What is Trading

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tradingTrading in finance is the buying and selling of a product with the intention of making quick profits.

You buy a product when you expect its price to rise and sell it later when you are satisfied with its price.

A trade has two faces

  1. The entry where the trader acquires (buys) the product
  2. The exit where the trader dumps (sells) the product

Example:

The chart shows the price of 1 barrel of oil over a 7 period

oil price chart

 Mark buys 1 barrel of oil for 90 USD.

5 days later the price of oil is 95 USD per barrel.

Mark sells his one barrel of oil on day 5 and makes a 5 USD profit.

Mark could have sold his barrel of oil at any day he wanted and make the respective profit or loss shown below.

Day 2 : Profit 7 USD

Day 3: Profit 10 USD

Day 4: Loss 4 USD

Day 5: Profit 5 USD

Day 6 : Loss 8 USD

Day 7: Profit 2 USD

It can be seen that Mark could have made more profit if he sold on day 2 but he may have expected the price to rise even higher.  In days 4 and 6 as the price is lower than what Mark bought oil , he would have made a loss if he had sold it.

Also Mark may have bought oil at day 6 (82 USD) and sold it on day 7 (92 USD)  giving him a profit of 10 USD

This is the beauty of trading that separates it from any other betting game.

You can choose when to enter and when to exit a trade and there is no time limit (except on certain cases)  as to when you need to perform any of the two.  You can infinitely hold a product until it gives you the profit you want.

It’s a two party thing

Trading essentially is the exchange of the product between two parties. Therefore in order for a trader to be able to buy a product he needs to first find another trader who wants to sell that particular product. Similarly when the trader wants to sell his product he needs to find a trader that wants to buy that product for that given price.

As it may be difficult for Mark (especially if he is a retail client) to find a buyer by himself, or find a seller when he wants to buy oil he can use the following methods.

  1. Through a stock exchange.  A location where people quote the prices they want to buy or sell a product.
  2. Through a broker. An intermediate that tries to math buy and sell needs for a fee.
  3. Through a market maker. An institution that quotes both a buy and a sell price for a product held in inventory, hoping to make a profit on the bid –ask price. Most FOREX companies are market makers.

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