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From early childhood, each of us knows how the store works. You come, take what you need, instead you pay money. This is an example of the present trading of everyday life. We just never really thought about it. Thus, trading - is primarily the exchange of goods, the process when one buys and another one sells. And the trader’s task is to buy cheaper and sell at the greater cost.
In financial markets, the trading process is exactly the same as in ordinary life; the only difference is in the product. You do not come to the grocery store, but you can safely purchase stocks. In other words, to acquire a part of the ownership of any company. You just need to buy a share, to wait when the price for it grows and sell it. It's very simple - the higher price per share will grow the more profit you get. This is an example of the present trading. So what makes the price of the shares change? The answer is very simple - to change the supply and demand in this share. The more it is demanded (the more people want to buy it), the higher the demand, and hence its value.
It can be described in one sentence: there is demand - price growth. When demand increases, the seller sees that the product was not enough, and increases the price of the commodity. But it cannot last forever and there comes a time when the price is so high that no one wants to buy a product. Once this happens, the seller is trying to lower the price down again to interest potential buyers.
Now let's consider a situation where the market is not one, but several vendors. When there is competition. What if the market is made of several vendors? They try to sell their goods in the first place and thus start to reduce the price to attract buyers. That is, when the proposal is growing - the price drops. More offers - price reduction!
All these theories are equally well as in everyday life (for example, shops, supermarkets, etc.) and the financial markets. If some company develops business and business is good, the shareholders receive high dividends and, accordingly, there is a large number of people willing to buy the shares of this company. As a result of increased demand for shares and, as a consequence, the share price increases.
A very long period of time to trade in the financial markets were entitled only large banks and financial institutions (brokers, investment funds, insurance companies and clearing), but it has changed dramatically in our time. In the age of high speed internet any person can try himself in online trading. One should understand one simple thing - you can trade all that costs money. This can be both shares and any commodity, all can be found on the modern trading floors. The largest venue for trading is the FOREX market. The daily turnover at different times there can reach 6.8 trillion US dollars.
The biggest players in the financial markets are the largest financial institutions (banks, hedge funds, institutional investors). They have the opportunity to buy the latest software, hire the best people, to use the most sophisticated algorithms and complex computer analysis. So is it possible to beat such competitors for ordinary (individual) trader?
Many banks and financial institutions are conducting an inefficient practice of trade. This is due to the fact that financial markets are initially developed for practical purposes that are, provided for the exchange of commodities, currencies and other assets. But the purposes of many of these transactions were not making a profit. For example, the currency markets have evolved due to the need arose between the two countries to trade in goods and services, while the futures markets have evolved out of the need for price stability in the volatile commodities market. Participants in this kind of trading don’t care about getting the best price. This makes their trading inefficient.
Let’s take a simple example. You're traveling to another country and you need to exchange your money to the currency of the country where you going. Naturally you use the services of the exchange office. This is the most primitive currency trading. Such exchangers often offer lower exchange rate. Yet for most tourists it does not matter and they still change money at unfavorable prices. After all, they just want to enjoy their holidays for what they need the local currency. For exchange offices such operations are very profitable, because their customers do not care which course is being offered. Such trading exists not only in the above scenario. Corporations and banks also carry out transactions for practical purposes, such as buying materials in other countries. Trading volumes may be enormous, and that such transactions affect the market price, creating opportunities for speculative trading and profit.
Another example of an inefficient trade is when companies from Europe need to purchase goods in Japan. For this it will be necessary to exchange the Euro into Japanese yen. At the same time when many companies are changing a large amount of currency, demand for the Japanese yen in the same scale of the exchange rate changes. These companies are not necessary seek a profit from foreign exchange transactions; they do not pay attention to the performance of benefit analysis within this transaction. They just need to exchange currency for the business and that’s what they’re successfully doing.
Individual traders with their personal account are not associated with
necessity of doing business. That’s why trader has the ability to use the fluctuation data to maximize profit according to their trading strategies.
There are many cases where transactions are carried out in the interests of any corporation. Suppose one of the investment fund managers learned negative rumors about a certain company and gives an indication of the possible sale of the shares of this company. Even if they think that the rumors are likely false: if there is a minimal probability of confirmation, and the fund will not take any action, they may lose their job. A trader, who owns a personal account, is not facing such conflicts of interest.
Substantially the political motives make influence on the financial market. So when there is an economic crisis, the profitability of foreign exchange and stock markets become volatile. Therefore, investors are trying to save their money and are looking for more secure tool to run business. Currently, the most popular the safe-havens are the Swiss franc and the Japanese yen. Also often are used so-called "Pacific" currencies – the Australian and New Zealand dollar. Such situations lead to further price fluctuations, which makes doing business in some countries unprofitable. Whereupon forcing central banks or other governmental organizations to buy assets to stabilize these markets, and it also leads to a fair price fluctuations. An independent trader can very successful use such state intervention to make profit.
Often traders react irrationally and emotionally to the news or any of the financial statements. This reaction typically results in a significant change in the prices and the total change in market sentiment. This movement is picked up by various media which is another catalyst for the continuation of disorderly trading with high volatility. Private traders can also take advantage of this situation, and wait for the opportune moment to get the maximum profit.
So, traders are able to profit by identifying market inefficiencies that arise due to the fact that other market participants do not trade for profit. Most market operations conducted by speculative reasons. The trader will not only look at the earnings of the inefficiencies of the market, but will also compete with other speculative traders who just try to make a profit. You could say that speculative traders trade against each other. If a trader is able to anticipate and predict how it will act competitor under certain circumstances in the market, it will be able to use their knowledge to make the most of their trading strategy. This knowledge is important when using technical analysis. At this time, the trader should be certain indicators, not because they simply trust, and to a greater extent due to the fact that assumes that other traders in transactions take them into account. Thus the trader must not only seek to profit on market inefficiencies, but he must stay one step ahead of their competitors.
So we came to the conclusion that there are many reasons why market participants perform various transactions. This allows the other participants of the same market to make a profit and explains only that trading can be profitable, but does not explain how the private trader can compete with major financial institutions. These companies tend to have very well-developed information and service infrastructure, thereby obtaining privileges in obtaining better prices. But practice shows that although there are some advantages, the main drawback is the obligations in terms of trades, which they must carry out. This is because market inefficiencies eventually ends and has a different scale. When these amounts are exhausted, the inefficiency of the market also disappears.
The main question beginner traders ask is how much time is necessary to become a successful trader? Firstly, it is worth mentioning that everyone is different and everyone learns at a different rate. Second, the basic review of the training videos and reading specialized literature is not enough for successful trading.
So where to start? Well, first of all, you need to get this type of knowledge that will help you make well-considered decisions in all financial matters. That knowledge that will help you became independent from advisers, who can act not from the point of your interest, and often too expensive. Typically, the advisors combine both of these disadvantages.
So where to start? Well, first of all, you need to get this type of knowledge that will help you make well-considered decisions in all financial matters. That knowledge that will help you became independent from advisers, who can act not from the point of your interest, and often too expensive. Typically, the advisors combine both of these disadvantages. You must be prepared to ensure that you will have to spend a few weeks or even months to study all kinds of financial instruments (assets, stocks, bonds, ETF, funds), methods for their unification and diversification. Particular attention should be given to risks. Control of risk - this is the main objective of any trader, because in trading it is often the most important thing to preserve your capital, and then multiply it. Factors such as high risks of the transaction, the unsuccessful drawdown could result in the loss of your deposit, even if you have a good strategy. In order to reduce risks to a minimum you need to ensure discipline trading and have a good money management strategy.
To prepare yourself for all the above mentioned, practical training should started with demo accounts. Advantages of demo accounts are that they fully represent real market in real time, and for trading they use training money. Through this, you can safely experiment with your strategies; try various trading techniques, to choose the most suitable tools for you without any risk losing your capital.