What is Trading?
Trading is a fundamental economic concept involving the buying and selling of assets. These assets can be goods and services where the buyer pays the seller, or the transaction can involve an exchange of goods and services between the participating parties.
In the context of financial markets, the assets traded are called financial instruments. These can include securities, bonds, foreign exchange (Forex) currency pairs, options, futures, margin products, cryptocurrencies, and many others. If these terms are new to you, don't worry—we will explore them in detail throughout this guide.
The term "trading" is often used to refer to short-term trading, where traders actively enter and exit positions over relatively short time intervals. However, this is a somewhat misleading assumption. In reality, trading can refer to a wide range of different strategies, such as day trading, swing trading, trend trading, and many more. We will cover these in more detail later.
What is Investing?
Investing means allocating resources (such as capital) with the expectation of generating a profit. This can include using money to fund and launch a business or buying land with the goal of selling it later at a higher price. In financial markets, this typically involves investing in financial instruments with the hope of selling them later at a higher price.
The expectation of a return is an essential aspect of investing (this is also called ROI). Unlike trading, investments usually take a longer-term approach to wealth accumulation. An investor's goal is to build wealth over an extended period (years or even decades). There are many ways to do this, but investors typically use fundamental factors to find potentially good investment opportunities.
Given the long-term nature of their approach, investors are usually not concerned with short-term price fluctuations. As such, they tend to be relatively passive, not worrying too much about short-term losses.
Trading vs. Investing – What's the Difference?
Both traders and investors seek to generate profits in financial markets. Their methods for achieving this goal, however, are quite different.
Generally, investors aim to generate a return over a more extended period—say, years or even decades. Because they have a longer time horizon, the target return for each investment also tends to be larger.
Traders, on the other hand, try to take advantage of market volatility. They enter and exit their positions more frequently and may seek smaller returns per trade (since they often enter multiple trades).
Which approach is better? Which one is more suitable for you? That's something you must decide for yourself. You can start by educating yourself about the markets and then learn by practicing. Over time, you can determine which approach best fits your financial goals, personality, and trading profile.
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What is Fundamental Analysis (FA)?
Fundamental analysis is a method of assessing the valuation of a financial asset. A fundamental analyst studies both economic and financial factors to determine whether an asset's value is fair. These can include macroeconomic conditions, such as the overall state of the economy, industry, or business related to the asset (if there is one). The latter are often monitored through leading and lagging macroeconomic indicators.
Once 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 can also include an emerging field of data science that deals with public blockchain data, called on-chain metrics. These metrics can include the network hash rate, top holders, the number of addresses, transaction analysis, and many other things. From the vast amount of data available 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 is 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. More importantly, the market is primarily driven by speculation and narratives. As such, fundamental factors often have an insignificant effect on the price of a cryptocurrency. However, more precise ways of thinking about crypto asset valuation could be developed as the market matures.
What is Technical Analysis (TA)?
Technical analysts take a different approach. The main idea behind technical analysis is that historical price action can indicate how the market is likely to behave in the future.
Technical analysts do not try to figure out the intrinsic value of an asset. Instead, they look at the history of trading activity and, based on that, try to identify opportunities. This can include analyzing price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The goal of this analysis is to assess the strength or weakness of a given market.
That said, technical analysis is not just a tool for predicting the probability of future price movements. It can also provide a useful framework for risk management. By providing a model for analyzing market structure, technical analysis makes trade management more precise and quantifiable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not strictly be considered traders—they may only use technical analysis as a risk management framework.
The practice of technical analysis can be applied to any financial market and is widely used among cryptocurrency traders. But does technical analysis really work? Well, as we mentioned earlier, cryptocurrency market valuation is largely determined by speculation. This makes them an ideal playground for technical analysts, as they can thrive by considering technical factors alone.
Fundamental Analysis vs. Technical Analysis – Which is Better?
This depends entirely on your trading strategy. In fact, why not use both? Most market analysis methods work best when combined with other methods or indicators. This way, there is a higher probability of finding more reliable investment opportunities. Combining different investment strategies can also help eliminate biases from your decision-making process.
This concept is often called confluence. Confluence traders combine multiple strategies into a single one that leverages all of them. The underlying idea is that the trading opportunities presented by the combination of strategies will be more robust than those provided by a single strategy.
What Drives the Financial Markets?
The price of an asset is determined simply by the balance of supply and demand. In other words, it is decided by buyers and sellers. Where supply and demand meet, there is a market. But what other elements can drive the value of a financial asset?
As we explained earlier, there can be fundamental factors, such as the state of the economy. In addition, technical factors such as a cryptocurrency's market capitalization may come into play. There may also 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 at any given moment is simply the balance between supply and demand.
What is a Market Trend?
A market trend is the general direction in which the price of an asset is moving. 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 market and bear market. A bull market involves a sustained upward trend—where prices continuously rise. A bear market involves a sustained downward trend—where prices continuously fall. We can also identify consolidating or "ranging" markets, where there is no clear directional trend.
It is worth noting that a market trend does not mean that the price will always move in the direction indicated by the trend. A prolonged bull market will contain smaller bear markets, and vice versa. This is simply the nature of market trends. It is a matter of perspective, as everything depends on the time frame you are looking at. In longer time frames, market trends will always be more significant than in shorter ones.
A peculiar aspect of market trends is that they can only be determined with absolute certainty in hindsight. You may have heard of the concept of "hindsight bias"—the tendency of people to convince themselves that they were able to accurately predict an event before it happened. As you can imagine, hindsight bias significantly influences the process of identifying market trends and trading decisions.
What is a Market Cycle?
You may have heard the phrase that "the market moves in cycles." A cycle is a pattern or trend that emerges at different times. Generally, over long time frames, market cycles are more reliable than over shorter ones. However, you might eventually discover small market cycles on one-hour charts, just as you can when analyzing decades of data.
Markets are cyclical by nature. Cycles can lead to certain asset categories performing better than others. In other segments of the same market cycle, these same asset categories may perform worse than others due to different market conditions.
It should be noted that it is almost impossible to determine at any given time where one is currently within a market cycle. Such analysis can only be carried out with high accuracy after part of the cycle has concluded. Moreover, market cycles rarely have specific start and end points. So in the end, positioning oneself in the present moment carries an exceptionally biased perspective of the financial markets.
Frequently Asked Questions
What is the best way to start trading cryptocurrencies?
The best way to start is by educating yourself. Understand the basics of blockchain technology, how exchanges work, and the different types of orders. Start with a small amount of capital you can afford to lose and consider using demo accounts or paper trading to practice without risk.
How much money do I need to start trading?
You can start trading cryptocurrencies with a relatively small amount of money. Some exchanges allow you to buy fractions of coins, so you can start with as little as $10-$100. However, the amount you need depends on your trading strategy and the specific cryptocurrencies you're interested in.
What's the difference between a market order and a limit order?
A market order executes immediately at the current market price, while a limit order allows you to set a specific price at which you want to buy or sell. Market orders guarantee execution but not price, while limit orders guarantee price but not execution.
How do I manage risk in cryptocurrency trading?
Risk management involves several strategies: never investing more than you can afford to lose, using stop-loss orders to limit potential losses, diversifying your portfolio across different assets, and avoiding emotional decision-making. Always have a clear trading plan before entering any position.
What are the most common mistakes beginner traders make?
Common mistakes include investing based on emotions or FOMO (fear of missing out), not doing proper research, risking too much capital on single trades, neglecting security practices, and expecting to get rich quickly. Successful trading requires patience, discipline, and continuous learning.
How do I keep my cryptocurrencies secure?
Use reputable exchanges with strong security measures, enable two-factor authentication, consider using hardware wallets for long-term storage, never share your private keys or seed phrases, and be cautious of phishing attempts and suspicious links.
Financial Markets and Trading Instruments
What is a Financial Instrument?
In simple terms, a financial instrument is a tradable asset. Examples include cash, precious metals (like gold or silver), a document confirming ownership of something (such as a business or resource), the right to deliver or receive cash, and many others. Financial instruments can be really complex, but the basic idea is that regardless of what they are or represent, they can be traded.
Financial instruments come in various types, based on different classification methods. One such classification is whether they are cash instruments or derivatives. As the name suggests, derivative instruments "derive" their value from something else (such as a cryptocurrency). Financial instruments can also be classified as "debt-based" or "equity-based."
What category do cryptocurrencies belong to? We can think of them in multiple ways, and they could belong to more than one category. The simplest classification would place them as digital assets. However, the potential of cryptocurrencies lies in creating a new financial and economic system.
In this sense, cryptocurrencies form a completely new category of digital assets. More importantly, as the ecosystem evolves, many new categories that otherwise couldn't exist may consolidate. Early examples of this can be seen in the realm of Decentralized Finance (DeFi).
What is the Spot Market?
The spot market is where financial instruments are traded for what is 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 don't settle in cash instantly. For example, when we talk about futures markets, assets are delivered at a later date (when the futures contract expires).
In simple terms, you can think of the spot market as a place where trades are made on the spot. Since trades are settled immediately, the current market price of an asset is often called the spot price.
But what does this mean in the context of cryptocurrency markets? What can you do in the spot market? You can exchange your coins with others. So if you want to exchange your BNB for BUSD, you go to the BNB/BUSD spot market and voilà! Similarly, if you want to exchange your BNB for BTC, you would go to the BNB/BTC spot market. Once your orders are completed, your coins will be exchanged instantly. This is one of the simplest ways to trade cryptocurrencies.
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What is Margin Trading?
Margin trading is a method of trading that uses borrowed funds from a third party. Thus, trading on margin amplifies results—both positive and negative. A margin account gives traders greater access to capital and removes some of the counterparty risk. How so? Because they can trade the same position size while keeping 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., that comes out of your own pocket). Leverage designates the amount by which you amplify your margin. So if you use 2x leverage, it means you open a position that is twice the amount of your margin. If you use 4x leverage, you open a position four times the value of your margin, and so on.
However, one must be careful with liquidations. The higher the leverage you use, the closer the liquidation price will be to your entry. If you are liquidated, you risk losing your entire margin. Therefore, be very aware of the high risks of trading on margin before you start.
Margin trading is widely used in stock, commodity, and Forex trading, as well as in Bitcoin and other cryptocurrency markets. In a more traditional environment, the borrowed funds are provided by an investment broker. When it comes to cryptocurrencies, the funds are usually lent by the exchange in exchange for a funding fee. In some other cases, however, the borrowed funds may come directly from other traders on the platform. These will usually carry a variable interest rate (funding fee), as it is determined by an open marketplace.
What is the Derivatives Market?
Derivatives are financial assets that base their value on something else—this can be an underlying asset or a basket of assets. The most common types of derivatives are stocks, bonds, commodities, market indices, or cryptocurrencies.
The derivative product itself is basically a contract between multiple parties. And it gets its price from the underlying asset used as a benchmark. Regardless of which asset is used as a benchmark, the main concept is that the derivative will derive its value from it. Among the most common examples of derivative products are futures contracts, options contracts, and swaps.
According to some estimates, the derivatives market is one of the largest in the world. How can that be? Because derivatives can exist for practically any financial product—even for derivatives themselves. Yes, you heard that right: it's possible to create derivatives of other derivatives. Then, new derivatives can be created from those derivatives, and so on. Does it sound like an unstable house of cards about to collapse? Well, it might not be far from reality. Some believe the derivatives market played a very prominent role in the 2008 Financial Crisis.
What are Forward and Futures Contracts?
A futures contract is a type of derivative 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 expiration or maturity date. As we explained regarding derivatives, the underlying asset of such a contract can be any asset. Common examples include cryptocurrencies, commodities, stocks, and bonds.
The expiration date of a futures contract is the last day when trading activity continues for that specific contract. At the end of that day, the contract expires at the last traded price. The settlement of the contract is determined in advance and can be cash-settled or physically delivered.
When it comes to physical delivery, the underlying asset of the contract is exchanged directly. For example, barrels of oil are delivered. When it comes to cash settlement, the underlying asset is not exchanged directly; only the value it represents is exchanged (in the form of cash or cryptocurrencies).
Futures products are an excellent way for traders to speculate on the price of an asset. However, what if they want to maintain their position even after the expiration date?
This is where perpetual futures contracts come into play. The main difference between them and an ordinary futures contract is that they never expire. This way, traders can speculate on the price of the underlying asset without worrying about expiration.
Now, this presents a problem in itself. What happens if the price of the perpetual futures contract moves significantly away from the price of the underlying asset? Without an expiration date, the perpetual futures market could have a significant and constant disparity compared to the spot market.
This is why perpetual futures contracts implement a funding rate that is paid between traders. Let's imagine that the perpetual futures market is trading at a price higher than the spot market. In this case, the funding rate will be positive, which means that long positions (buyers) will pay funding fees to short positions (sellers). This encourages buyers to sell, which in turn causes the contract price to fall—bringing it closer to the spot price. Conversely, if the perpetual futures market is trading at a price lower than the spot market, the funding rate will be negative. In this case, shorts will pay longs to encourage the contract price to rise.
To summarize, if funding is positive, longs pay shorts. If funding is negative, shorts pay longs.
What are Options Contracts?
An options contract is a type of derivative that gives traders the right, but not the obligation, to buy or sell an asset in the future at a predetermined price. The main difference between a futures contract and an options contract is that traders are not obligated to settle the latter.
When traders buy an options contract, they speculate that the price will move in one direction.
There are two types of options contracts: call options and put options. A call option bets that the price will rise, while a put option bets that it will fall.
As with other derivative products, options contracts can be based on a wide variety of financial assets: market indices, commodities, stocks, cryptocurrencies, etc.
Options contracts can facilitate highly complex trading strategies and risk management methods—such as hedging. In the context of cryptocurrencies, options can be very useful for miners who want a hedge for their significant cryptocurrency holdings. This way, they are better protected against events that could negatively impact their funds.
What is the Foreign Exchange (Forex) Market?
The foreign exchange market (Forex, FX) is where traders can exchange one country's currency for another. Basically, the Forex market is responsible for determining the exchange rates of currencies around the world.
We can 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 be subject to significant market fluctuations. How can that be? Because the value of currencies is also determined by supply and demand. Additionally, they can be conditioned by inflation or other market forces related to global trade and investment, as well as geopolitical factors.
How does the Forex market work? Currency pairs can be traded by investment banks, central banks, commercial companies, investment firms, hedge funds, and retail Forex traders. The Forex market also facilitates global currency conversions to settle international trade exchanges.
Typically, Forex traders will use day trading strategies, such as leveraged scalping, to amplify their returns. Later in this article, we will look at how this works exactly.
The Forex market is one of the main components 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.
What are Leveraged Tokens?
Leveraged tokens are tradable assets that can provide you with leveraged exposure to the price of a cryptocurrency without the usual requirements that managing a leveraged position imposes. This means you don't have to worry about margin, collateral, funding, and liquidation.
Leveraged tokens are an innovative financial product that only exists thanks to the power of blockchain. Leveraged tokens were originally introduced by the derivatives exchange FTX, but alternative implementations would later appear. The main idea behind them, however, remains the same—to tokenize open leveraged positions. What does this mean?
Leveraged tokens represent open perpetual futures positions in a tokenized form. Remember when we mentioned that derivatives can be created from derivatives? Leveraged tokens are an excellent example, as they derive their value from futures positions, which are also derivatives.
Leveraged tokens are an excellent way to achieve simple leveraged exposure to a cryptocurrency.