Understand What Trading Actually Is
Before you learn charts, indicators, strategies, or options, you need to understand what you’re actually doing when you place a trade.
So, What Is Trading?
At its simplest, trading means buying and selling a financial asset with the goal of benefiting from a change in its price.
That asset might be a stock, an exchange-traded fund (ETF), an option, or another financial instrument. Markets bring buyers and sellers together, and prices constantly change as those participants make decisions.
Investing vs. Swing Trading vs. Day Trading
People often use the word “trading” to describe very different approaches. One of the first things a beginner should understand is the amount of time they expect to hold a position.
Investing
Investors generally buy assets with a longer time horizon. A position may be held for months or years based on the investor’s goals and view of the asset.
Swing Trading
Swing traders generally look for price movements that may develop over several days or weeks rather than opening and closing every position during the same trading day.
Day Trading
Day traders open and close positions during the same trading day. Because decisions can happen quickly, risk management and discipline become especially important.
What Makes a Price Move?
Market prices are created through buying and selling. When buyers are willing to pay higher prices, price can move upward. When sellers are willing to accept lower prices, price can move downward.
Many things can influence those decisions: company news, earnings, economic reports, interest rates, market sentiment, supply and demand, and expectations about the future.
As a beginner, you don’t need to understand every force in the market. What matters is recognizing that price represents the ongoing interaction between buyers and sellers.
What Happens When You Buy a Stock?
A stock represents an ownership interest in a company. When you purchase shares, you are purchasing an equity interest in that business.
Simple Example
Imagine a stock is trading at $50 per share and you purchase 10 shares.
Your position has a market value of approximately $500 at the time of purchase, excluding any fees or other costs.
If the stock later trades at $55, the market value of those shares would be $550. If it falls to $45, their market value would be $450.
This is one of the most important concepts in trading: prices can move in either direction.
A Trade Should Have a Plan
Before entering a trade, a trader should be able to answer a few basic questions.
Why am I entering?
What are you seeing in the market that gives you a reason to consider this trade?
Where am I wrong?
Decide what price action would tell you that your original trade idea is no longer working.
How much am I risking?
Determine your risk before entering rather than making that decision emotionally after the trade moves against you.
Trading Is About Probabilities, Not Certainty
No chart pattern, indicator, strategy, or trader can know with certainty what the market will do next.
A trading setup can look excellent and still fail. That’s why successful trading isn’t built around being right on every trade. The goal is to develop a repeatable process for identifying opportunities while controlling risk when you’re wrong.
Everything Comes Back to the 4 Keys
Throughout LYK Trader, we’ll organize the trading process around four principles.
Lesson 1 Complete
You now understand the basic purpose of trading and the difference between investing, swing trading, and day trading.
Next, we’ll look at the tools that actually allow you to participate in the market.
NEXT LESSON: CHOOSE A BROKER & TRADING PLATFORM →