Trading Basic

What is trading?  

It's probably wise to kick  things off with a  definition of the topic  we'll be discussing. A  staple of economics,  trading simply refers to  the buying and selling of  assets. When you buy  your groceries at the  local shop, that's a trade. When you exchange your old PC for a new game  console, that's a trade. We could go on forever here. To cut a long story  short, any activity where you give something to someone in return for  something else is a trade.  

This principle really extends to the financial markets. You trade financial  assets like stocks, bonds, Forex pairs, options, cryptocurrencies, etc. Don't  worry
if you don't know what any of those are yet. By the end of this book,  you'll be an expert!

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What is investing? 

You might hear people talking about trading financial instruments, but you  might also hear them talking about investing in them. The aim in both of  these activities is similar (let's make some monaaay!), but they're  somewhat different in their methodologies. 

When you invest in something, you're hoping to get a return on that  investment – the goal is to get back the money you put in, plus some  more. For example, you could buy a run-down fast food restaurant for  $100,000, fix it up, and try to resell it for $500,000 in a few years. You could also buy a stake in a small startup, believing that the stake will be  worth a lot more when the business grows. 

But wait, we hear you ask, isn't that what traders do? Not quite. Yes, a  trader might buy shares in a business, but they're playing on a shorter time  frame. Traders frequently enter and exit positions to generate smaller  returns over a number of trades. Investors, on the other hand, generally  take a more passive approach – they invest capital into ventures or assets  that are likely to generate a larger profit on a longer time frame.  

But how do you decide what to buy and sell? You might get lucky randomly  picking stocks and flipping a coin to decide whether to buy or sell them,  but it won't net you consistent returns. Most traders instead conduct some  form of analysis to decide what moves to make next. Broadly, the types of  frameworks used can be broken down into two categories – fundamental  analysis and technical analysis. Let's talk about those.