What is Trading & Investing?
Trading is simply buying/selling of a financial instrument, for example, suppose you are buying something at 100$ and selling it at 110$ you get 10% profit, that is also a kind of trading, today you can take advantage of internet technology and you can access various website (exchanges) and trade many financial instruments online such as Gold, Stocks, Currencies etc. Trading is mostly about short term gains and it is oriented toward short term gains thus its has some degree of high risk.
Investing is almost same as trading but here you look for long term opportunities instead of short term gains, for example, you buy an asset (stock, real estate etc) because you think that the value of that asset may go higher in long term (for an example 3-5years) & after a certain period of time when you sell your assets you get some profit out of it, investment is mostly about long term gains and it has lesser risk than trading most of the time.
What is the difference between trading and investing?
1) Trading is all about short term gains mostly intraday | Investing is all about long term gains
2) Trading is all about high-risk high reward, a trader can target 10-15% profit or loss/day | Investing has a lower risk and also lower reward than trading, and investor usually has a target of 10-15% profit or loss/year.
What is the risk-reward ratio?
The risk-reward ratio is usually used as a measure in trading. The best risk/reward ratio usually differs in various trading strategies. The risk/reward ratio helps a trader to manage their risk of losing capital on trades. Even if a trader is making profit in some trades, he will lose money over time if his win rate is below 50%, for example, a trader bought 100 quantity of WXY Company at $20 and placed a stop loss at $15 to make sure that his losses will not surpass $500. Also, suppose this trader thinks that the price of WXY will hit $30 within a few days. In that case, the trader is likely to risk $5 per stock to make an expected profit of $10/stock after closing the trade. In that case, the trader is willing to make 2x the amount that he/she has risked, here on this particular trade risk/reward ratio is 1:2.
What are the different types of trading?
There are five different types of trading –
Day trading is buying and selling on the same day without holding your position for a long time, a day trader will always look for entry and exit on the same day during the market hours, usually a day trader use leverage to maximize the profitability. Day trading involves some amount of risk and needs proper discipline.
Scalping is all about trading in a very small timeframe, usually a scalper trades on 1min to 15mins timeframe to make a quick profit out of the small movements in the market. Scalping is a highly risky style of trading and needs really good experience and skills to make profit out of it. Many newcomers find this method of trading very attractive and usually they end up losing money, it is highly recommended that if you are new into trading you should totally avoid scalping.
A positional trader hold the trade for mid to long term, they usually use longer-term charts mostly 1day,1week or monthly timeframe to predict the market, a positional trader will not be concerned about any short term fluctuations in the market and always look for long term opportunities, a positional trader usually makes significant gains in long run and it needs high patience and focus to make profit. This type of trading is less risky than day trading & scalp trading.
The main goal of this type of trading is to buy low and sell high, a swing trader uses technical analysis to take good entry and exit price. Mostly a swing trader secure profit within 2-7days and they do not care about fundamentals and rely on charts, patterns or trend.