What is trading?
Trading is a fundamental economic concept that involves buying and selling assets. These can be goods and services, where the buyer pays the compensation to the seller. In different cases, the transaction can involve the exchange of goods and services between the trading parties.
In the context of the financial markets, the assets being exchanged are called financial instruments. These can be stocks, bonds, currency pairs on the Forex market, options, futures, margin products, cryptocurrency, and numerous others. Assuming these terms are different to you, you can definitely relax we’ll explain of all later in this article.
The term trading is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short time frames. However, this is a slightly misleading assumption. In fact, trading may refer to a wide range of various strategies, for example, day trading, swing trading, trend trading, and numerous others. In any case, don’t worry. We’ll go through every one of them in more detail later.
What is investing?
Investing is allocating resources “like capital” with the expectation of generating a profit. This can include using money to fund and kickstart a business or buying land determined to exchange it later at a higher price. In the financial markets, this typically involves investing in financial instruments with the hopes of selling them later at a higher price.
The expectation of a return is core to the concept of investment (this is called return on initial capital investment). As opposed to trading, investing typically takes a more extended term approach to wealth accrual. The goal of an investor is to build wealth over an extensive stretch of time (years, or even decades). There are plenty of ways to do that, yet investors will typically utilize fundamental factors to find potentially good investment opportunities.
Due to the long-term nature of their approach, investors generally don’t concern themselves with short-term price fluctuations. Thusly, they will typically stay relatively passive, without worrying a lot about short-term losses.
Trading vs. investing – what’s the difference?
Both traders and investors seek to generate profits in the financial markets. Their methods to achieve this goal “however, are quite different.
Generally, investors seek to generate a return over a longer period of time – think years or even decades. Since investors make some bigger memories horizon, their targeted returns for every investment tend to be bigger also.
Traders, then again, attempt to take benefit of the market volatility. They enter and exit positions all the more frequently , and may seek smaller returns with each trade(since they’re often entering multiple trades).
Which one is better? Which one is more suitable for you? That is for you to decide. You can begin educating yourself about the markets, and afterward learn by doing. Over time, you’ll have the option to determine which one suits better your financial goals, personality, and trading profile.
What is fundamental analysis (FA)?
Fundamental analysis is a method for assessing a financial asset’s valuation. A fundamental analyst studies both economic and financial factors to determine on the off chance that the worth of an asset is fair. These can include macroeconomic circumstances like the state of the wider economy, industry conditions, or the business associated with the asset (in the event that there’s one). What’s more, these are often tracked through macroeconomics leading and lagging indicators.
Once the fundamental analysis is complete, analysts aim to determine whether the asset is undervalued or overvalued. Investors can utilize this conclusion while making their investment decisions.
In the case of cryptocurrencies, fundamental analysis may also include an emerging field of data science that concerns itself with public blockchain data approached chain metrics. These metrics can include the network hash rate, the top holders, the number of addresses, analysis of transactions, and some more. Using the abundance of accessible data on public blockchains, analysts can create complex technical indicators that measure certain aspects of the overall health of the network.
While fundamental analysis is widely used in the stock market or Forex, it’s less suitable for digital currencies in their present status. This asset class is new to the point that there essentially is definitely not a standardized, comprehensive framework for determining market valuations. What’s more, a large part of the market is driven by speculation and narratives. Thusly, fundamental factors will typically unimportantly affect the price of a cryptocurrency. However, more accurate ways to think about cryptoasset valuation may be developed once the market matures.
What is technical analysis (TA)?
Technical analysts work with an alternate approach. The core thought behind technical analysis is that historical price action may indicate how the market is is likely to behave in the future.
Technical analysts don’t try to find out the intrinsic worth of an asset. Instead, they take a gander at the historical trading activity and try to identify opportunities in view of that. This can include analysis of price action and volume, chart pattern, and many other charting tools, The goal of this analysis is to evaluate a given market’s strength or weakness.
With that said, technical analysis isn’t only a tool for predicting the probabilities of future price movements. It can also be a useful framework for risk management. Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered strictly traders. They may use technical analysis purely as a framework for risk management.
The practice of technical analysis can be applied to any financial market, and it’s widely used among cryptocurrency traders. But does technical analysis work? Well, as we’ve mentioned earlier, the valuation of the cryptocurrency markets is largely driven by speculation. This makes them an ideal playing field for technical analysts, as they can thrive by only considering technical factors.
Fundamental analysis vs. technical analysis – which is better?
That entirely depends on your trading strategy. Actually, why not utilize both? Most market analysis methods work best when they’re combined with different methods or indicators. Along these lines, there’s a bigger chance of finding more reliable investment opportunities. Combining different trading strategies can also assist with eliminating biases from your decision-making process.
This concept is sometimes referred to as confluence. Confluence traders combine multiple strategies into one that harnesses benefits from every one of them. The idea is that the trading opportunities presented by the combined strategies may be stronger than the ones given by only one strategy.
What drives the financial markets?
The price of an asset is simply determined by the balance of supply and demand. As such, it’s decided by the buyers and sellers. Where supply meets demand, there’s a market. Be that as it may, what else can drive the worth of a financial asset?
As we’ve discussed earlier, there can be fundamental factors, like the state of the economy. In addition, there can be technical factors like the market capitalization of a cryptocurrency. Also, there may be different factors to consider, like market sentiment or late news.
However, these are only that – factors to consider. What truly determines the price of an asset in a given moment is simply the balance of supply and demand.
What is a market trend?
A market trend is the overall direction where the price of an asset is going. In technical analysis, market trends are typically recognized using price action, trend lines, or even key moving averages.
Generally, there are two main types of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are continually going up. A bear market consists of a sustained downtrend, where prices are continually going down. In addition, we can also identify consolidating, or “sideways” markets, where there is definitely not a clear directional trend.
It’s quite significant that a market trend doesn’t mean that the price is always going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is basically only the nature of market trends. It’s a matter of perspective as everything depends on the time frame you are looking at. Market trends on higher time frames will always have more significance than market trends on lower time frames.
A peculiar thing about market trends is that they can only be determined with full confidence in hindsight. You may have heard about the concept of hindsight bias, which refers to the tendency of individuals to convince themselves that they accurately predicted an occasion before it happened. As you’d imagine, hindsight bias can have a significant impact on the process of identifying market trends and making trading decisions.
What is a market cycle?
You may have heard the phrase that “the market moves in cycles”. A cycle is a pattern or trend that arises at various times. Typically, market cycles on higher time frames are more reliable than market cycles on lower time frames. All things being equal, you can eventually find small market cycles on an hourly chart similarly as you may do while looking at decades of data.
Markets are cyclical in nature. Cycles can bring about certain asset classes outperforming others. In different fragments of the same market cycle, those same asset classes may fail to meet expectations different types of assets due to the different market conditions.
Significant it’s almost difficult to determine in any given second where we presently are in a market cycle. This analysis can be done with high accuracy only after that part of the cycle has concluded. Market cycles also rarely have concrete beginning and endpoints. For reasons unknown, being in the current second is an exceptionally biased viewpoint in the financial markets.
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