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Understanding Trading (Things You Should Know Before Starting Trading)

What is trading?

Trading is a fundamental economic concept that involves buying and selling assets. These can be goods and services, where the buyer pays the compensation to the seller. In other cases, the transaction can involve the exchange of goods and services between the trading parties.

In the context of the financial markets, the assets being traded are called financial instruments. These can be stocks, bonds, currency pairs on the Forex market, options, futures, margin products, cryptocurrency, and many others. If these terms are new to you, don’t worry – we’ll explain them all later in this article.

The term trading is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short time frames. However, this is a slightly misleading assumption. In fact, trading may refer to a wide range of different strategies, such as day trading, swing trading, trend trading, and many others.

What is investing?

Investing is allocating resources (such as capital) with the expectation of generating a profit. This can include using money to fund and kickstart a business or buying land with the goal of reselling it later at a higher price. In the financial markets, this typically involves investing in financial instruments with the hopes of selling them later at a higher price.

The expectation of a return is core to the concept of investment (this is also known as ROI). As opposed to trading, investing typically takes a longer-term approach to wealth accrual. The goal of an investor is to build wealth over a long period of time (years, or even decades). There are plenty of ways to do that, but investors will typically use fundamental factors to find potentially good investment opportunities.

Due to the long-term nature of their approach, investors usually don’t concern themselves with short-term price fluctuations. As such, they will typically stay relatively passive, without worrying too much about short-term losses.

Trading vs. investing – what’s the difference?

Both traders and investors seek to generate profits in the financial markets. Their methods to achieve this goal, however, are quite different.

Generally, investors seek to generate a return over a longer period of time – think years or even decades. Since investors have a larger time horizon, their targeted returns for each investment tend to be larger as well.

Traders, on the other hand, try to take advantage of the market volatility. They enter and exit positions more frequently, and may seek smaller returns with each trade (since they’re often entering multiple trades).

Which one is better? Which one is more suitable for you? That’s for you to decide. You can start educating yourself about the markets, and then learn by doing. Over time, you’ll be able to determine which one suits better your financial goals, personality, and trading profile.

What is responsible trading?

Trading crypto responsibly is more than just watching how much you’re buying and selling. You should be in control of your trading behavior rather than act based on emotions. You also need to take accountability and understand if the trading activity you’re doing really works for you.

There are many different ways you can invest in or trade cryptocurrencies. Alternatives like futures and margin trading can provide large returns through leverage but are riskier. Some traders may struggle to use these responsibly. Buying crypto on the spot market and HODLing is a safer option and might be more suitable for your risk profile.

Responsible traders will avoid the behavior and activities that can lead to irresponsible trades. A large part of responsibly trading crypto is to recognize when your decision-making might be negatively influenced. This skill does come with time and experience, and it’s common for new traders to trade impulsively or rely on gut feeling. The more you avoid this, the better.

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