What is Trading: Definition, Types & Trading Strategies

What is Trading?

Trading involves buying and selling stocks and other securities with the goal of earning profitable returns from the initial purchase. It provides an opportunity for investors to gain exposure to diverse markets, such as ETFs, bonds, global currencies like the US Dollar or Japanese Yen, or even commodities like gold, silver, or oil.

Which assets are open for Trading?

Typically, a large variety of assets, including both conventional and contemporary investment options, are available for Trading. Here's a breakdown of some common categories:

• Stocks (Equities): Equities, or stocks, are ownership shares in businesses that let you take advantage of their expansion or receive dividends, which are a portion of the company's profits.
• Bonds are loans to corporations or governments with a maturity date that returns your principal investment plus a fixed interest rate payout over time.
• Exchange-Traded Funds (ETFs): Easy and diversified investment options that offer a variety of securities, such as bonds or stocks, in a basket that trades on exchanges like individual stocks.
• Derivatives: A contract based on the value of underlying assets, like, commodities, stocks, bonds, or currencies. They can be applied in various ways, such as risk hedging and price movement speculation (Futures and Options contracts are examples).
• Currencies (Forex): The exchange rates between different countries' currencies, allowing you to profit from fluctuations in their relative value.
• Commodities are physical goods like gold, oil, or agricultural products traded on specialised exchanges. Factors like supply, demand, and global events can influence their prices.

As you've seen, there are multiple assets to trade. However, remember that trades carry risk, so analyse your risk appetite before trading.

Types of Trading

Here's a breakdown of some common types of trading strategies, as per their time horizon:

1. Short-term Trading (focuses on capitalising on price movements within a day):

• Day Trading involves buying and selling assets within the same trading day, aiming to profit from short-term fluctuations. It requires constant monitoring and a high level of activity.
• Scalping: Similar to day trading, but with even shorter holding times (seconds or minutes) and aiming for very small profits on numerous trades.

2. Medium-term Trading (focuses on trends lasting from days to weeks or months):

• Swing Trading: Capitalises on price swings within a trend, holding positions for a few days to a few weeks. Uses technical analysis to identify entry and exit points.

3. Long-term Trading (focuses on trends lasting months or even years):

• Positional Trading: Analyses stocks based on fundamentals (company health) and technicals (chart patterns) to identify long-term growth potential. Holds positions for weeks, months, or even years.
• Buy-and-Hold Investing: A passive strategy focused on long-term wealth creation by buying and holding assets for the long haul, with minimal buying and selling.

4. Other Trading Strategies:

• Momentum Trading: Aims to profit from assets with strong price movements in a particular direction, riding the trend until it weakens.
• Hedging: Uses derivatives (options or futures contracts) to protect existing holdings from potential losses due to adverse market movements.

Remember, the best trading strategy depends on your individual goals, risk tolerance, and available time for managing your portfolio.

Trading Strategies for Beginners

If you are new to this trading scene and want some effective strategies to help you understand the trader's game, we have put together a list of commonly used trading strategies that'll help you.

• Paper Trading: This strategy is a great practice start for new traders. It helps you test your trading skills before you start trading in the live market. So, there is no possibility of losing money when you are trading paper.
• Trend Following: Spotting an upward trend in an asset's price can be a great opportunity! It might indicate a chance to buy with the hope that the price will continue to climb in the near future. However, it's important to remember that markets can be unpredictable, and even strong trends can change direction. So, while upward trends are a positive sign, always do your research and have a risk management plan in place before making any investment decisions.
• Breakout Trading: Using trend lines, moving averages, and chart patterns, identify the stocks with potential levels of support and resistance. Now that you have identified the consolidation period, all you need to do is wait for the breakout. And when it happens, place your trade in the direction of it.

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