From Beginner to Professional: Discover What Trading Is and How It Works in Financial Markets

What is trading and how does it work in practice?

When we talk about what trading is and how it works, we refer to the activity of buying and selling financial instruments with the goal of making profits from price fluctuations. A trader is someone who carries out these operations using their own resources, usually focusing on short-term horizons and seeking to maximize returns.

The assets traded by traders include a wide variety: currencies in the Forex market, company stocks, stock indices, bonds, commodities like gold and oil, as well as the popular Contracts for Difference (CFDs) that allow speculation without owning the underlying asset.

What differentiates a trader from other market participants is their dynamic approach. While an investor seeks to hold assets long-term expecting appreciation, a trader executes multiple transactions taking advantage of short-term movements. Meanwhile, the broker acts as an intermediary, facilitating these operations on behalf of their clients.

Getting Started: How to Become a Trader

For those wishing to venture into trading successfully, following a structured path is essential:

Continuous education and market analysis: Before making any move, it is crucial to develop a solid knowledge base. This involves studying how financial markets operate, which economic variables affect them, and staying updated with relevant news. Mastery of technical analysis (based on charts and price patterns) and fundamental analysis (which examines the economic health of assets) are crucial skills.

Defining a personal strategy: Each trader must clearly establish their approach. Will they execute multiple trades in a single day? Will they prefer to hold positions for weeks? What level of risk can they tolerate? These answers will guide all subsequent decisions.

Selecting a regulated platform: Opening an account on an authorized trading platform is essential. Many offer demo accounts with virtual funds to practice strategies without risking real capital, which is invaluable for gaining experience.

Rigorous risk management: This is perhaps the most critical aspect. Never invest more than you are willing to lose. Tools like stop loss (automatic closure at maximum loss), take profit (ensures gains when reaching the target price), and trailing stop (adjusts to favorable movements) are fundamental components of any operation.

Types of Trading: Finding Your Style

There are various trading styles, each with its own characteristics:

Day Trading: Involves closing all positions before the end of the day. Offers the possibility of quick profits but demands constant market attention and can generate high commissions.

Scalping: Makes dozens of small trades during the day, seeking smaller but consistent gains. Requires extreme precision and meticulous risk management, as small errors are amplified by the volume of transactions.

Momentum Strategy: These traders capture gains by leveraging market inertia, trading assets showing strong movements in one direction. The challenge lies in correctly identifying trends and timing entry and exit points.

Swing Trading: Holds positions for several days or weeks to take advantage of price oscillations. Requires less attention than other modalities, although it exposes the trader to market changes during nights and weekends.

Technical and Fundamental Analysis: Some traders specialize in interpreting charts or evaluating economic fundamentals, regardless of the asset they trade.

Available Assets to Trade

A trader has access to multiple markets:

• Stocks: Shares of company ownership, whose price fluctuates based on corporate performance.
• Bonds: Debt instruments that generate income through interest.
• Forex: The largest liquid market in the world, where currency pairs are traded.
• Commodities: Gold, oil, natural gas, and other resources.
• Indices: Represent the performance of groups of securities, such as the S&P 500 or Nasdaq.
• CFDs: Allow speculation on prices without owning the asset, offering leverage and flexibility for long and short positions.

Essential Tools to Protect Capital

Once understanding what trading is and how it works, mastering protection tools is critical:

Stop Loss: Automatically stops a losing trade at a predetermined level, limiting damages.

Take Profit: Secures gains when reaching the set target.

Trailing Stop: A dynamic variant that moves with favorable movements, protecting profits while allowing upside potential.

Margin Call: Alerts when positions should be closed or funds added due to margin decline.

Diversification: Spreading operations across different assets reduces the impact of a poor individual result.

Practical Case: Momentum Operation on Indices

Let’s consider a momentum trader operating the S&P 500 index through CFDs. When the Federal Reserve announces an interest rate hike (generally interpreted as negative for stocks), the market reacts with a pronounced downward trend.

The trader opens a short position on 10 contracts of the S&P 500 at a price of 4,000, setting a stop loss at 4,100 (to limit losses if it recovers) and a take profit at 3,800 (to secure gains if it continues falling).

If the index drops to 3,800, the position closes automatically with profits. If it rises to 4,100, it also closes but limits losses. This example illustrates how risk management structures each decision.

The Realities of Professional Trading: Key Data

Statistics reveal a demanding landscape. According to academic research, only 13% of day traders achieve consistent positive profitability over six months, and just 1% sustain gains over five years or more. Nearly 40% quit in the first month, while only 13% persist after three years.

The market is also evolving: algorithmic trading accounts for between 60-75% of total volume in developed markets, increasing both efficiency and volatility, posing challenges for individual traders without access to cutting-edge technology.

Final Tips to Get Started

Understanding what trading is and how it works is the first step, but execution is where true learning resides. It is advisable to:

• Treat trading as a secondary activity while maintaining a primary income source
• Never invest capital that cannot be lost
• Practice extensively on demo accounts before using real money
• Maintain emotional discipline and adherence to strategy
• Constantly study market developments

Frequently Asked Questions

How do I start trading operations?
Educate yourself about markets, choose a regulated platform, open a demo account to practice, develop a clear strategy, and then gradually transition to real capital trading.

What features should I look for in a trading platform?
Check for regulation by the relevant authority, competitive commissions, robust analysis tools, quality customer service, and availability of a demo account.

Is it feasible to trade while working full-time?
Yes, many traders start this way. However, some styles like day trading require constant attention, which may be incompatible with full-time employment. Swing trading or lower-frequency strategies are more compatible.

How much capital do I need to start?
It depends on the chosen platform and asset. Some allow starting with very small amounts. The important thing is to ensure it is disposable capital.