How to Trade: Beginners' Guide to Trading

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During conversations with friends, family, or acquaintances, we have all heard the word “Trading.” We have seen it in news business reports and have even used the word multiple times when having random conversations or commenting on a viral Reddit thread.

So, what exactly is trading? What does it mean to trade an asset? What does trading mean in the financial setting?

The simple definition of trading is speculating on financial assets and predicting whether a financial asset/instrument will perform well or poorly. Trading can be defined as the science of betting on an underlying asset's market price movement without purchasing or owning the asset itself. It is a science because technical tools are involved in making a successful trade.

If you are a beginner and are just coming across the word, or you have been hearing the word for a while now and have finally decided it is time to dip your toes in the water, but before you dive fully into the pool, you must understand the basics and have a full grasp of the terminologies involved.

In the past, you might need to go through separate brokers or platforms to trade stocks, forex (foreign currency exchange), cryptocurrencies, and commodities (like gold or oil), but due to the advancement of technology, you can now be in your room and comfortably trade any financial asset you want.

Technology has allowed us to access various financial markets through our mobile devices without breaking a sweat.

In this article, Clacified will dissect the fundamentals of trading, provide practical tips for getting started, and provide a comprehensive overview of the concepts you need to understand. 

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The Basics of Asset Trading

The basics of trading start with the use of trading strategies. Traders use these strategies with the aim of making a profit and it involves using a series of patterns that happen frequently in the financial market and the world to predict an outcome within that market.

Different types of markets exist; in the context of trading, a market is an agreed-upon place where sellers and buyers come together to exchange financial assets. Financial assets are substitutes for something that has value and worth and can be bought, traded, sold, or used as payment.

Thus, financial assets are certificates of ownership that grant monetary value to the holder and are categorized into different types of markets specialized in trading them:

  • The Stock Market

    The stock market is an environment where investors buy and sell companies' shares (stocks). Fundamental factors such as company performance, investor confidence, etc., play a role in determining the market price of stocks. Examples of stock exchanges are the New York Stock Exchange, NASDAQ, etc.

  • Forex Market

    The forex market is another financial market that concentrates on trading foreign currencies. Traders pair different fiat currencies against each other and predict which one will perform better. The forex market plays a significant role in global finance and determines the exchange rates of currencies based on the demand and supply of the currency.

  • Crypto Market

    The cryptocurrency market is the new kid on the block. It is a platform designed for buying, selling, and trading crypto assets. Crypto assets like Bitcoin, Dogecoin, and Shiba Inu are digital currencies with no central ownership or authority. It is all about decentralization, security, and privacy.

  • Commodity Market

    The Commodity Market is arguably the oldest of the markets. Since the dawn of time, man has exchanged food through what is known as trade by barter. This trade by barter has taken a new form, now known as the commodity market. The commodity markets deal in agricultural products and raw materials. They enable buyers and producers to connect and trade.

Key Parties Involved in Trading

Trading is a well-oiled machine that requires many moving parts to keep the machine running smoothly; these moving parts are in the form of major people whose actions play vital roles in the market. They ensure the market functions properly and work the way it should; they are:

  • Retail Traders:

Retail traders are the lowest of the group and are made up of individual investors who participate in trading financial instruments using their money. Retail traders access the financial markets they want through online platforms provided by brokers.

Retail traders could be day traders or long-term investors with varying experience levels and investment goals. Retail traders generally seek short-term capital appreciation.

  • Institutional Traders

Institutional Investors are large organizations that manage and grow money; they have vast financial resources, employ thousands of professional investment teams, and trade large sums of funds such as pension funds, mutual funds, hedge funds, etc. Institutional investors focus on long-term capital appreciation and have a wider reach than retail traders.

  • Market Makers

Market Makers are firms that maintain liquidity in the market. They usually take the opposite sides of a trade to ensure buyers and sellers are always available. Market makers play a significant role in the financial market because they facilitate efficient trading and smooth market operation.

  • Brokers

Brokers are the middlemen who connect investors with the financial markets. Brokers offer online brokerage platforms for retail traders to access the financial markets. Some brokers charge for their services, allowing users to place orders, monitor their investments, and access market information.

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Basic Orders Used In Trading

Trading is a well-structured, complex world where traders look at past events to predict future events using what is known as market orders. Market orders are instructions traders give to effect a trade in the market.

Trading is a whole new world with its rules of engagement, and to successfully engage in it, some of these orders must be known and understood. They are Buy limit, Sell limit, Buy stop, and Sell stop.

Here, we will examine what these tools mean and provide practical scenarios to illustrate their use.

Buy Limit Order

A buy limit order is an instruction to a broker telling the broker that if the price pushes below what is currently being traded and hits a certain limit of a specified price, the broker should buy into the trade.

A practical example is, Let us say you are interested in getting a couple of Apple shares for yourself, but the current price of $168.45 is a little high. You can place a buy-limit order at $140. This means your broker will buy the stock only if the price falls to $140 or lower.

Sell Limit Order

A sell limit is the opposite of a buy limit. It instructs the broker to sell the position if the price rises to a predetermined limit.

Let us say you own a couple of Netflix shares, and the price is currently at $628.41, but you do not want to miss out if the price keeps going up. You can place a sell limit at $700. This means your broker will only sell your shares if the price reaches $700 or higher. A sell limit order allows you to make some profit, and you will not miss out if the price keeps going up.

Limit Orders

Buy Stop Order

A stop order tells the broker that a trade should be bought in if it reaches a level above the current trade. It is used when a trader wants to enter the market data with at a higher price.

Let us say you have been watching and analyzing the Microsoft stock price. Based on your analysis, the price has been steadily rising, and you believe it will continue to rise. So, if the current price is $500, you can place a buy-stop order at $510. This means your order will only be executed when the Microsoft stock price reaches $510.

Sell Stop Order

A sell-stop order instructs the trader to sell the position if the trading price falls below the current price. This type of order is initiated when market analysis shows that the market will continue to fall.

So, you own a share of Google, and based on your analysis, you are worried that the stock price ($120) is likely to fall. You can place a sell-stop order at $110. This means once Google's stock price falls or reaches $110, your sell-stop order will be executed, and you will be taken out of the trade. Sell-stop orders help to limit potential losses.

Stop Orders

Trading Tips For Beginners

Trading is a business, not a hobby or something to be done for fun; it is a real professional business. In any business, the most important tip is to have the right mindset and follow the process without skipping any steps.

The first mindset that brings a beginner to trading must be the right one. Beginners should not come into trading hoping to make millions in the first few weeks. Trading is not a get-rich-quick scheme that will give millions of dollars in days.

The second thing a beginner also needs is consistency and perseverance. It will take 6 months to learn the basics of paper trading—demo, 12 months to fully master how to trade, and 12-18 months to become consistently profitable.

Beginners should learn for 12 months because a 12-month period shows market varieties such as inflation, bear market, bull market, etc.

Beginners should set realistic goals, learn continuously, and stay informed on market trends, trading strategies, and risk management techniques. Beginners should not be in a rush; they should start small and gradually increase their investment as they advance and become better.

Every beginner should take risk management seriously, know when to deploy market orders and set their stop loss to the amount they can afford to lose without debt. Finally, every beginner should practice, practice, and practice using demo accounts.

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Trading is one of the most powerful ways to grow money. With the right strategy, traders can achieve their target profits with minimal loss.

The various financial markets have unique features, merits, and demerits. Traders should choose the one that aligns most with their interests and not just jump into a market because everyone else is doing it.

The goal of trading is to get in at the best price possible and sell at the best price without breaking the bank.

Market dynamics such as price movement, bullish/upward trending markets, bearish/downward trending markets, ranging markets, and indecisive markets should be understood, and efficient trading strategies should be developed to navigate these markets.

Market orders such as buy limit, sell limit, buy stop, sell stop, at market, and stop order should be applied where necessary.

The market's support and resistance should be considered when placing a trade.

Phases of the market, such as the run-up and pull-back phases, should be considered during market analysis.

Learning is constant; beginners should continue learning and practice trading with caution and discipline.

Beginners should choose the best time to concentrate on their learning and stick to it to grasp the market and terminology better. Mastery can only be achieved through constant and consistent learning.

Beginners should also do diligent research and choose the right broker for their trading to place trades at the appropriate time without missing a deadline.

It is important to note that fundamental analysis is just as important in trading as technical analysis and should not be ignored when learning how to trade.