What is Trading?
Trading in this specific context refers to buying and selling securities based on specific strategies. These strategies are developed by using technical analysis. Which we, as traders, use to identify low risk, high reward, high probability trade setups. Traders will often utilize advanced software and indicators to perform accurate analysis or trade setups and management. There are many different types of trading including: day-trading, intra-swing trading, or long term position trading. It is different than investing in that it allows for extraction of income and does not hinge on a percentage growth of capital. Think of it like investing for people with ADHD.
Pros & Cons of Trading:
As with anything in life, there are good and bad things to consider when beginning the life of a trader.
- You’re able to make money in both bullish and bearish markets.
- Risk can be actively qualified and quantified for each trade.
- High liquidity of personal assets.
- Able to utilize multiple strategies and setups to profit from opportunities.
- You can make your own financial decisions.
- Focus on extracting income from trading, not % returns over time.
- Taxation is a liability if your corporate structure is not set up properly and you are trading full time for an income.
- More decision making required due to being more active in the markets.
- It can be risky in many different ways, further outlined below.
Types of Risk in Trading:
Outlined below are just a few of the types of risks you may encounter when trading. By knowing them and preparing yourself, you stand a great chance of becoming a successful trader.
- Price risk (price fluctuations) – Increase and decrease in price movement can cause significant losses, especially if you don’t know what you’re doing before you enter into a trade.
- Liquidity risk (volume) – Different market factors can make it hard to unload the security you’re holding if demand is low. This can leave you tied up in a trade that may not be desirable.
- Credit/capital risk (insufficient capital) – Trading the wrong markets or not having enough capital to trade successfully can be a big challenge. If you don’t have enough money to trade successfully, this is probably not for you.
- Capital markets risk (global risk) – Global catalysts (war, political, natural disaster) are often unpredictable, but can still directly affect your trades.
- Volatility risk (news risk) – Announcements from the Federal Reserve, economic data, and business information are among some of the common causes of market volatility.
Ok, Let’s Do This!
Now that you’ve looked over that list and you know you can handle it… What’s next? Building a strategy that works for you will help ensure your eventual success. We at NeuroStreet like to break it down into two categories: Trader Type & Trader Style. A traders type relates to their time horizon, goals, commitment level and availability to trade. A traders style relates to their trading strategy. Many traders (including NeuroStreet traders) use a combination of styles to allow their strategy to remain effective in changing and dynamic markets. We will explore trader types and styles in more detail in our next blog post.