Why to trade in financial markets?
Why to trade in financial markets?
2A.Difference between trading and investing:
One of the major differences between investing and trading is that investing means holding on to the asset for a long period of time whereas trading could be anywhere from a few seconds to months.
2B.Benefits of Trading:
Participate and benefit from the growing economy:
One can be a part of the economic growth of the country by investing and taking advantage of the increase in corporate earnings, dividends and growth in indices.
Exposure towards Investing can uplift helps gain more knowledge about the financial markets and business cycles.
Working on your own terms:
Trading comes with the flexibility of trading from anywhere and at any time. It can be considered as an additional income or even full time income with proper risk management strategy. It gives the freedom of working when you want to and on your own flexible terms unlike other jobs.
Grow your wealth:
Trading provides an opportunity to earn more returns on capital than other forms of investment such as fixed deposit or mutual funds. It can help an individual multiply their wealth and grow it in the long term with a profitable strategy.
2C.Participants in the market:
Speculators are traders who implement trading strategies to benefit in the short term returns with small price changes. Market makers are also considered speculators as they participate in the market by taking profit from the difference between bid and ask price.
Hedging is a risk-neutralizing strategy to offset losses at times of adverse price movements in an existing position. This can be done by taking a new position in the opposite direction to that of the original existing position.
For example: The farmer who anticipates the price of cotton to fall after harvest,can buy the put option as a hedge to cover the price risk.The position can be exited when an uptrend is foreseen again.
An arbitrator takes advantage of the momentarily price difference existing in different markets by buying the asset at lower price in one market and selling at higher price on different markets. The profit is made by the slight difference between the prices on both markets.
For example: If the current spot price of gold is $1,800 per ounce while the future price of a three month contract is $1,850 per ounce, then the arbitrageurs could lock in a profit of $50 (assuming there is no transaction cost) by buying spot gold at a lower price and selling the three month futures at a higher price.
2D.Major Trading Sessions:
The Asian session begins at 22:00 (GMT) as per Sydney and ends at 8:00 (GMT) as per Tokyo.Some of the major participants in this session are from countries like HongKong, Tokyo, Sydney and Singapore. The major currency traded during this time is the Japanese yen with about 16% of the total transactions.
London is the major contributor for forex as 32% of the total transactions happen during the London session. It starts at 8:00 GMT and ends at 16:00 GMT. This session has the highest liquidity among all sessions and slows down mid-day during lunch time until the New York trading session begins at 13:00 GMT.
New York session:
The New York session starts at 13:00 GMT and ends at 21:00 GMT. Almost 80% of the trades taken during this time are USD pairs. Hence, this is one of the most impactful sessions.
The London and New York sessions overlap between 13:00 GMT and 16:00 GMT. This is one of the best times to trade due to high liquidity, low spreads and major market movements.
In general, liquidity is very thin during the beginning and towards the end of the week
2E.Different types of trading:
Scalping involves profiting from minor price changes and the duration of the trade ranges from a few seconds to minutes.
Intraday trading involves buying / selling of securities on the same day before the close of the market. This is done to minimize the risk of carry trades.
Swing trading means holding a position from a few days to several weeks with the intention of capturing a larger trend.
Positional trading involves holding a trade for a long term period of time but it differs from investing as the trader can buy as well as sell but the investor only buys an asset with the future expectations of price appreciation.