What is trading and how is it different from investing? After reading yesterday’s lesson on what investing really is and how to invest, like most people you probably realized investing isn’t what exactly what you thought it was. Most people aren’t coming from the perspective of a business owner in the stocks they own. If your primary interest is that a stock, gold, or any other asset’s price moves in your favor so you make money, that’s trading. Another way to phrase this is, let’s say the company releases bad news but your stock goes up anyway. Do you care about the implications of the bad news or just glad to make profits on the stock? If you just care about making profits, and you’re glad to make profits any which way you can, learn more about trading, not investing.
Hence the title, Active Trading for income. Income can be a lot, as it is for lawyers and doctors, or a little. You can trade on the side, as many of you will start recognizing you already do. Or, you can trade as a part time occupation or full time job.
The basic idea of trading for a living is no different in the financial markets than any other industry. If you work at a store or do business on Ebay, you’re buying and selling “stuff” to make income, aka trading. For many people, trading can be a viable home business. All you need is a computer to access your online broker and funds to start. And of course you’ll have to know what you’re doing, which is why you’re starting your training here.
Trading in a Nutshell
How does a trader make money? It’s all very common sense. Think of it like running your own store.
1. Buy merchandise at a lower price, sell for a higher price. Make money when the price of a stock or other asset goes up.
2. Short (sell borrowed merchandise) at a higher price, buy it back for a lower price. Make money when the price of a stock or other asset goes down.
3. Have a plan for when to take profits. Turn merchandise into cash so you can keep doing business.
4. Have a plan for when to take a loss. Turn merchandise into cash so you can keep doing business.
Pretty straightforward right? The majority of a trader’s job is to
1. Find opportunities where the price has the best chance of moving in a specific direction. This is akin to a store’s purchasing manager or owner analyzing which are good products that customers would want (so they’ll be able to sell the products).
2. After deciding what to buy or sell, traders must learn to analyze what are good prices to buy or sell. What if a popular product is already too expensive and few people would buy it? It wouldn’t make sense for you to buy that product for your store and try to sell it to customers for an even higher price. You may have to lower the price with a sale to entice customers to buy this product, causing you to just recover what you paid for the product or even take a loss.
Basic trading concepts can be used to trade just about anything. So whether you want to trade stocks or other assets such as forex (currencies), commodities (gold, oil, corn), or futures, the principles are the same.
Analysis: Finding Opportunities
In the last lesson on investing, we introduced Fundamental Analysis, meaning analysis of the real world like how a company is doing. Technical Analysis, analyzing the price and volume of the stock or asset itself, is much more important for trading. We will have lessons about each type of analysis and go into details about both. Just know that the more frequently you want to buy and sell, the more you’ll use Technical Analysis. The less frequently you buy and sell, such as investing over long periods of time, the emphasis is on Fundamental Analysis.
Once you’ve understood the basics of both Fundamental Analysis and Technical Analysis, it may be to your advantage to subscribe to some advisory newsletters and reports. Professional traders and analysts provide these reports, which you can use their work to find opportunities instead of doing all of the analysis yourself.
How Should You Trade? Your Style in Timeframes
How much time do you have to dedicate to trading for income? Understanding when you have time to trade determines how you can trade. If you’re not available in front of your computer all day, you’re not going to day trade. The logistics simply doesn’t work. Let’s break down the spectrum of trading and investing time you’ll need to be available, which corresponds to how often you may buy or sell.
Scalping. Shortest holding period of a stock or asset. Scalpers try to make tiny profits of a few cents many many times throughout the day. This is the most active trading style and takes a lot of energy and focus.
Day Trading. Holding a stock or asset for a few minutes or hours when the markets are open. Scalping is an example of very active day trading. However, many day traders may wait for just a handful of opportunities during the day. Some day traders know the opening or closing hours of the market well, making all their profits in those hours. Day traders try to profit from price changes during the day and can make money even if the stock ends at the same price with which it started the day.
Swing Trading. Holding a stock or asset for days or weeks. Those with part-time and full-time jobs have schedules that fit swing trading. Swing traders focus more on the daily and weekly price changes and can enter buy and sell orders before work, after work, and on weekends. While swing traders don’t buy and sell as often as day traders, swing traders can do just as well.
ETN (Exchange Traded Notes),
ETF (Exchange Traded Fund),
Stock Index Futures Options (aka Equity Index Futures Options),
Stock Index Futures (aka Equity Index Futures),
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