is provided in the day trading method. Of course, you should note that the release of daily news may upset all traders' predictions of asset price changes. For this reason, the risk of daily trading is still high.
A swing trader focuses on the price volatility of assets over a period of 1 to 30 days. For this reason, by choosing this trade method, you can count on short-term to medium-term trends in the asset price chart. Compared to day trading and scalping, swing trading strategy is simpler and involves less risk. Besides, it needs to spend less time to be active in the market. All this makes the trader bear less stress.
Position Trader works with the aim of making profit from transactions in the time frames of one month to several years. In other words, a trading position may remain open even for more than 1 year in this strategy. By choosing this method, you practically lose the opportunity to profit from short-term price fluctuations.
At the same time, the risk of transactions is also reduced to a great extent. In addition, according to the selection of a long-term time frame, the accuracy percentage of the technical analysis of the asset price chart is much higher. Of course, you should note that you cannot count on short-term profit in position trading.
Differences between trade and investment
The most important difference between investing and trading is the length of time people hold the purchased assets. Investors usually consider a time horizon higher than one year. However, it is rare to find a trader who keeps a trading position open for longer than a year.
Another difference between investing and trading is the potential and risk of losing the principal. Certainly, none of these two methods are without risk. But at the same time, experience shows that the risk is much higher for traders compared to investors. Investors do not go to derivative transactions. Rather, they buy the asset they want and keep it in their portfolio. For this reason, price fluctuations do not lead to the risk of liquidating their trading positions. A risk whose shadow always weighs heavily on the heads of traders.
Another difference that can be mentioned between investing and trading is the way people act in the financial markets. Investors focus more on fundamental analysis. In this way, they estimate the intrinsic value of an asset in the future and decide to buy it. Regardless of temporary price fluctuations, they wait for the asset to reach the target price in the long term. Meanwhile, traders open a special account on technical analysis. Technical analysis tools provide signals about asset price changes in the short term to make buying and selling decisions.
Key skills of a trader
As a trader, you must have several key features, which are:
- Familiarity with fundamental analysis to identify and select valuable assets in trading
- Getting to know the best trade trading strategies and choosing the most suitable option according to personality characteristics
- Familiarization with various ordering methods in buying and selling assets, such as the difference between stop and limit orders
- The skill of reading the board and examining the depth of the trading market
- Capital management time skill
- Mastery of various technical analysis tools
- Familiarity with market psychology to monitor traders' emotions
- High risk tolerance
What are the challenges of a trader?
If you choose to work as a trader in the financial markets, you should be aware that you are not stepping on a smooth road. Rather, there will be a lot of ups and downs in front of you that you will not be able to overcome except with a lot of patience and learning and gaining experience. The most important challenges facing a trader are:
- Providing sufficient liquidity to open the desired trading positions
- Choosing the right portfolio of assets from the many options on the table
- Monitoring and follow-up of important financial market news
- Managing nerves and controlling nervous tension with a complete understanding of market psychology
- Choosing the right technical analysis tools from among the various available options
- Identifying real buy and sell signals in working with technical analysis tools
- Spending enough time to work as a trader
- Keeping up with the trends and adhering to the trading strategy
- Overcoming emotions and avoiding emotional decisions
The fact is that trading is not the right choice for everyone. Sometimes investing in a financial market can be a good decision for a group of people; Of course, if you are a risk taker and face challenges; You have enough opportunity to work in the financial markets and you welcome learning and gaining experience, working as a trader in the financial markets can be the right choice for you.