From Beginner to Trader: The Complete Guide on What Trading Is and How It Works

Who is a Trader? Definition and Role in Financial Markets

A trader is an active participant in financial markets who conducts frequent transactions with various instruments: cryptocurrencies, currencies, stocks, bonds, commodities, derivatives, and funds. Unlike other market actors, the trader primarily operates with their own capital, seeking to generate profits through short- and medium-term price movements.

It is essential to understand that there are several categories of traders. Professional traders work within financial institutions with limited resources and strict regulation. Retail traders operate independently with their own funds. Investors, on the other hand, seek long-term returns, while brokers act as intermediaries between buyers and sellers. This distinction is crucial because each category has different levels of experience, available capital, and risk exposure.

How Trading Works: The Essential First Steps

If you are interested in understanding what trading is and how it works, the first step is to acquire a solid foundation of financial knowledge. This involves studying specialized literature, staying informed about economic news, and understanding how global events affect price movements.

Fundamental elements to get started:

• Continuous education: Learn about technical analysis, fundamental analysis, and market psychology
• Market understanding: Comprehend what factors influence price fluctuations
• Asset selection: Define which financial instruments you want to work with
• Platform choice: Register on a regulated platform that offers educational tools and demo accounts

Exploring Different Trading Styles

There is no single correct approach to trading. The style you choose should align with your goals, availability of time, and risk tolerance.

Day Trading: Involves opening and closing positions within the same day. Offers the possibility of quick profits but requires constant attention and can generate high commissions. Common in stock, Forex, and CFD markets.

Scalping: Scalpers perform multiple trades daily aiming for small, consistent gains. Takes advantage of market liquidity and volatility, especially in Forex and CFDs. Demands strict discipline because small errors multiply with high transaction volume.

Momentum Trading: Focuses on capturing significant market movements. Traders applying this strategy buy assets in an upward trend and sell in a downward trend, leveraging market inertia. The challenge lies in correctly identifying entry and exit points.

Swing Trading: Holds positions for several days or weeks to capitalize on price oscillations. Requires less time than day trading but exposes traders to risks from overnight or weekend events. Works well with CFDs, stocks, and commodities.

Technical and Fundamental Analysis: Some traders base their decisions solely on chart patterns and historical data (technical), while others study economic indicators and companies’ financial health (fundamental). Both approaches require experience and deep knowledge.

Financial Assets: What You Can Trade in Markets

The universe of instruments available for trading is broad:

Stocks represent ownership of companies. Their prices fluctuate based on corporate performance and macroeconomic conditions.

Bonds are debt instruments where the trader lends money to governments or corporations in exchange for periodic interest.

Commodities include resources like gold, oil, and natural gas. Their prices depend on supply, demand, and geopolitical factors.

Forex (Forex) constitutes the largest and most liquid market in the world. Traders buy and sell currency pairs speculating on exchange rate changes.

Stock indices track the performance of groups of stocks. They allow trading on entire sectors in a single operation.

Contracts for Difference (CFDs) enable speculation on price movements without owning the underlying asset. They offer flexibility, leverage, and the ability to open long (buy) and short (sell) positions.

Risk Management: Protecting Your Capital

Effective risk management is what separates successful traders from those who lose money. These tools are available on regulated platforms:

Stop Loss is an order that automatically closes your position at a predetermined price, limiting potential losses.

Take Profit secures gains by closing the position when it reaches a specific price target.

Trailing Stop is a dynamic stop loss that adjusts favorably as the market moves in your favor.

Margin Call is an alert warning when your available margin falls below a certain threshold, indicating you need to close positions or deposit more funds.

Diversification spreads risk by investing in multiple assets, sectors, or strategies.

Fundamental rule: Never invest more than you are willing to lose entirely.

Practical Example: Applying What Trading Is in Reality

Suppose you are a momentum trader interested in the S&P 500 index trading via CFDs. The Federal Reserve announces an interest rate hike. Historically, this puts downward pressure on indices because it makes credit more expensive for companies.

You observe that the S&P 500 begins a strong downward trend. As a momentum trader, you decide to open a short (sell) position in CFDs of the S&P 500 to benefit from this decline.

To protect your investment, you set a stop loss at 4,100 points (above the current level) and a take profit at 3,800 points (below). You sell 10 contracts at the price of 4,000.

If the index falls to 3,800, your position closes automatically and you realize gains. If it rises to 4,100, the position closes, limiting losses. This way, you clearly define your maximum risk before executing the trade.

The Reality of Professional Trading: Data You Need to Know

Before starting, it is important to have realistic expectations. According to academic research:

• Only 13% of day traders achieve consistent positive profitability over six months
• Only 1% generate sustained profits over five years or more
• Nearly 40% of day traders quit within the first month
• Only 13% continue trading after three years

These numbers highlight that what is trading is not just an income opportunity but an activity that requires continuous learning, discipline, and emotional management.

Additionally, markets are undergoing a transformation. Algorithmic trading currently accounts for between 60-75% of total trading volume in developed markets. This changes the dynamics and presents challenges for independent traders.

Final Considerations

Trading offers schedule flexibility and profit potential but involves significant risks. It is advisable to:

• Maintain a stable source of income (main job or other businesses)
• Initially consider it as supplementary income
• Invest in education and practice before using real capital
• Use demo accounts to develop skills without risk

Deeply understanding what trading is and how it works is the first step. The next is to act with patience, discipline, and humility in the markets.

Frequently Asked Questions

Where do I start if I want to trade?
Start by educating yourself about financial markets. Then choose a regulated platform, open a demo account to practice, and develop a strategy before investing real capital.

What should I look for when choosing a trading platform?
Prioritize regulation, competitive commissions, suitable analysis tools, responsive customer support, and educational offerings.

Can I trade while working full-time?
Yes, many start this way, trading in their free time. However, it requires dedication and discipline even with limited hours.

How much capital do I need to start?
It depends on the platform and asset. Some allow starting with modest amounts. The important thing is not to risk more than you can afford to lose.