Explain the concept of trading.
Buying and selling goods and services is a cornerstone of economics. Products and services are acceptable, as is recompense paid by the customer. Goods and services may be traded between the parties involved in the transaction.
Financial instruments are the assets that are traded in the financial markets. Stocks, bonds, Forex currency pairings, options, futures, margin products, cryptocurrencies, and many others might all fall under this category. Don’t worry if you are unfamiliar with any of these concepts; they will be defined in further detail below.
Short-term trading, in which positions are actively entered and exited during brief time periods, is usually meant when the word “trading” is used. This, however, is a somewhat erroneous assumption. Day trading, swing trading, trend trading, and many more terms cover the broad spectrum of trading methods. But have no fear. Later, we’ll discuss each of these points in further depth.
Eager to put what you’ve learned to use?
When do you invest?
The goal of each investor is to earn a return on their initial investment (or capital). One example is investing money into a business with the hope of making a profit later on, while another is purchasing property with the intent of flipping it for a profit. It is common practice in the financial markets to purchase financial instruments with the expectation of selling them for a profit at a later date.
Investment is predicated on the hope of a profit (this is also known as ROI). Investing, as opposed to trading, is a method of building money over the long term. An investor’s objective is to increase their wealth over time (years, or even decades). There is a plethora of methods for this, but fundamental considerations are the most common ones used by investors.
Investors generally don’t worry about temporary shifts in value because of the long-term nature of their strategy. As a result, they tend to take a passive stance and not worry too much about short-term setbacks.
Which is better, trading or investing?
In the financial markets, both traders and investors are looking to make a profit. But, they take very different routes to get there.
Most investors are looking for returns over the course of many years, if not decades. Investors typically aim for bigger returns on their investments when they have a longer time horizon.
Conversely, traders aim to profit from price fluctuations. Since they routinely enter several trades, they tend to enter and exit positions more frequently, and may look for lesser returns per transaction.
Which one is preferable? Which one do you think will work better for you? The answer lies in your hands. Learn the basics first, then put what you’ve learned into practice in the market. You’ll learn through time which one is most suited to your trading style, personality, and financial objectives.
Check out how much Bitcoins are currently selling for.
Simply put, what is fundamental analysis (FA)?
Values of financial assets can be evaluated with the use of fundamental analysis. To assess whether or whether an asset’s price is appropriate, a fundamental analyst looks at a wide range of economic and financial indicators. The asset’s value may rise or fall depending on broader economic factors, conditions in the underlying industry, or the performance of the associated business. And leading and trailing indicators in macroeconomics are frequently used to monitor them.
Following the completion of the fundamental research, analysts attempt to ascertain whether or not the asset is undervalued. This finding can help investors make better investing choices.
An growing area of data science known as on-chain metrics is expanding into the realm of cryptocurrency fundamental analysis. The network hash rate, number of addresses, transaction analysis, and the top holders are only a few examples of these indicators. Because of the sheer volume of information stored in public blockchains, experts in the field have been able to develop sophisticated technological indicators for gauging the state of the industry as a whole.
While fundamental analysis sees widespread use in traditional financial markets like stocks and forex, it is currently ill-suited to the volatile and ever-changing nature of cryptocurrencies. Because of its relative youth, this asset class lacks a universally accepted method of establishing fair market value. The market is also heavily influenced by stories and speculation. The price of a coin will therefore respond very little to changes in basic variables. But, as the market develops, more precise ways of thinking about cryptoasset valuation may emerge.
Briefly describe technical analysis (TA).
Technical analysts take a unique approach to their profession. Technical analysis is based on the premise that past price movement can provide clues about the market’s future behavior.
To clarify, technical analysts are not interested in discovering an asset’s true worth. Instead, they analyze past trade data in search of potential openings. This can be done with the help of several charting tools, such as price action and volume analysis, chart patterns, and technical indicators. The analysis’s intended use is to determine the relative health of a specific market.
But, technical analysis can be used for more than only anticipating price changes in the future. It also provides a helpful structure for dealing with risks. Technical analysis gives a framework for evaluating market structure, which in turn makes trade management more systematic and quantifiable. The first stage in risk management is, obviously, quantifying risk. Because of this, not all technical analyzers work exclusively in the trading industry. Technical analysis could simply serve as a risk management foundation for them.
Cryptocurrency traders are not the only ones who put the principles of technical analysis to use in the market. But is there any truth to technical analysis? In any case, we’ve already established that speculation plays a major role in setting the value of bitcoin markets. This makes them a great arena for technical analysts, who need only focus on the technical aspects to succeed.
Which is better, fundamental or technical analysis?
That is totally strategy-dependent. In fact, why not employ both? Combining multiple approaches or indications into a single market study plan maximizes their effectiveness. More secure investment options may be uncovered in this way. Trading techniques that are combined can help traders make more objective decisions.
The term “confluence” is sometimes used to describe this phenomenon. Traders that take advantage of “confluence” do so by incorporating elements of several different trading approaches into a single plan. The rationale behind doing so is that the trading chances supplied by the two techniques together may be superior to those provided by either one alone.
Want to learn the basics of cryptocurrency? Get your Bitcoins at Binance!
Who or what manipulates the financial markets?
The supply and demand for an asset will always set its price. What this means is that the buyers and sellers themselves make the call. A market forms when supply and demand are equal. Nevertheless, what other factors might influence the price of a financial asset?
We’ve already touched on how fundamental elements like the economy’s health can play a role. There are also technical considerations, such as a cryptocurrency’s market cap. Market emotion and breaking news are two examples of additional variables.
But, these are merely things to think about. In every given moment, an asset’s price is decided solely by the interaction of its supply and demand.
Explain the concept of a market trend.
The general movement of an asset’s price is referred to as a market trend. Market trends are often determined in technical analysis through the use of price action, trend lines, or even important moving averages.
Bull markets and bear markets are the two most common market cycles. A bull market is characterized by an extended period of rising prices. A bear market is characterized by a prolonged downturn in which prices keep falling. Markets that are consolidating or moving “sideways” can also be identified when there is no discernible uptrend or downtrend.
History of Bitcoin’s Price Chart
The price of bitcoin has increased steadily since its inception.
It’s important to keep in mind that the direction of a market trend is not necessarily the direction of the price movement. Little bad markets are bound inside a longer bull market, and vice versa. Simply put, this is how markets work. It’s relative, because it depends on how far back in time you go. Market movements on longer time periods will always carry more weight than those on shorter time spans.
The strange thing about market trends is that they can only be known for sure in retrospect. You may be familiar with the term “hindsight bias,” which describes the way in which people tend to convince themselves that they correctly predicted an occurrence after the fact. Market trend identification and trading decisions can be significantly impacted by hindsight bias.
A market cycle is defined as.
The expression “the market goes in cycles” may be familiar to you. A cycle is a recurring pattern or trend that occurs at regular intervals. Market cycles on longer time frames tend to be more consistent than those on shorter time horizons. Yet, similar to how you could detect minor market cycles when looking at data over decades, you can eventually spot them on an hourly chart.
The markets tend to go through cycles. Some asset types may do better than others during the cycle. It’s possible that the same asset classes will underperform others at subsequent phases of the same market cycle.
It’s important to remember that pinpointing exactly where we are in any given market cycle at any given time is an extremely difficult task. After that phase of the cycle is complete, only then can a thorough examination be performed. There is also a lack of consistency about the beginning and finish of market cycles. It turns out that investing in the here-and-now is a very biased strategy due to the inherent subjectivity of the moment.
The Psychology of Market Cycles is a good book to read if you want to learn more about market cycles.
Interested in giving trading a shot?
Subchapter 2: Trading Tools and Financial Markets
Contents
A financial instrument is defined as.
The spot market is defined as.
How does margin trading work?
The derivatives market is defined as what?
Forward and futures contracts are defined.
How do futures contracts that last forever work?
Options contracts are what?
Exactly what is the Forex market?
The definition of leveraged tokens.
A financial instrument is defined as.
A financial instrument is an asset that can be bought and sold. Money, gold, silver, the title to a company or a resource, the right to transfer funds, and many other things can all be considered forms of currency. Complex though they may be, the underlying concept of financial instruments is the same: they may be bought, sold, and swapped for something else.
Several systems of categorization result in a wide variety of financial instruments. One category considers whether the instruments are cash or derivatives. Derivative instruments, as their name implies, are valued in relation to another asset (like a cryptocurrency). Debt-based and equity-based financial instruments are two further categories.
But, they don’t seem to fit anywhere. They’re flexible enough that more than one method of thinking about them is possible. They might be categorized most simply as “digital assets.” Yet, the true promise of cryptocurrencies rests in the creation of a brand new monetary and economic order.
Cryptocurrencies, in this sense, represent an entirely new class of digital assets. Also, numerous new categories may be formed as the ecosystem develops that otherwise would not be doable. The Decentralized Financial (DeFi) industry is one early adopter of this model.
The spot market is defined as.
The spot market is where “immediate delivery” of financial products is transacted. To “deliver” a financial instrument implies to exchange it for cash. Despite the seeming needlessness of making this difference, not all markets are resolved immediately in cash. In the futures markets, for instance, the actual delivery of the underlying assets occurs at a later time (when the futures contract expires).
The current market price of an item is often referred to as the spot price, and a spot market can be thought of as a place where deals are performed “on the spot,” or immediately.
What does this signify for the bitcoin exchanges? What are your options on the Binance spot exchange? You can make a monetary trade with one another. Simply visit the Binance Coin US Dollar (BNB/BUSD) spot market to make a BUSD trade. Similarly, the BNB/BTC spot market is where you would go to make a BTC exchange. Coins will be instantly exchanged after your orders have been fulfilled. This is a simple method of exchanging cryptocurrency.
How does margin trading work?
Margin trading entails making trades with money borrowed from a broker. Margin trading, in essence, magnifies outcomes, both positive and negative. Traders can reduce their exposure to counterparty risk and gain greater access to funds with a margin account. How so? Traders can maintain the same volume of trades on the cryptocurrency exchange while risking less of their own money.
The terms “margin” and “leverage” are frequently used while discussing margin trading. The term “margin” is shorthand for “commitment of capital” (i.e., put up from your own pocket). Leverage refers to the factor by which your profit margin is increased. In other words, if you utilize 2x leverage, you can create a position for twice as much as your margin. With 4x leverage, you can open a position worth four times your margin, etc.
Nonetheless, you should be wary of liquidation. The closer the liquidation price is to the entrance price, the larger the leverage. Your entire margin is at stake in the event of a liquidation. Hence, before you start trading on margin, make sure you fully understand the enormous stakes involved. Before you go in, make sure you read through the Binance Margin Trading Handbook.
Stock, commodities, Forex, Bitcoin, and cryptocurrency markets all make extensive use of margin trading. A more conventional source of borrowing funds is an investment broker. Most cryptocurrency transactions include the exchange lending money for a charge. Yet sometimes the money is borrowed from other dealers on the platform itself. Because to the competitive nature of the funding market, the interest rate (funding charge) you pay may likely fluctuate over time.
Now that the basics of margin trading have been covered, there is always room for expansion in one’s education. Check out What is Margin Trading? if you’re interested in learning more.
The derivatives market is defined as what?
Derivatives are a type of financial asset that derives its worth from the value of another asset. Any underlying asset or group of assets will do. Examples include equities, bonds, commodities, market indices, and digital currencies.
In essence, the derivative product is a legal agreement between several parties. The price is based on the value of the underlying asset. The basic idea behind a derivative product is that its value is based on the underlying asset. Futures contracts, option contracts, and swaps are all types of derivatives products.
The derivatives market is thought to be one of the largest in the world. How so? Derivatives can, in fact, be created for just about every type of financial instrument. Derivatives themselves can be derived, hence the answer is yes. And from there, further derivatives can be derived, and so on. Do you feel that this is a precarious situation waiting to collapse? This might not be too far from the truth, actually. The Derivatives Market May Have Contributed to the 2008 Financial Crisis, According to Some.
Forward and futures contracts are defined.
One sort of derivatives instrument that facilitates this kind of speculation is the futures contract. Settlement of the transaction is postponed until a future date (the “expiry date”), as agreed upon by the parties involved. As we’ve seen with derivatives, any asset can serve as the basis for such a contract. Cryptocurrencies, commodities, equities, and bonds all fall into this category.
The last day on which a particular futures contract can be traded is known as its expiration date. The contract will terminate at the closing price on that day’s trading. The contract can be cash-settled or physically delivered, depending on what is agreed upon in advance.
When the contract’s underlying asset is physically delivered, the parties engage in a direct exchange. For instance, oil is shipped in barrels. When a transaction is resolved in cash, just the cash equivalent of the underlying asset is transferred (in the form of cash or cryptocurrency).
Check out The Definitive Guide to Trading on Binance Futures if Binance futures trading interests you.
How do futures contracts that last forever work?
Speculating on the future value of an asset is made much easier with futures products. But what if they wish to continue working past the termination date?
Step in futures contracts that last forever. The key distinction between these and traditional futures contracts is that the perpetual contracts never lapse. This allows investors to make price predictions on the underlying asset without worrying about when the option would expire.
This, however, raises issues of its own. When the perpetual futures contract’s price significantly deviates from that of the underlying asset, what happens? Due to the lack of a termination date, the perpetual futures market may consistently be very different from the spot market.
This is why traders in perpetual futures contracts agree to a financing charge. Suppose the perpetual futures market is now trading at a premium to the spot market. If the funding rate is positive, then the long positions (the buyers) are responsible for covering the financing costs for the short positions (sellers). This prompts sellers to get in and drives down the contract price, bringing it lower and closer to the spot rate. When perpetual futures are trading at a discount to spot prices, however, the funding rate will be negative. In this scenario, shorts offer longs compensation for driving up the contract price.
In a nutshell, longs have to compensate shorts if funding is in the black. For negative funding, shorts must compensate longs.
Bitcoin and cryptocurrency investors have shown a marked preference for perpetual futures contracts. What Are Perpetual Futures Contracts? provides further information for those interested.
Do you wish to initiate a personal portfolio?
Options contracts are what?
The right, but not the duty, to buy or sell an asset at a certain price in the future is the basis of an options contract, a form of derivatives instrument. Options contracts are different from futures contracts in that traders are not compelled to settle them.
Traders who purchase options contracts are making a wager on the future direction of the underlying asset’s price.
Options contracts can be either a call option or a put option. You can wager on the price increasing with a call option, or on the price decreasing with a put option.
Options contracts, like other derivatives products, can be based on many different types of underlying assets in the financial markets.
Options contracts allow for sophisticated hedging strategies and other forms of risk management. Options may prove to be the most practical tool for cryptocurrency miners who wish to protect their substantial bitcoin holdings. This will help safeguard their financial security in the face of unforeseen circumstances.
