What exactly is financial trading?

Interest in financial trading is growing rapidly, likely this was helped by the Covid epidemic where many were stuck at home looking for options to make money remotely. In January 2021 6 million people in the USA downloaded financial trading apps and throughout 2021 retail traders (retail = individuals rather than institutional investors) made up 23% of all US equity trading, a 100% increase from 2019! This surge in individual investors shows that many more people find financial trading an attractive proposition. We all know it involves buying and selling things like stocks, currency and bitcoin. But what is a good definition of financial trading, what is it, what’s the point, why do it, is it for me, and what are the goals?

Financial trading is nothing more than predicting the future prices of assets like stocks, currency and commodities. Correctly predicting price movements or changes allows people to make money by buying or selling. But of course, the reverse is also true, incorrectly predicting price movements allows people to lose money! Buying or selling in a market with an aim to make a profit based on these predictions, is called financial trading. There are many kinds of trades and assets, but all financial markets are regulated and checked to prevent fraud.

The increase in retail investors is likely due to several factors in addition to COVID, for example:

• The availability of intuitive online trading platforms and mobile apps which are accessible to beginners.
• Low entry barriers in terms of capital required – you don’t have to be a millionaire to trade the markets anymore!
• The popularity of investing forums and social media.

TLDR Takeaways:

• Financial trading involves predicting price movements in a wide range of financial instruments then buying/selling to capitalize on the resulting price fluctuations.
• Financial trading takes place in regulated markets to ensure quality control and reduce fraud.
• Understanding the fundamentals of financial trading is crucial for success.
• The potential rewards are substantial, but so are the potential losses.

Understanding the Core Principle of Financial Trading

Successful financial trading is all about predicting future prices or price movements correctly. Some may say this is just educated guessing or even gambling, but is it?

Is Financial trading just gambling?

This is a more interesting topic than it initially seems. There are, of course, differences between trading in sports markets or sports betting, and trading the financial markets. It could be argued that trading the financial markets relies more on skill and economic factors, whereas sports betting relies more on luck and unpredictable factors. There is certainly some truth to this in terms of conventional sports betting using bookmakers (although many sports betters would argue they do more research than financial traders!). However, when it comes to betting exchanges such as Betfair or Betdaq, the differences between sports markets and financial markets are much more subtle. In fact, this is a topic that really deserves an article dedicated to exploring the differences and similarities between trading on betting exchanges versus trading in financial markets. Stay tuned!

Predicting Price Movements: The Key to Financial Trading

To succeed, traders must correctly guess where prices are heading. This is simple, but far from easy! There are countless books on this topic, covering technical analysis, supply and demand, and many other related factors. But it is clear that a certain amount of knowledge is required for  traders to create and adopt strategies that consistently make profit, but what is this knowledge and how do we obtain it? Traders first of all need to understand the basics of how financial markets work and what causes prices to change.

To learn about financial trading, we need to develop a deep understanding of market dynamics and price movements. Key areas of knowledge to study include:

• Market fundamentals: Understand how financial markets function, including supply and demand dynamics, market participants, and factors that influence prices in the short and long-term.
• Technical analysis: Studying price charts and using indicators to identify trends, patterns, and potential entry/exit points for trades. Understanding key technical analysis tools include moving averages, relative strength index (RSI), MACD, and stochastic oscillators.
• Supply and demand zones: The areas on charts that show significant buying (demand) or selling (supply) pressure. Identifying these zones can help traders set entry/exit points and anticipate potential price reversals.
• Economic indicators: For longer term trades its important to understand how macroeconomic factors like GDP, inflation rates, and employment data can affect market trends.
• Risk management: Implementing proper risk management techniques is vital, the execution of trades with stop-loss orders and managing position sizes, is essential for trading success
• Market psychology: Understanding crowd behavior and the emotions that can drive market movements can help traders make more informed decisions.
• Multi-timeframe analysis: Analyzing price action across several different timeframes can provide a more comprehensive view of market trends and trading opportunities.

To obtain this knowledge, traders can:

1. Study trading books and online resources
2. Take trading courses or attend seminars
3. Practice with demo accounts to gain hands-on experience
4. Analyze historical price data and backtest trading strategies
5. Join trading communities to learn from experienced traders
6. Keep a trading journal to track and analyze their own performance

But the difficulty is knowing which courses, books and other resources are worth studying, and which are simply a waste of time or worse! I will continually update the site with my opinions and experiences of all such resources to help you avoid the scams and stick with the legitimate and useful resources.

But successful trading does require continuous learning and adaptation, this much I know already. Markets are dynamic, and strategies evolve, though there will always be basic truths that are near universal. Traders should however remain flexible and open to refining their approaches and strategies based on changing market conditions. While understanding market mechanics and technical analysis is crucial, successful trading also requires discipline, emotional control, and the ability to manage risk. Traders must develop a comprehensive skill set that combines knowledge with practical application and mental strategies to avoid emotional trading and consistently generate profits in the long run.