Trading is short-term trading in stocks, currencies and other financial instruments. The trader tries to adjust sales and purchases to the rise and fall of the stock market prices in such a way that he makes a profit with every action. The most important factor in this type of trading is the fluctuations in the financial markets, also known as volatility. So trading is only possible because the values are constantly changing.
- When trading, an investment does not last long and there is no guarantee of profit.
- Trading strategies differ depending on how long the trader keeps the financial product. Position trading covers a period of a few days to a few months, swing trading a few days, day trading is carried out within a day.
- Private individuals cannot act themselves, but have to open a custody account with a broker. The broker takes over the trade on behalf of his customers.
Trading: Risks and Profit Margins
Since trading is about increasing your balance, at first glance it looks like one of many investment opportunities. But it is exactly the opposite of long-term investments: firstly, an investment is usually never held for long when trading and secondly, there is no guarantee of a profit. It is even possible to lose all of the capital invested.
Nevertheless, not only financial experts are interested in this form of trading, but also more and more private individuals. The reason for this is the high profit margins that traders with a good knack for the market can theoretically exploit. In addition, nowadays online brokers make it possible to participate in daily stock market events from the computer at home. All users need for this is a stable, fast internet connection and a depot.
The time horizon: an important factor in trading
Trading is not about investing money and holding a position for a long time; so there is little time between a purchase and a sale. However, there are quite a few trading strategies that differ in terms of the average duration that a financial product will keep. For example, any trade that spans a period of a few days to a few months is known as position trading .
Another trading strategy is swing trading or movement trading, in which expected price fluctuations dictate the trade. The time span here can be a few days, but sometimes the swing is completed in one day. In general, all intraday (i.e. within one day) trades are referred to as day trading . This also includes promotions in which positions are bought and sold again within a few minutes. Since such transactions are possible from anywhere thanks to online brokers, day trading is one of the most interesting forms of trading.
Day Trading Risks
In day trading, the main focus is on derivatives. These are financial products whose value is derived from another product, the so-called base product. Very popular but also very risky derivatives are contracts for difference (CFDs).
Contracts for difference offer traders the prospect of a high profit within a short period of time, but they also carry the risk of a total loss. Basically, CFDs are a type of bet that brokers and traders make on the price development of a share or the performance of another financial product. If the trader is correct in his assessment, he will receive the difference between the value at the time the contract was concluded and the value at the end of the contract.
The fact that particularly high profits are possible here is due to a so-called leverage that is used in CFDs. The trader only has to raise a small part of the value invested, the greater part comes from the broker. A lever is used, so to speak, that moves the possible profit amount upwards. If the trader is right in his assessment of a price or value development, he will be paid the difference of the total amount staked. But if he is wrong with his assumption, it can also happen that he completely loses the capital he has brought in himself.
So CFDs are a great example of how a trader can make a lot of profit in a short period of time. Another is foreign exchange trading (Forex trading), which is primarily about how currencies relate to one another. CFDs and Forex trading also have in common that they are very speculative and therefore always associated with a high level of risk.
Brokers execute the trade
Private individuals cannot initiate purchases and sales on the stock exchange themselves. For this reason, there are brokers who trade on behalf of their clients. So if you want to become active as a trader, you open a portfolio with a broker and use it to make purchases and sales. The broker makes money by charging trading fees for the trades initiated by the trader. There may also be costs, for example for using the depot. So if you are looking for a broker, you should always check what costs the individual providers charge. These expenses have to be deducted from potential profits and can reduce them significantly.
In addition to a deposit and start-up capital, traders need tools that support them in assessing the market and predicting price developments. One of the most widely used tools is chart analysis, also known as chart analysis or simply technical analysis. It can be created with a trading software and makes it easier, for example, to recognize patterns according to which a certain price behaves.
If you are a Neutrader, you should definitely use a demo account for such a software online and try it out without using real money. Such test runs are called paper trading and are essential to familiarize yourself with the software and the market.