What is Trading?
Trading is a fundamental concept in economics that involves the buying and selling of valuables. These may be goods and services for which the buyer pays the seller some compensation. In other cases, trade may involve the exchange of goods and services between parties to a transaction. In the context of financial markets, tradable assets are referred to as financial instruments.
These can be stocks, bonds, Forex currency pairs, options, futures, leveraged products, cryptocurrencies, and other instruments. If you are unfamiliar with some of the terms from this list, it’s okay – we’ll explain them as we go along.
The term “trading” is commonly used to refer to short-term trading, where traders actively open and close positions over relatively short periods of time.
However, this definition is fairly misleading. In fact, trading can refer to a wide range of different strategies such as day trading, swing trading, trend trading, etc. But don’t worry. We will look at these strategies in more detail later.
What is Investing?
Investing is the investment of resources (for example, capital) with the expectation of making a profit. This includes using money to finance and start a business or buying land to resell at a higher price.
In the context of financial markets, it usually means investing in financial instruments with the expectation of selling them later at a higher price.
A key concept in investing is the return on investment (also known as ROI ). Unlike trading, investing takes a longer-term approach to wealth accumulation. The goal of the investor is to accumulate wealth over a long period of time (years or even decades).
There are many ways to do this, but usually, the search for potentially good investment opportunities
starts with fundamentals. The long-term nature of the strategy allows investors not to worry about temporary price fluctuations. As a rule, they behave relatively passively and do not pay much attention to short-term losses.
Trading and investing – what’s the difference?
Both traders and investors strive to make a profit in the financial markets. However, their methods of achieving this goal are different.
As a general rule, investors are looking to make a profit over a longer period of time – remember that we talked about years and even decades. And because investors have a longer time horizon, their target return on each investment tends to be higher as well.
On the other hand, traders are trying to capitalize on market volatility. They open and close positions more often and allow a lower return on each trade (because they often open several at once). What is the best strategy? Which one is more suitable for you? You decide. You can start by learning about the markets and then move on to practice. Over time, you will learn to determine which strategy is best for your financial goals, personality, and trading profile.
What is fundamental analysis (FA)?
Fundamental analysis is a method for assessing the value of a financial asset. A fundamental analyst examines economic and financial factors to determine if an asset’s value is fair. Fundamental analysis looks at macroeconomic circumstances such as the state of the economy as a whole, industry conditions, and the business associated with the asset (if any). Often these circumstances are tracked with the help of leading and lagging indicators of macroeconomics.
Based on the results of fundamental analysis, the analyst must determine whether the asset is undervalued or overvalued. Investors can use the findings when making investment decisions. In the case of cryptocurrencies, fundamental analysis can also be based on Data Science, which processes public blockchain data, called on-chain metrics. These metrics include network hash rate, holder rating, number of addresses, transaction analysis, and much more.
Using the wealth of public blockchain data available, analysts can create complex technical indicators that measure certain aspects of the overall health of the network. Although widely used in the stock market or in the forex market, fundamental analysis is less suitable for analyzing the cryptocurrency market in its current state. This asset class is so new that there is simply no standardized overarching basis for determining market valuation yet.
Moreover, the movement of the market is predominantly influenced by speculation and narrative. Thus, fundamental factors have little effect on the prices of cryptocurrencies. However, as the market matures, more accurate ways of valuing crypto-assets may be developed.
What is technical analysis (TA)?
Technical analysts take a different approach. The main idea behind technical analysis is that historical price action can indicate likely future market movements. Technical analysts do not seek to find out the true value of an asset. Instead, they look at historical trading activity and try to identify trading opportunities based on it.
Technical analysis includes metrics such as price movement and volume, chart patterns, the use of technical indicators, and many other charting tools. The purpose of this analysis is to assess the strength or weakness of a given market. With that said, technical analysis is not only a tool for predicting likely future price movements.
It can also be a useful risk management framework. Because technical analysis provides a model for analyzing market structure, it makes trade management more specific and measurable. In this context, risk measurement is the first step towards risk management. This is why some technical analysts cannot be considered traders in the narrow sense. They may use technical analysis solely as a risk management tool.
The practice of technical analysis is applicable to any financial market and is widely used by cryptocurrency traders. But what is the secret of its effectiveness? As we have said, the valuation of cryptocurrency markets is subject to speculation. This makes them an ideal platform for technical analysts as they can only benefit from technical factors.
Fundamental analysis and technical analysis – which is better?
It completely depends on your trading strategy. Actually, why not use both methods? Most market analysis methods work best in combination with other methods or indicators. Thus, there is a greater chance of finding more reliable investment opportunities. Combining different trading strategies can also help eliminate bias in the decision-making process.
This approach is sometimes referred to as merging. Merger traders combine several strategies, taking advantage of the strengths of each. The idea is that trading opportunities provided by combined strategies can be stronger than opportunities provided by only one strategy.
What influences financial markets?
The price of an asset is determined only by the balance of supply and demand. In other words, it is determined by buyers and sellers. Where supply meets demand, there is a market. But what else can increase the value of a financial asset?
We have already said that fundamental factors (for example, the state of the economy) can be the cause; technical factors (such as the market capitalization of the cryptocurrency); as well as other factors that should be taken into account (for example, market sentiment or recent news).
However, all these are just additional “variables”. In reality, the price of an asset at a particular moment is determined by the balance of supply and demand.
What is a market trend?
A trend is the general direction of the market. In technical analysis, market trends are determined using price action, trend lines, or even key moving averages.
There are two main market trends – bullish and bearish. A bull market means a steady uptrend in which prices are constantly rising. A bear market means a sustained downtrend in which prices are constantly falling. There are also consolidating, or “lateral” markets without a clearly directed trend.
Note that a market trend does not mean that the price always moves in the direction of the trend. In a protracted bull market, there may be short-term bearish trends and vice versa.
This is the nature of market trends. You could say it’s a matter of perspective, as it all depends on the time frame you’re looking at. In the context of long time intervals, the market will always be more important than in the context of short ones.
The peculiarity of market trends is that they can be determined with absolute certainty only in hindsight. You may have heard of the concept of hindsight bias, where people tend to convince themselves that they accurately predicted an event before it happened. As you can imagine, retrospective bias can have a significant impact on determining market trends and making trading decisions.
What is a market cycle?
You may have heard the expression “The market is cyclical”. A cycle is a pattern or trend that occurs in different periods. Generally, market cycles at higher time frames are more reliable than those at lower ones. But even on an hourly chart, you can find small market cycles, just like looking at decades of data.
Markets are cyclical in nature. Cycles can cause some asset classes to outperform others. At other stages of the same market cycle, the same asset classes may outperform other asset classes due to different market conditions.
It is worth noting that at any current moment, it is impossible to understand at what stage of the market cycle we are. The analysis can be performed with high accuracy only after the completion of part of the cycle. Market cycles also rarely have a specific beginning and end, which means that being “here and now” in the context of financial markets is a highly biased point of view.
If you want to know more about market cycles, read our article The Psychology of Market Cycles.
