What is trading?
Trading is a vital economic concept that entails buying and selling assets. These can be goods and services, where the customer 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 traded are known as financial instruments. These can be stocks, bonds, currency pairs on the Forex market, options, futures, margin products, cryptocurrency, and many others. If these words are new to you, don’t worry – we’ll give an explanation for them all on this topic.
The term trading is often used to refer to short-term trading, where merchants actively enter and exit positions over fantastically short time frames. However, this is a slightly deceptive assumption. In fact, trading can also refer to a vast range of different strategies, such as day trading, swing trading, trend trading, and many others. But don’t worry. We’ll go through every one of them in more detail later.
What is investing?
Investing is allocating resources (such as capital) with the expectation of making a profit. This can include the use of money to fund and kickstart a business or buying land with the intention of reselling it later at a higher price. In the financial markets, this typically entails 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 also regarded as ROI). As opposed to trading, investing generally takes a longer-term approach to wealth accrual. The purpose of an investor is to build wealth over a long period of time (years, or even decades). There are plenty of ways to do that, however investors will normally use fundamental factors to discover potentially good investment opportunities.
Due to the long-term nature of their approach, traders generally don’t concern themselves with short-term price fluctuations. As such, they will generally stay particularly passive, without worrying too much about short term temporary losses.
Trading vs. investing – what’s the difference?
Both traders and investors look to generate income in the financial markets. Their strategies to achieve this goal, however, are pretty different.
Generally, buyers are seeking to generate a return over a longer period of time – suppose years or even decades. Since investors have a large time horizon, their targeted returns for every investment have a tendency to be larger as well.
Traders, on the other hand, attempt to take advantage of the market volatility. They enter and exit positions more frequently, and can also seek smaller returns with every trade (since they’re regularly getting into more than one trades).
Which one is better? Which one is more appropriate for you? That’s for you to decide. You can begin educating yourself about the markets, and then learn by doing. Over time, you’ll be in a position to decide which one suits better your financial goals, personality, and trading profile.
What is fundamental analysis (FA)?
Fundamental analysis is a technique for assessing a financial asset’s valuation. A fundamental analyst studies each economic and financial factors to decide if the value of an asset is fair. These can consist of macroeconomic circumstances like the state of the wider economy, industry conditions, or the business related to the asset (if there’s one). And these are frequently tracked through macroeconomics leading and lagging indicators.
Once the quintessential analysis is complete, analysts aim to decide whether or not the asset is undervalued or overvalued. Investors can use this conclusion when making their investment decisions.
In the case of cryptocurrencies, fundamental evaluation might additionally consist of an emerging field of data science that concerns itself with public blockchain records known as on-chain metrics. These metrics can consist of the network hash rate, the top holders, the number of addresses, analysis of transactions, and many more. Using the abundance of available data on public blockchains, analysts can create complicated technical indicators that measure certain aspects of the overall health of the network.
While fundamental analysis is extensively used in the stock market or Forex, it is less appropriate for cryptocurrencies in their contemporary state. This asset class is so new that there simply isn’t a standardized, comprehensive framework for identifying market valuations. What’s more, much of the market is driven by speculation and narratives. As such, fundamental factors will normally have negligible effects on the price of a cryptocurrency. However, more accurate approaches to think about cryptoasset valuation may be developed as soon as the market matures.
What is technical analysis (TA)?
Technical analysts work with a different approach. The core idea behind technical analysis is that historic price action can also indicate how the market is possibly to behave in the future.
Technical analysts don’t attempt to find out the intrinsic value of an asset. Instead, they seem to be at the historical trading activity and attempt to identify possibilities based on that. This can consist of analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The purpose of this analysis is to evaluate a given market’s strength or weakness.
With that said, technical analysis isn’t solely a tool for predicting the probabilities of future price movements. It can additionally be a beneficial framework for risk management. Since technical analysis provides a model for examining 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 regarded as strictly traders. They can also use technical analysis basically as a framework for risk management.
The practice of technical analysis can be utilized to any financial market, and it’s widely used amongst cryptocurrency traders.
But does technical analysis work? Well, as we’ve noted 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 thinking about technical factors.
Fundamental analysis vs. technical analysis – which is better?
That absolutely depends on your buying and selling strategy. Actually, why not use both? Most market analysis techniques work best when they’re blended with different techniques or indicators. This way, there’s a better chance of discovering more reliable investment opportunities. Combining different buying and selling techniques can additionally assist eliminate biases from your decision-making process.
This concept is now and again referred to as confluence. Confluence merchants mix a couple of techniques into one that harnesses benefits from all of them. The concept is that the buying and selling opportunities introduced by the combined techniques may also be stronger than the ones provided by only one strategy.
What drives the financial markets?
The price of an asset is really decided by the balance of supply and demand. In other words, it’s decided by the buyers and sellers. Where supply meets demand, there’s a market. But what else can power the value of a financial asset?
As we’ve mentioned earlier, there can be fundamental factors, such as the state of the economy. In addition, there can be technical factors like the market capitalization of a cryptocurrency. Also, there may additionally be other elements to consider, such as market sentiment or recent news.
However, these are just that – factors to consider. What actually 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 generally recognized using price action, trend lines, or even key moving averages.
Generally, there are two main kinds of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are consistently going up. A bear market consists of a sustained downtrend, where prices are continuously going down. In addition, we can additionally identify consolidating, or “sideways” markets, where there isn’t a clear directional trend.
Bitcoin price chart since creation
Bitcoin has been in a bull market throughout all its existence.
It’s really worth noting that a market trend doesn’t imply that the rate is usually going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is simply just the nature of market trends. It’s a matter of perspective as it all relies on the time frame you are looking at. Market trends on higher time frames will continually have more significance than market trends on lower time frames.
A peculiar thing about market trends is that they can solely be determined with absolute certainty in hindsight. You might also have heard about the concept of hindsight bias, which refers to the tendency of people to convince themselves that they precisely predicted an event before it happened. As you’d imagine, hindsight bias can have a great impact on the process of figuring out market trends and making trading decisions.
What is a market cycle?
You might also have heard the phrase that “the market moves in cycles”. A cycle is a pattern or trend that emerges at different times. Typically, market cycles on higher time frames are more dependable than market cycles on lower time frames. Even so, you can in the end find small market cycles on an hourly chart simply as you might also do when looking at decades of data.
Markets are cyclical in nature. Cycles can result in positive asset classes outperforming others. In different segments of the same market cycle, these equal asset training may underperform different kinds of assets due to the distinctive market conditions.
It’s really worth noting that it’s almost impossible to decide in any given moment where we currently are in a market cycle. This analysis can be carried out with high accuracy only after that phase of the cycle has concluded. Market cycles additionally rarely have concrete beginning and endpoints. As it turns out, being in the present moment is an noticeably biased viewpoint in the financial markets.