Trading/Investing Basics

What Is Trading?

Buying and selling assets is at the heart of trading, which is a foundational idea in economics. The vendor receives money from the consumer for these goods and services. In other circumstances, the participants to the transaction are exchanging products and services.

Financial instruments refer to the assets that are traded on the financial markets. This includes stocks, bonds, currencies, futures, options and margin products as well as cryptocurrencies. Don't worry if you've never heard of these phrases before; we'll go over them in detail later on.

Trades are typically defined as short-term positions that are actively entered and exited over a short period of time. However, this notion is a little misleading. Day trading, swing trading, trend trading, and a slew of other tactics are all included in the broad category of "trading." However, do not be alarmed. Later, we'll go through each one in further depth.

What Is Investing?

To invest is to put money into an organization in the hopes of making a profit. Using money to start a business or buying land with the intention of later reselling it at a greater price are examples of this. It's common in the financial markets to invest in a financial asset with the intention of eventually selling it for a better price.

The concept of investing is predicated on the expectation of a profit (this is also known as ROI). Trading, on the other hand, focuses on short-term gains and losses. Long-term wealth accumulation is the goal of an investor (years, or even decades). There are a number of ways to do this, but investors often use fundamental variables to identify potentially promising investments.

Investors aren't frequently bothered by short-term price changes because of the long-term nature of their strategy. As a result, they are more likely to keep a low profile and not worry about short-term losses.

Trading vs. Investing – What’s The Difference?

In the financial markets, both traders and investors are looking to make money. The approaches to achieving this objective, on the other hand, are vastly different.

As a rule, investors are looking for a long-term return on their money – perhaps even decades. Investors that have a longer time horizon tend to have higher expectations for their investments' returns. In contrast, traders seek to profit from the current state of the market. It's common for these traders to enter and exit positions more often, and to seek lesser returns per trade (because they're initiating several transactions).

What's the best one out of the two of them? Do you prefer one over the other? That is all up to you. It's possible to begin learning about the markets and then use what you've learned. To find out which one best fits your financial goals, personality, and trading profile, you'll have to keep using it over time.

What Is Fundamental Analysis (FA)?

Fundamental analysis is a method for assessing a financial asset’s valuation. When determining whether an asset's value is fair, a fundamental analyst considers a variety of economic and financial criteria. Macroeconomic factors such as the overall state of the economy, industry trends, or the company directly linked to the asset are examples of these. Macroeconomic leading and lagging indicators are routinely used to monitor these trends.

After completing the fundamental research, analysts look to see if the asset is overvalued or undervalued. Investing decisions can be aided by this conclusion.

In the case of cryptocurrencies, a new branch of data science known as on-chain metrics, which is concerned with public blockchain data, may also be included in fundamental analysis. Among these measures are the network's hashing rate, the amount of addresses, the analysis of transactions, and a host of others. Analysts can develop elaborate technical indicators that monitor various aspects of the network's overall health using the vast amount of data available on public blockchains.

Cryptocurrency fundamental analysis isn't the best fit for this type of study, which is extensively utilized in the stock and forex markets. This asset class is so young that it lacks a recognized framework for market values. In addition, a large portion of the market is based on rumors and speculation. The price of a cryptocurrency is rarely affected by factors that are considered to be fundamental in nature. However, as the market evolves, more accurate means of valuing cryptoassets may be created.

What Is Technical Analysis (TA)?

Technical analysts, on the other hand, employ a distinct methodology. Fundamental to technical analysis is the notion that past price movements can serve as a predictor of future market behavior.

The intrinsic worth of an asset is not the focus of technical analysts. Instead than focusing on the current market, they look over the past to see if there are any prospects. In addition to price and volume analysis, chart patterns, technical indicators, and many other charting tools can also be used in this process. The purpose of this research is to determine the strength or weakness of a specific market.

That being said, technical analysis is more than just a tool for estimating the likelihood of price changes in the future. Useful framework for risk management may be found here. Market structure can be studied using technical analysis, which clarifies and quantifies trading decisions. To begin managing risk, it's important to know how much you're dealing with. As a result, not all technical analysts are considered traders by the general public. For risk management purposes only, they can employ technical analysis as a framework.

Any financial market may benefit from technical analysis, and cryptocurrency traders are no exception. However, does technical analysis really work? There is a lot of speculation behind the valuation of the cryptocurrency markets. Technical analysts will have an advantage here because they can focus solely on the technical aspects of the situation.

Fundamental Analysis vs. Technical Analysis – Which Is Better?

It all depends on what you're doing in the market. Isn't it better to use both? It's ideal to use a variety of methodologies and indicators to get the best results from your market research. It is more likely that you will come across more solid investment options this way. Diversifying your trading approaches can also help you remove preconceived notions from your decision-making.

Confluence is a term used to describe this phenomenon. Diverse trading approaches are combined by confluence traders, who profit from the best of all possible worlds. When two or more methods are integrated, the trading opportunities they offer may be more powerful than those offered by a single strategy.

What Drives The Financial Markets?

Supply and demand are the only factors that determine an asset's price. It's up to the buyers and sellers to decide. There is a market when supply and demand meet. A financial asset's value might be influenced by a variety of other factors.

In the past, we've talked about fundamental variables, including the state of the economy, which can have a significant impact on the market. It's also possible to take into account technical factors, such as the value of a cryptocurrency's market capitalization. Other considerations include the mood of the market or recent news.

However, these are only considerations. The price of an asset is mostly determined by the balance of supply and demand at any given time.

What Is A Market Trend?

In the financial markets, a trend refers to the general direction in which an asset's price is moving. Price action, trend lines, or even important moving averages are commonly used in technical analysis to spot market trends.

Bull and bear markets are two of the major types of patterns in the market. A bull market is characterized by a long-term upward trend in prices. A bear market is characterized by a long-term downward trend in prices. As a further option, we can potentially detect "sideways" markets, where there is no discernible trend.

It's important to keep in mind that a market trend does not imply that the price will always follow suit. Smaller bear tendencies will be confined in a long-term bull market, and vice versa. This is simply the way things work in the market. A person's point of view changes with regard to the time period under consideration. Higher-time-frame market trends always have a greater impact than lower-time-frame market trends.

What Is A Market Cycle?

"The market moves in cycles" is a term you may have heard before. A pattern or trend that appears and disappears repeatedly is referred to as a cycle. Higher-time-frame market cycles are more trustworthy than shorter-time-frame market cycles. Even yet, if you stare at an hourly chart for long enough, you can see minor market cycles.

The nature of the market is cyclical. Certain asset classes may outperform others during economic cycles. The same asset classes may underperform other asset classes in different market conditions during the same market cycle.

It's important to keep in mind that it's very hard to know where we are in the market cycle at any particular time. The only time this analysis can be performed with great precision is after the previous stage of the cycle has ended. The beginning and end of a market cycle are likewise rarely clearly defined. Being in the here and now is an extremely skewed perspective when it comes to the financial markets.