wall-street-g61a3df11f_1920.jpg

What is Trading?

The Anglicism trader stands in the financial industry for people or institutions that act as dealers in financial instruments or commodities.

General

Their activity is "trading", i.e. trading in underlying assets. Traders are often understood to be speculatively oriented market participants who take financial risks in order to profitably exploit the market development they expect. The word "trader" appeared in a universal lexicon as early as 1863 as "tradesman". Traders work for financial institutions as foreign exchange or securities dealers in the cash market and in the futures market or for their own account as proprietary traders. They also include the stock exchange traders, but not the stock brokers or lead brokers.

Types

Private traders usually act as private individuals for their own account. Institutional traders often act on behalf of credit institutions, investment funds or insurers. They usually have access to more markets and trading strategies than private traders. The speculator with a short planning horizon is called a "short-term trader" or day trader, in contrast to the "position trader" who works with a long planning horizon and holds futures contracts over a longer period of time. Ring traders are called “independent traders” in Great Britain and “floor traders” in the USA. In contrast to "information traders", who make their buying, holding and selling decisions dependent on fundamental data, "noise traders" act on the basis of information that is not price-sensitive, such as rumors or as part of herd behavior.

Economic aspects

Trader is a term that often has negative connotations and is often associated with high-frequency trading. As the variety of types of traders shows, their trading motive is very different. However, they all pursue the goal of using profit opportunities to achieve price gains. A mistrade – a financial contract with a loss – is to be avoided at all costs. Before making buying and selling decisions, they have to collect and evaluate all market data and use their opinion to anticipate trends and market developments. If a trader assumes that the market price of the underlying asset will rise (bullish), he will open a long position by buying futures, and conversely, a short position in the case of a bear market.

When a "trader scene" is mentioned, what is meant is mainly particularly active private traders, especially professional traders who try to earn their income exclusively from trading activities. The trader scene in Germany can be classified as rather small. According to studies by the CFD Association, there are currently around 140,000 trading accounts for contracts for difference (CFD) and foreign exchange in Germany, with many of these accounts also being second or third party accounts. Accordingly, it is estimated that there could be around 50,000 to 60,000 active traders in Germany.

Recent surveys show that 19.4 percent of online traders worldwide are women. Within Europe, most traders are in the UK. There are currently around 730,000 trading accounts there.

 

Traders usually meet at the major industry events such as the "World of Trading" in Frankfurt or the Invest in Stuttgart. There are also a number of trading forums and specialized trading websites. Online seminars are also increasingly being offered.

According to the Handelsblatt, the activity of "trading" is frowned upon among ordinary investors in Germany. Many think of traders as lonely gamblers doing intensive trading in front of the computer. However, many see themselves as "serious" traders whose goal is not to make a quick profit, but to continuously accumulate wealth.

By no means every single transaction is profitable, not even for professionals. Losing trades are part of a trader's everyday life. Depending on the system, a win rate of 40-60 percent is usual, although this alone says nothing about absolute success.

 

The book author Michael Voigt says: "But I prefer a technically clean mistrade - i.e. a trade where you make a loss - to an unclean plus trade, because success is based solely on luck - and that's difficult to reproduce." He continues to advise traders: “Don't throw your rulebook out of the blue just because you've had a few mistrades; but always consider good money management instead.”

 

The criminal law limit of a trader's willingness to take risks is reached when the perpetrator (trader) "only in the manner of a gambler consciously and contrary to the rules of commercial diligence accepts an extremely increased risk of loss, only to obtain a highly dubious prospect of winning".

Three steps to prepare for a trade

 

Placing a stock trade is much more than just pressing a button and entering your order. It is important that you are prepared before opening a position and have a plan for managing it. Let's take a look at a few things to consider before placing this trade.

1. Have a clear and considered opinion about the stock you want to trade and the market.

 

Typically, your opinion is based on the strategies you use to analyze stocks and markets. There are many methods and criteria for analyzing stocks, and they generally fall into two categories: fundamental analysis and technical analysis.
For example, a technical strategy is to follow the money. What does that mean? Markets consist of buyers and sellers. By charting price trends, you may be able to determine which group is currently in control or price the stock. When buyers are in control, you may want to become a buyer. When sellers dominate, you may not want to buy or sell an already held long position.

2. Always knows when to fold when the trade isn't going your way and when to take your profit when it is.

 

To better understand when it's time to close a position, consider the following:

  • Downside risk management is one of the most important and most overlooked aspects of trading. Determining when to cut your losses is just as important as understanding when to lock in your profits.​

  • Consider creating a simple risk management plan before placing your trade and use a stop order to enforce it. The stop is triggered automatically when the stock moves against you and reaches your predetermined target price. Otherwise, your emotions could cause you to hold them too long and take an even greater loss. Note that this is just one of many strategies used to hedge the risk of an investment, and you should choose the one that best suits your own portfolio management strategy.​

  • When a trade is moving in the direction you want, you need to figure out when to take a profit. Although it's impossible to predict the future, you can use charts, technical indicators, fundamental analysis, and other tools to determine your exit point. As with risk management, discipline is key. Setting a trailing stop order can help you counteract your own potentially unrealistic profit expectations, while still allowing wiggle room if the stock continues to rise.

3. Look at how this would affect the balance of your portfolio.

 

If you open a trade, would that increase your focus on a specific sector or industry? This could cause you big losses if the market turns against you. To avoid this, you should look for opportunities in other sectors or industries.

 

These three principles aren't the only useful guidelines for preparing for a trade, but they're a good place to start.

Do you want to start trading?

You can open a free eToro account using the following button.

etoro.png