Trading is a basic economic concept that involves buying and selling of assets. These assets can be goods and services, Where the buyer pays its value to the seller. In other cases, the transaction may involve the exchange of goods and services between trading parties.
In the context of financial markets, the assets that are traded are called financial instruments. These assets can be in the form of stocks, bonds, forex trading pair, options, futures contracts, borrowing products, digital currency, and many more. If these terms are new to you, don't worry - we'll explain them all later in this article.
The term trading is usually used to refer to short-term trading, where traders actively enter and exit trades in relatively short time frames. However, this is a slightly misleading assumption. In fact, trading may refer to a wide range of different strategies, such as day trading, swing trading, trend trading, and many more. But do not worry. We will discuss each of them in more detail later.
What is investment?
Investment is the allocation of resources (such as capital) with the expectation of making a profit. This could include using the money to finance and set up a business, or purchase land with the intention of reselling it at a later price at a higher price. In the financial markets, this usually involves investing in financial instruments with the hope of selling them at a later time at a higher price.
The expectation of returns is fundamental to the concept of investment (this is also known as return on investment). Unlike trading, investing usually takes a long-term approach to increasing wealth. An investor's goal is to build wealth over a long period of time (years, or even decades). There are plenty of ways to do this, but investors usually use key factors to find potentially good investment opportunities.
Due to the nature of their long-term approach, investors are usually not concerned with short-term price fluctuations. Thus, they usually remain relatively passive, without worrying too much about short-term losses.
Trading vs investing - what's the difference?
Traders and investors seek to make profits in the financial markets. However, their methods for achieving this goal are quite different.
Generally, investors seek a return over a longer period of time - years or even decades. Since investors have a larger time horizon, their target returns on each investment tend to be larger as well.
On the other hand, traders try to take advantage of market volatility. They get in and out of trades faster, and may seek lower returns with each trade (because they often enter multiple trades).
Which is better? Which one is more suitable for you? This decision is up to you. You can start by getting to know the markets, and then learn in action. Over time, you will be able to determine which one best suits your financial goals, personality and trading profile.
What is Fundamental Analysis (FA)?
Fundamental analysis is a method for determining the value of a financial asset. A fundamental analyst studies both economic and financial factors to determine whether the value of an asset is fair and appropriate.
This can include macroeconomic conditions, such as the state of the broader economy, industry conditions, or business related to that asset (if there is a business). They are often tracked by leading and lagging indicators across the overall economy.
Once the fundamental analysis is completed, the analysts aim to determine if the asset is undervalued or overvalued. Investors can use this finding when making their investment decisions.
In the case of cryptocurrencies, fundamental analysis may also include an emerging field of data science that is concerned with public blockchain data called on-chain metrics.
These metrics can include network hash rate, early holders of cryptocurrency, number of wallet addresses, transaction analysis, and much more. Using the abundance of data available on public blockchains, analysts can create complex technical indicators that measure certain aspects of the overall health of the network.
Although fundamental analysis is widely used in the stock market or forex, it is less suitable for cryptocurrencies in their current state. This asset class is so new that there is simply no unified, comprehensive framework for determining market valuations.
Moreover, most of the market is driven by speculation and narratives. Thus, fundamental factors usually have minimal effects on the price of a digital currency. However, more accurate ways of thinking about valuing digital assets can be developed once the market matures.
What is the spot market?
The spot market is where financial instruments are traded for what is called "spot delivery". Delivery, in this context, simply means exchanging a financial instrument for cash. This may seem like an unnecessary distinction, but some markets are not immediately cash settled.
For example, when we talk about futures markets, the assets are delivered at a later date (when the futures contract expires).
In simple terms, you can think of the spot trading market as the place where the trading takes place 'on the spot'. Since the settlement of the trade occurs instantly, the current market price of the asset is often referred to as the spot price.
So, what does this mean in the context of the cryptocurrency markets? What can you do on the Binance spot market? You can exchange coins. So, if you want to exchange your BNB for BUSD, go to the BNB/BUSD spot market, and that's it!
What is loan trading?
Debit trading is a method of trading using funds borrowed from a third party. In fact, leverage trading amplifies results – both in an upward and downward direction.
A leveraged trading account gives traders more access to capital and eliminates some of the counterparty risk. How is that? Well, traders can trade with the same deal size but keep less capital in the cryptocurrency trading platform.
When it comes to leveraged trading, you often hear about the terms of leveraged trading and leverage. Debit trading refers to the amount of capital that you are committing to (meaning you are paying it out of your own pocket).
Leverage means the amount you are amplifying your leveraged trading. So, if you use 2x leverage, this means that you open a position equal to twice your borrowed trading amount. If you use 4x leverage, you open a position equal to four times the value of your carry trade, and so on.
However, beware that filtering can occur. The more leverage you use, the closer the liquidation price will be to your position. If your position is liquidated, you risk losing the entire borrowed trade. So, be aware of the high risks of leveraged trading before you start. A guide to leveraged trading on Binance is an essential resource before you get started.
What is the foreign exchange (“Forex”) exchange?
The foreign exchange market (Forex, FX) is where traders can exchange one country's currency for another. Basically, the forex market is what determines the exchange rates of currencies around the world.
We often think of currencies as "safe haven" assets.
Even the term "stable currency" indicates, in theory, that the asset is somewhat safe from volatility. But, while this is true to some extent, currencies can also experience significant market volatility. How is that? Well, the value of currencies is also determined by supply and demand. In addition, it may also be affected by inflation or other market forces related to global trade, investment, and geopolitical factors.
How does the forex market work? Well, the currency pair may be traded by investment banks, central banks, trading companies, investment firms, hedge funds, and retail forex traders. The Forex market also offers the possibility of converting world currencies for international trade settlements.
Forex traders usually use day trading strategies such as leveraged speculation to amplify their returns.
The Forex market is one of the main building blocks of the modern global economy as we know it. In fact, the forex market is the largest and most liquid financial market in the world.
What is the trading strategy?
A trading strategy is simply a plan that you follow when executing trades. There is no one right approach to trading, so each strategy will depend largely on the trader's profile and preferences.
Whatever your trading style, having a plan is crucial - it sets clear goals and can prevent you from getting derailed by emotion. Usually, you'll want to decide what you're trading, how you'll trade it, and the points you'll get in and out of.