What is trading?

Trading:

The commonly used definition of trading is: a trader tries to make a profit by entering into trades or betting on price movements, by anticipating the future price trend as correctly as possible. We will now examine the various components of this definition in more detail.

The profit potential:

In trading, it is possible to bet on rising as well as on falling prices and thus to make a profit even if the stock market or another financial market falls. If the trader believes, based on the findings of his/her analysis, that the stock of Apple or the exchange rate between the EUR and the USD will appreciate, he/she can buy the shares or the corresponding currencies today and sell them at a higher price later to make a profit. And even if the trader assumes that prices will go down, he/she can take this into account in his/her trading plan and enter a so-called sell (short) trade with which he/she profits when prices on the underlying assets depreciate. Naturally there is always the risk that the price trend will not be as per the trader's expectations and hence he/she has to close the trade with a loss.

Decision-making:

To make buying or selling decisions, traders can use various methods and tools to Analyse price movements in the price charts and stock prices. A distinction is made between the fundamental data trader, who makes trading decisions based on company or economic data, and the so-called technical trader, who only analyses share prices and focuses on specific patterns and price formations. It is difficult to generalize that a particular type of decision-making or analysis is superior to the other. Rather, it is important that the individual trader chooses the type of trading that suits him/her better. This book exclusively focuses on understanding and applying the concepts of technical analysis.

Short-term vs. long-term trading:

The investment horizon is an important topic that fundamentally determines the type of trading. We normally distinguish between two groups: day trading and swing trading. In the case of short-term trading, the trader opens and closes his/her individual trades within a few minutes or hours. Since the speculative period is usually limited to one day, these trades are called day trading. If the holding period of a position is a few days to weeks or even months, it is called swing trading. The application possibilities of these two trading types and the respective requirements for traders are fundamentally different. 

Day trading is often less suitable for employed people due to time constraints, since it is often necessary to keep an eye on price charts throughout the opening hours of the market. When the Frankfurt Stock Exchange opens at 9.00 AM, most people in Germany are probably at work and cannot follow the price movements actively. However, a German day trader could alternatively switch to other stock markets and actively trade on the American or Asian stock exchanges after his/her working hours.

Most people find it far more practical to limit themselves to medium to longer-term swing trading since the time involvement can be considerably less. Swing trading is often the better solution for employed people, since they don’t have to sit in front of a PC for hours and the decision-making process is slower.