Lesson 1 of 8
Estimated time: 15 minutes
What is Trading?
Understanding the fundamentals of trading and how financial markets work
Key Concept
Trading is the act of buying and selling financial instruments with the goal of making a profit from price movements. Unlike investing, which focuses on long-term growth, trading typically involves shorter time horizons and more frequent transactions.
The Basics of Trading
At its core, trading is simple: you buy something at one price and sell it at another, hopefully higher price. The difference between your buying price and selling price, minus any costs, is your profit (or loss).
However, successful trading requires understanding market dynamics, developing strategies, managing risk, and maintaining psychological discipline. It's both an art and a science that combines analysis, intuition, and strict rules.
Types of Trading
Day Trading
Day traders open and close positions within the same trading day, never holding positions overnight. This style requires intense focus, quick decision-making, and the ability to manage multiple positions simultaneously.
- Timeframe: Minutes to hours
- Number of trades: 5-100+ per day
- Capital requirement: $25,000+ (PDT rule in US)
- Best for: Full-time traders with high risk tolerance
Swing Trading
Swing traders hold positions for several days to weeks, capturing "swings" in market momentum. This style balances the intensity of day trading with the patience of long-term investing.
- Timeframe: Days to weeks
- Number of trades: 5-20 per month
- Capital requirement: $2,000+ recommended
- Best for: Part-time traders who can't watch markets all day
Position Trading
Position traders hold trades for weeks to months, focusing on longer-term trends and fundamental analysis. This style requires patience and conviction in your analysis.
- Timeframe: Weeks to months
- Number of trades: 1-5 per month
- Capital requirement: Flexible
- Best for: Those with limited time but good market understanding
What Can You Trade?
Stocks
Shares of ownership in companies
Example: Buying 100 shares of Apple (AAPL) at $150 and selling at $155 = $500 profit
Forex
Currency pairs from different countries
Example: Buying EUR/USD at 1.1000 and selling at 1.1050 = 50 pips profit
Cryptocurrencies
Digital or virtual currencies
Example: Buying 1 Bitcoin at $30,000 and selling at $35,000 = $5,000 profit
Commodities
Physical goods like gold, oil, wheat
Example: Buying gold at $1,800/oz and selling at $1,850/oz = $50/oz profit
How Trading Works
Open a Trading Account
Choose a broker, complete the application, and fund your account with capital you can afford to lose.
Analyze the Market
Use technical analysis (charts) or fundamental analysis (news, earnings) to identify opportunities.
Place Your Trade
Enter a position using market orders (immediate) or limit orders (at specific price).
Manage Your Position
Monitor your trade, adjust stop losses, and take partial profits as needed.
Close Your Trade
Exit the position when your target is reached or stop loss is hit, realizing your profit or loss.
Risks and Rewards
Potential Rewards
- Financial independence and freedom
- Work from anywhere with internet
- No ceiling on earning potential
- Continuous learning and growth
Inherent Risks
- Can lose more than invested (with leverage)
- 90% of traders lose money
- Emotional and psychological stress
- Requires significant time commitment
Trading vs Investing
| Aspect | Trading | Investing |
|---|---|---|
| Time Horizon | Minutes to months | Years to decades |
| Analysis Focus | Technical analysis | Fundamental analysis |
| Profit Source | Price movements | Growth + dividends |
| Time Commitment | High (daily) | Low (periodic) |
| Risk Level | Higher | Lower |
Key Takeaways
- Trading involves buying and selling financial instruments to profit from price movements
- Different trading styles suit different personalities and time commitments
- Success requires education, practice, discipline, and proper risk management
- Most traders lose money - only trade with capital you can afford to lose
- Trading is different from investing in terms of timeframe, analysis, and commitment
Your Next Steps
Ready to Continue Learning?
Now that you understand what trading is, it's time to learn about the different financial markets where trading takes place. Each market has its own characteristics, trading hours, and opportunities.