What is trading? Markets, strategies, and chart patterns

Trading is the heartbeat of the financial world, where fortunes are made and lost in the blink of an eye. It's a realm where participants buy and sell financial instruments, from stocks and currencies to commodities and derivatives, in the pursuit of profit. Yet, beneath the surface of this fast-paced arena lies a complex ecosystem governed by markets, strategies, and chart patterns. In this comprehensive guide, we embark on a journey to demystify the world of trading, exploring its fundamental principles, diverse strategies, and the intricate language of chart patterns. Whether you're a seasoned trader or a novice investor, understanding these essential elements is key to navigating the tumultuous waters of the financial markets with confidence and skill.

Content

1. Markets and assets in trading
2. Key online trading terms to know
3. The 3 main trading strategies
4. Chart patterns in online trading
5. How to start trading?
6. The importance of a trading platform
7. Final thoughts

Markets and assets in trading

Trading spans various financial markets, each offering unique characteristics and diverse opportunities.

Forex

The Forex market or foreign exchange market is where currencies are traded against each other, allowing businesses, governments, and individuals to convert one currency into another. It's the world's largest financial market, open 24 hours a day from Monday to Friday, with daily transactions exceeding $7.5 trillion. Participants speculate on exchange rate fluctuations to earn profits, using currency pairs like EURUSD or USDJPY. Economic, political, and market factors influence forex price movements.

Stocks

The financial market for stocks, often referred to as the stock market, is a segment of the global financial market where investors can buy and sell stakes in companies in the form of shares. These shares represent a portion of ownership in a company and entitle the holder to a fraction of its assets and profits, depending on the type and quantity of shares held.

There are two main ways to trade stocks: purchasing shares directly or through Contracts for Difference (CFDs). When investors buy shares outright, they own a portion of the company and can benefit from dividends and long-term price appreciation. In contrast, stock trading through CFDs allows traders to speculate on price movements without owning shares, making it possible to profit from both rising and falling markets. This method provides greater flexibility and leverage but also comes with higher risk. Understanding how the stock market works and the differences between traditional investing and CFD trading is essential for making informed decisions when selling stocks or opening new positions.

Stock indices

The stock market for indices comprises calculated measures based on the prices of a group of stocks, representing the performance of sectors or the entire market. Indices like the S&P 500 or the Dow Jones serve as barometers for the financial health of the markets. They allow investors to gauge the general market trend and diversify their investments through index funds or ETFs, thereby reducing risk and simplifying portfolio management by tracking the performance of a broad range of companies with a single financial product.

Commodities

The commodities market is a sector of the financial market where raw or primary natural resources, such as oil, gold, silver, copper, wheat, and coffee, are traded. These commodities are fundamental to the global economy and are the basis for producing goods and services. Prices in this market are determined by global supply and demand, influenced by factors such as weather conditions, geopolitical conflicts, and economic fluctuations. Investing in commodities can provide a hedge against inflation and diversify an investment portfolio, though this market is often more volatile than those for stocks or bonds.

Cryptocurrencies

The cryptocurrency market is a segment of the financial market where decentralized digital currencies, such as bitcoin, ethereum, and thousands of other altcoins, are traded. These currencies operate on blockchain technology, offering security, anonymity, and independence from traditional financial institutions. 

The cryptocurrency market is known for its high market volatility, with prices that can fluctuate widely in a very short time. The potential for high gains attracts investors and traders, but they must also be aware of the significant risks of trading cryptocurrencies. This market operates 24/7, allowing transactions at any time without centralized regulatory intervention, making it distinct from traditional financial markets.

Key online trading terms to know

To get started in online trading, it's crucial to understand specific vocabulary:

• Margin: In trading, margin is the deposit required to open and maintain positions on financial markets using leverage, which allows control of a large number of assets with limited capital. It is divided into the initial margin, required to open a position, and the maintenance margin, the minimum needed to keep the position open. Effective margin management is vital, as it influences the potential for gains and the risk of losses. Failing to meet margin requirements can lead to a margin call, forcing the trader to add funds or close positions.
• Leverage: Leverage is a powerful tool that allows traders to control larger positions with a relatively small amount of capital. Expressed as a ratio (e.g., 1:50 or 1:100), leverage amplifies potential profits and losses. While it provides opportunities to maximize gains, excessive leverage can also lead to significant risks, making effective risk management essential for long-term success in trading.
• Spreads: The spread is the difference between the bid (selling) price and the ask (buying) price of a financial asset. It represents the cost of executing trades and varies depending on market conditions, asset liquidity, and the broker's pricing model. Tighter spreads generally indicate a more liquid market, while wider spreads can result from volatility or lower trading volumes, impacting the overall cost of trading.

• Stop-loss: A stop-loss is an order traders place in the market to sell an asset when its price reaches a certain level to limit potential losses on an open position. It's an essential risk management strategy in trading, allowing investors to predetermine the maximum amount they're willing to lose on a transaction. Using stop-loss helps protect capital by automatically closing a position at a predetermined price, avoiding larger losses in volatile or fast-moving markets.

• Take-profit: A take-profit is an automatic order traders use to close an open position when the price of an asset reaches a predetermined level where it has gained value. This risk management tool enables traders to secure their profits by exiting the market at a target price without constantly monitoring their positions. The take-profit order is particularly useful in volatile markets, where it helps capture profits before a price reversal reduces the gains. This strategy ensures profit objectives are automatically met, helping traders execute their trading strategies with discipline and efficiency.

These terms are fundamental for effectively managing risks and opportunities in online trading.

The 3 main trading strategies

Choosing the right trading style is crucial for success in financial markets, as different strategies cater to various risk appetites and experience levels. While some traders prefer buying and selling assets within the same day, others adopt a long-term approach, holding positions for months or even years. In this section, we explore three widely used strategies—day trading, momentum trading, and investment trading—each with its own advantages and challenges. However, these are not the only strategies available. 

Beginners may also want to explore other approaches, such as swing trading, which captures medium-term price movements, or position trading, where investors hold assets for extended periods, often aligning with broader market trends. Each strategy requires a deep understanding of market conditions and a clear risk management plan, as the risks involved in trading can vary significantly. Whether you're a day trader seeking quick gains, an experienced investor focusing on long-term growth, or somewhere in between, selecting the right strategy will depend on your financial goals, time commitment, and risk tolerance.

Day trading

Day trading, also known as intraday trading, is a strategy where positions are opened and closed within the same trading day, without being left open overnight. Day traders capitalize on short-term price fluctuations to profit from stocks, currencies, commodities, and other financial instruments. 

This approach requires constant market attention, quick reaction to changes, and good risk management. Day trading suits experienced traders who can analyze markets swiftly and make decisions under pressure while managing capital effectively and cautiously using financial leverage.

Momentum trading

Momentum trading is a strategy that involves buying assets in an uptrend and selling those in a downtrend. It is based on the assumption that assets moving in a particular direction will continue in that trajectory in the short term. 

Momentum traders look for signals indicating that a stock or another financial instrument is gaining speed, often triggered by news events, financial reports, or changes in economic indicators. This approach requires technical analysis to identify trends and quick decisions to capitalize on price movements before they reverse, making timing and risk management key success elements.

Investment (long-term trading)

Investment trading, often referred to as long-term investing, is a strategy that involves buying and holding financial assets for an extended period, typically several years or decades. Unlike day trading or momentum trading, which aim to profit from short-term price fluctuations, investment trading focuses on long-term growth potential and income generation through dividends or interest. 

Investors using this approach base their choices on fundamental analysis of companies, markets, and economic conditions to identify assets likely to appreciate over time. This strategy demands patience, discipline, and risk tolerance aligned with extended time horizons, favoring stability and sustained growth over short-term volatility.

Chart patterns in online trading

Traders use various chart patterns to anticipate future price movements:

Wedges

"Wedges" are consolidation patterns in technical analysis where trend lines converge, signaling a potential reversal or continuation of the trend. They are divided into rising and falling wedges, offering clues about future price movements.

Triangles

Triangles are chartist patterns formed by the convergence of support and resistance lines, indicating a pause in the trend before a potential continuation or reversal. They are categorized into ascending, descending, and symmetrical triangles, suggesting a build-up of price pressure before a significant breakout.

Channels

Channels are trend patterns formed by two parallel lines, representing support and resistance, through which prices oscillate. They indicate stable bullish or bearish movements and can help identify buying and selling opportunities by following the channel's direction.

Mastering these patterns can significantly enhance a trading strategy's effectiveness.

How to start trading?

Entering the world of trading requires preparation and education. Follow these steps to get started:

1. Choose a reliable platform: Look for platforms like Exness that offer security, educational resources, and customer support.
2. Education: Utilize educational resources and demo accounts to grasp market mechanics without risking real capital.
3. Define a trading strategy: Based on your financial goals and risk tolerance, choose a strategy that best suits you, whether day trading, swing trading, or long-term investing.
4. Market analysis: Before trading, thoroughly analyze the market using technical and fundamental analysis. This involves studying price charts, economic indicators, financial news, and company reports to make informed trading decisions.
5. Risk management: One key to successful trading is effective risk management. This includes using stop-loss orders to limit potential losses, diversifying your portfolio to spread risk, and adjusting the size of your positions based on your confidence level and market analysis.
6. Trading psychology: Controlling your emotions is crucial for trading success. Stay disciplined, follow your trading plan, and don't let fear or greed dictate your decisions.
7. Continuous learning: The market constantly evolves, so it's essential to keep learning about new trends, trading tools, and strategies. Many online trading platforms offer webinars, courses, and tutorials to help traders improve their skills.

The importance of a trading platform

Choosing a suitable online trading platform is fundamental for any trader. A good platform not only provides direct access to financial markets but also offers advanced analysis tools, interactive charts, and real-time information that can aid in making informed trading decisions. Platforms like Exness also offer demo accounts, allowing traders to practice their strategies risk-free.

Final thoughts

Trading is a demanding activity that offers the potential for profits but also entails risks. To succeed, it's crucial to understand the workings of financial markets, master trading strategies, manage risk effectively, and maintain strict discipline. By adhering to these principles and utilizing the resources available on reputable platforms like Exness, traders can increase their chances of success in the markets.