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. But don’t worry. We’ll go through each of them in more detail later.
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.
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.
Sneak a peek at the latest Bitcoin (BTC) prices right now.
Fundamental analysis is a method for assessing a financial asset’s valuation. A fundamental analyst studies both economic and financial factors to determine if the value of an asset is fair. These can include macroeconomic circumstances like the state of the wider economy, industry conditions, or the business connected to the asset (if there’s one). And these are often tracked through macroeconomics leading and lagging indicators.
Once the fundamental analysis is complete, analysts aim to determine whether the asset is undervalued or overvalued. Investors can use this conclusion when making their investment decisions.
In the case of cryptocurrencies, fundamental analysis may also include an emerging field of data science that concerns itself with public blockchain data called on-chain metrics. These metrics can include the network hash rate, the top holders, the number of addresses, analysis of transactions, and many more. Using the abundance of available data on public blockchains, analysts can create complex technical indicators that measure certain aspects of the overall health of the network.
While fundamental analysis is widely used in the stock market or Forex, it’s less suitable for cryptocurrencies in their current state. This asset class is so new that there simply isn’t a standardized, comprehensive framework for determining market valuations. What’s more, much of the market is driven by speculation and narratives. As such, fundamental factors will typically have negligible effects on the price of a cryptocurrency. However, more accurate ways to think about cryptoasset valuation may be developed once the market matures.
Technical analysts work with a different approach. The core idea behind technical analysis is that historical price action may indicate how the market is likely to behave in the future.
Technical analysts don’t try to find out the intrinsic value of an asset. Instead, they look at the historical trading activity and try to identify opportunities based on that. This can include analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The goal of this analysis is to evaluate a given market’s strength or weakness.
With that said, technical analysis isn’t only a tool for predicting the probabilities of future price movements. It can also be a useful framework for risk management. Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered strictly traders. They may use technical analysis purely as a framework for risk management.
The practice of technical analysis can be applied to any financial market, and it’s widely used among cryptocurrency traders. But does technical analysis work? Well, as we’ve mentioned earlier, the valuation of the cryptocurrency markets is largely driven by speculation. This makes them an ideal playing field for technical analysts, as they can thrive by only considering technical factors.
That entirely depends on your trading strategy. Actually, why not use both? Most market analysis methods work best when they’re combined with other methods or indicators. This way, there’s a bigger chance of finding more reliable investment opportunities. Combining different trading strategies can also help eliminate biases from your decision-making process.
This concept is sometimes referred to as confluence. Confluence traders combine multiple strategies into one that harnesses benefits from all of them. The idea is that the trading opportunities presented by the combined strategies may be stronger than the ones provided by only one strategy.
Looking to get started with cryptocurrency? Buy Bitcoin on Binance!
The price of an asset is simply determined by the balance of supply and demand. In other words, it’s decided by the buyers and sellers. Where supply meets demand, there’s a market. But what else can drive the value of a financial asset?
As we’ve discussed earlier, there can be fundamental factors, such as the state of the economy. In addition, there can be technical factors like the market capitalization of a cryptocurrency. Also, there may be other factors to consider, such as market sentiment or recent news.
However, these are just that – factors to consider. What really determines the price of an asset in a given moment is simply the balance of supply and demand.
A market trend is the overall direction where the price of an asset is going. In technical analysis, market trends are typically identified using price action, trend lines, or even key moving averages.
Generally, there are two main types of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are continually going up. A bear market consists of a sustained downtrend, where prices are continually going down. In addition, we can also identify consolidating, or “sideways” markets, where there isn’t a clear directional trend.
Bitcoin has been in a bull market throughout all its existence.
It’s worth noting that a market trend doesn’t mean that the price is always going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is simply just the nature of market trends. It’s a matter of perspective as it all depends on the time frame you are looking at. Market trends on higher time frames will always have more significance than market trends on lower time frames.
A peculiar thing about market trends is that they can only be determined with absolute certainty in hindsight. You may have heard about the concept of hindsight bias, which refers to the tendency of people to convince themselves that they accurately predicted an event before it happened. As you’d imagine, hindsight bias can have a significant impact on the process of identifying market trends and making trading decisions.
You may have heard the phrase that “the market moves in cycles”. A cycle is a pattern or trend that emerges at different times. Typically, market cycles on higher time frames are more reliable than market cycles on lower time frames. Even so, you can eventually find small market cycles on an hourly chart just as you may do when looking at decades of data.
Markets are cyclical in nature. Cycles can result in certain asset classes outperforming others. In other segments of the same market cycle, those same asset classes may underperform other types of assets due to the different market conditions.
It’s worth noting that it’s almost impossible to determine in any given moment where we currently are in a market cycle. This analysis can be done with high accuracy only after that part of the cycle has concluded. Market cycles also rarely have concrete beginning and endpoints. As it turns out, being in the present moment is an exceptionally biased viewpoint in the financial markets.
If you’d like to read more about market cycles, check out The Psychology of Market Cycles.
Contents
- What is a financial instrument?
- What is the spot market?
- What is margin trading?
- What is the derivatives market?
- What are forward and futures contracts?
- What are perpetual futures contracts?
- What are options contracts?
- What is the foreign exchange (Forex) market?
- What are leveraged tokens?
In simple terms, a financial instrument is a tradable asset. Examples include cash, precious metals (like gold or silver), a document that confirms ownership of something (like a business or a resource), a right to deliver or receive cash, and many others. Financial instruments can be really complex, but the basic idea is that whatever they are or whatever they represent, they can be traded.
Financial instruments have various types based on different classification methods. One of the classifications is based on whether they are cash instruments or derivative instruments. As the name would suggest, derivative instruments derive their value from something else (like a cryptocurrency). Financial instruments may also be classified as debt-based or equity-based.
But where do cryptocurrencies fall? We could think of them in multiple ways, and they could fit into more than one category. The simplest classification is that they are digital assets. However, the potential of cryptocurrencies lies in building an entirely new financial and economic system.
In this sense, cryptocurrencies form a completely new category of digital assets. What’s more, as the ecosystem evolves, many new categories may be established that wouldn’t otherwise be possible. Early examples of this can already be seen in the Decentralized Finance (DeFi) space.
The spot market is where financial instruments are traded for what’s called “immediate delivery”. Delivery, in this context, simply means exchanging the financial instrument for cash. This may seem like an unnecessary distinction, but some markets aren’t settled in cash instantly. For example, when we’re talking about the futures markets, the assets are delivered at a later date (when the futures contract expires).
In simple terms, you could think of a spot market as the place where trades are made “on the spot.” Since the trades are settled immediately, the current market price of an asset is often referred to as the spot price.
So, what does this mean in the context of cryptocurrency markets? What can you do on the Binance spot market? You can exchange coins with each other. So, if you want to exchange your BNB to BUSD, you go to the BNB/BUSD spot market, and voilá! In the same way, if you’d like to exchange your BNB to BTC, you’d go to the BNB/BTC spot market. Once your orders are filled, your coins will be swapped instantly. This is one of the easiest ways of trading cryptocurrencies.
Margin trading is a method of trading using borrowed funds from a third party. In effect, trading on margin amplifies results – both to the upside and the downside. A margin account gives traders more access to capital and eliminates some counterparty risk. How so? Well, traders can trade the same position size but keep less capital on the cryptocurrency exchange.
When it comes to margin trading, you’ll often hear the terms margin and leverage. Margin refers to the amount of capital you commit (i.e., put up from your own pocket). Leverage means the amount that you amplify your margin with. So, if you use 2x leverage, it means that you open a position that’s double the amount of your margin. If you use 4x leverage, you open a position that’s four times the value of your margin, and so on.
However, be aware of liquidation. The higher leverage you use, the closer the liquidation price is to your entry. If you get liquidated, you’ll risk losing your entire margin. So, be very aware of the high risks of trading on margin before getting started. The Binance Margin Trading Guide is an essential resource before you get started.
Margin trading is widely used in stock, commodity, and Forex trading, as well as the Bitcoin and cryptocurrency markets. In a more traditional setting, the funds borrowed are provided by an investment broker. When it comes to cryptocurrencies, the funds are typically lent by the exchange in return for a funding fee. In some other cases, however, the borrowed funds may come directly from other traders on the platform. This will usually incur a variable interest rate (funding fee), as the rate is determined by an open marketplace.
So, we’ve briefly explained what margin trading is, but there’s always more to learn. If you’d like to read more, check out What is Margin Trading?.
Derivatives are financial assets that base their value on something else. This can be an underlying asset or basket of assets. The most common types are stocks, bonds, commodities, market indexes, or cryptocurrencies.
The derivative product itself is essentially a contract between multiple parties. It gets its price from the underlying asset that’s used as the benchmark. Whatever asset is used as this reference point, the core concept is that the derivative product derives its value from it. Some common examples of derivatives products are futures contracts, options contracts, and swaps.
According to some estimates, the derivatives market is one of the biggest markets out there. How so? Well, derivatives can exist for virtually any financial product – even derivatives themselves. Yes, derivatives can be created from derivatives. And then, derivatives can be created from those derivatives, and so on. Does this sound like a shaky house of cards ready to come crashing down? Well, this may not be so far from the truth. Some argue that the derivatives market played a major part in the 2008 Financial Crisis.
A futures contract is a type of derivatives product that allows traders to speculate on the future price of an asset. It involves an agreement between parties to settle the transaction at a later date called the expiry date. As we’ve discussed with derivatives, the underlying asset for a contract like this can be any asset. Common examples include cryptocurrency, commodities, stocks, and bonds.
The expiration date of a futures contract is the last day that trading activity is ongoing for that specific contract. At the end of that day, the contract expires to the last traded price. The settlement of the contract is determined beforehand, and it can be either cash-settled or physically-delivered.
When it’s delivered physically, the underlying asset of the contract is directly exchanged. For example, barrels of oil are delivered. When it’s settled in cash, the underlying asset isn’t exchanged directly, only the value that it represents (in the form of cash or cryptocurrency).
If you’d like to trade futures on Binance, make sure to check out The Ultimate Guide to Trading on Binance Futures.
Futures products are a great way for traders to speculate on the price of an asset. However, what if they want to remain in their position even after the expiry date?
Enter perpetual futures contracts. The main difference between them and a regular futures contract is that they never expire. This way, traders can speculate on the price of the underlying asset without having to worry about expiration.
However, this presents a problem of its own. What if the price of the perpetual futures contract gets really far from the price of the underlying asset? Since there’s no expiry date, the perpetual futures market could have a significant, continual disparity with the spot market.
This is why perpetual futures contracts implement a funding fee that’s paid between traders. Let’s imagine that the perpetual futures market is trading higher than the spot market. In this case, the funding rate will be positive, meaning that long positions (buyers) pay the funding fees to short positions (sellers). This encourages buyers to sell, which then causes the price of the contract to drop, moving it closer to the spot price. Conversely, if the perpetual futures market is trading lower than the spot market, the funding rate will be negative. This time, shorts pay longs to incentivize pushing up the price of the contract.
To summarize, if funding is positive, longs pay shorts. If funding is negative, shorts pay longs.
Perpetual futures contracts are hugely popular among Bitcoin and cryptocurrency traders. If you’d like to read more about perpetual futures contracts, check out What Are Perpetual Futures Contracts?.
An options contract is a type of derivatives product that gives traders the right, but not the obligation, to buy or sell an asset in the future at a specific price. The main difference between a futures contract and an options contract is that traders are not obligated to settle options contracts.
When traders buy an options contract, they speculate on the price going in a direction.
There are two types of options contracts: call options and put options. A call option bets on the price going up, while a put option bets on the price going down.
As with other derivatives products, options contracts can be based on a wide variety of financial assets: market indexes, commodities, stocks, cryptocurrencies, and so on.
Options contracts can enable highly complex trading strategies and risk management methods, such as hedging. In the context of cryptocurrencies, options might be the most useful for miners who want to hedge their large cryptocurrency holdings. This way, they’re better protected against events that could have a detrimental impact on their funds.
If you’d like to read more about options contracts, check out What Are Options Contracts?. If you’d like to trade options on Binance, be sure to read our options guide for iOS and Android first.
The foreign exchange (Forex, FX) market is where traders can exchange one country’s currency into another. In essence, the Forex market is what determines the exchange rates for currencies around the world.
We may often think of currencies as “safe haven” assets. Even the term “stablecoin” should imply, in theory, that the asset is somehow safe from volatility. However, while this is true to some extent, currencies can also experience significant market fluctuations. How come? Well, the value of currencies is also determined by supply and demand. In addition, they may also be influenced by inflation or other market forces related to global trade and investment, and geopolitical factors.
How does the Forex market work? Well, currency pairs may be traded by investment banks, central banks, commercial companies, investment firms, hedge funds, and retail Forex traders. The Forex market also enables global currency conversions for international trade settlements.
Forex traders will typically use day trading strategies, such as scalping with leverage, to amplify their returns. We’ll cover how exactly that works later in this article.
The Forex market is one of the major building blocks of the modern global economy as we know it. In fact, the Forex market is the largest and most liquid financial market in the world.
Leveraged tokens are tradable assets that can give you leveraged exposure to the price of a cryptocurrency without the usual requirements of managing a leveraged position. This means you don’t have to worry about margin, collateral, funding, and liquidation.
Leveraged tokens are an innovative financial product that only exist thanks to the power of blockchain. Leveraged tokens were initially introduced by derivatives exchange FTX, but since then have seen various alternative implementations. The main idea behind them, however, is still the same – tokenizing open leveraged positions. What does this mean?
Leveraged tokens represent open perpetual futures positions in a tokenized form. Remember when we discussed how derivatives can be created from derivatives? Leveraged tokens are a prime example since they derive their value from futures positions, which are also derivatives.
Leveraged tokens are a great way to get a simple leveraged exposure to a cryptocurrency. If you’d like to trade them on Binance, check out A Beginner’s Guide to Binance Leveraged Tokens (BLVT).
If you’d like to read about FTX Leveraged Tokens, check out A Beginner’s Guide to FTX Leveraged Tokens.
Contents
- What is a trading strategy?
- What is portfolio management?
- What is risk management?
- What is day trading?
- What is swing trading?
- What is position trading?
- What is scalping?
- What is asset allocation and diversification?
- What is the Dow Theory?
- What is the Elliott Wave Theory?
- What is the Wyckoff Method?
- What is buy and hold?
- What is index investing?
- What is paper trading?
A trading strategy is simply a plan you follow when executing trades. There’s no single correct approach to trading, so each strategy will largely depend on the trader’s profile and preferences.
Regardless of your approach to trading, establishing a plan is crucial – it outlines clear goals and can prevent you from going off course due to emotion. Typically, you’ll want to decide what you’re trading, how you’re going to trade it, and the points at which you’ll enter and exit.
In the following chapter, we’ll get into a few examples of popular trading strategies.
Portfolio management concerns itself with the creation and handling of a collection of investments. The portfolio itself is a grouping of assets – it could contain anything from Beanie Babies to real estate. If you’re exclusively trading cryptocurrencies, then it will probably be made up of some combination of Bitcoin and other digital coins and tokens.
Your first step is to consider your expectations for the portfolio. Are you looking for a basket of investments that will remain relatively protected from volatility, or something riskier that might bring higher returns in the short term?
Putting some thought into how you want to manage your portfolio is highly beneficial. Some might prefer a passive strategy – one where you leave your investments alone after you set them up. Others could take an active approach, where they continuously buy and sell assets to make profits.
Managing risk is vital to success in trading. This begins with the identification of the types of risk you may encounter:
- Market risk: the potential losses you could experience if the asset loses value.
- Liquidity risk: the potential losses arising from illiquid markets, where you cannot easily find buyers for your assets.
- Operational risk: the potential losses that stem from operational failures. These may be due to human error, hardware/software failure, or intentional fraudulent conduct by employees.
- Systemic risk: the potential losses caused by the failure of players in the industry you operate in, which impacts all businesses in that sector. As was the case in 2008, the collapse of the Lehman Brothers had a cascading effect on worldwide financial systems.
As you can see, risk identification begins with the assets in your portfolio, but it should take into account both internal and external factors to be effective. Next, you’ll want to assess these risks. How often are you likely to encounter them? How severe are they?
By weighing up the risks and figuring out their possible impact on your portfolio, you can rank them and develop appropriate strategies and responses. Systemic risk, for example, can be mitigated with diversification into different investments, and market risk can be lessened with the use of stop-losses.