Stock Trading

Stock trading involves buying and selling company shares with the goal of making a profit. This will typically involve publicly traded shares, but over-the-counter (OTC) trading also exist. When someone purchases shares – either publicly traded shares or OTC shares – to hold on to for a longer time period, we typically call it investing rather than trading, although there line between the two activities can be blurry.

The basic type of stock trading is to purchase a share with the goal of selling it when the market price has increased. It is, however, also possible to make money from falling stock prices, by using a technique known as short-selling.

Instead of actually buying, owning and selling shares, it is also possible to use derivatives based on share prices to gain exposure to a share price without ever owning the share.

Stock trading (and using derivatives based on stocks) offers the potential for substantial profits, but it also comes with significant risks. Whether you’re day trading, swing trading, or holding positions open for longer, it’s crucial to have a clear strategy, understand the risks, and use the right tools and platforms. By staying informed and disciplined, traders can navigate the stock market more effectively and increase their chances of long-term success.

stock trading

Examples of different strategies for stock trading

Stock traders aim to capitalize on price movements in the stock market, which can be driven by a variety of factors, including company performance, economic indicators, and market sentiment. Stock trading can be done on various time frames, from day trading, which involves making multiple trades within a single day, to long-term investing, where stocks are held for years.

1. Day Trading

Day trading involves buying and selling stocks within the same trading day, with the goal of profiting from small price movements. Day traders do not hold positions open overnight, hence the name day trading.

Using technical analysis and real-time data to make quick decisions is common among day traders. Technical analysis is a method for spotting and interpreting market trends. By looking at market trends, the day trader can make quick decisions for short-term trading without focusing on the company’s fundamental analysis.

A subset of the daytrading category is the technique known as scalping. Scalping is an ultra-short-term trading strategy where traders aim to profit from extremely small price changes, often holding stocks for just seconds or minutes. Scalpers rely on high trading volumes and speed to make profits.

(information on daytrading from thetrader.se and daytrading.nu)

2. Swing Trading

Swing trading involves holding positions open over one or more nights, but not long enough to be considered position trading or investing. The average swing trader will keep positions open for several days to weeks, aiming to profit from short- to medium-term price movements. Swing traders often use a combination of technical and fundamental analysis to identify trading opportunities.

3. Position Trading

Position trading is a longer-term approach, where traders hold stocks for weeks, months, or even years. This strategy relies heavily on fundamental analysis and is closer to traditional investing than active trading.

How stock trading works

Stock trading typically takes place on stock exchanges like the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). Traders can buy and sell shares through brokerage accounts, which provide access to these markets. The price of a stock is determined by supply and demand, with various factors influencing both, including company news, earnings reports, economic data, and broader market trends.

Order Types

  • Market Orders: Buy or sell orders executed immediately at the current market price.
  • Limit Orders: Orders to buy or sell a stock at a specified price or better.
  • Stop Orders: Orders that become market orders once a certain price is reached.

Tools and platforms

Traders use various tools and platforms to execute trades and analyze the market:

  • Trading Platforms: Software provided by brokers that allows traders to buy and sell stocks, monitor market activity, and analyze data. Popular platforms include MetaTrader 5 (MT5), eToro, cTrader, and Interactive Brokers.
  • Charting Tools: Used to analyze stock price movements and trends, essential for technical analysis. TradingView and NinjaTrader are popular choices.
  • News Feeds: Real-time news and economic data are crucial for making informed trading decisions. Companies like Bloomberg and Reuters offer these services.

Risks and considerations

Stock trading involves significant risk, particularly for those who trade frequently or use leverage. Market volatility, unexpected news, and economic events can lead to sudden price swings, resulting in losses. It’s essential for traders to have a solid risk management strategy, which may include setting stop-loss orders, diversifying their portfolios, and not investing more than they can afford to lose.

Leverage Risk

Leverage allows traders to control larger positions with a smaller amount of capital, amplifying both potential gains and losses. While it can increase profitability, it also increases the risk of substantial losses. When you are using leverage, you are essentially borrowing money from your broker, and this money must be repaid even if the market goes against you.

Because of the risk of losing more money than you put into the trade from your trading account, many jurisdictions and financial authorities around the world have put caps on how much leverage a broker is permitted to extend to a retail trader (a trader not classified as a professional trader). Some jurisdictions also require negative account protection, where the retail trader can not lose more money than what is in their account. This is to prevent retail traders from ending up in debt.

If you have negative account balance protection, that usually also means that you have agreed to terms and conditions that permit your broker to put automatic stop-loss orders on all your leveraged positions and close them if the market price reaches a certain point. Brokers do this to protect themselves from having to cover losses incurred by a retail trader with negative account balance protection.

Emotional Trading

The fast-paced nature of stock trading can lead to emotional decision-making, which often results in poor trading outcomes. Traders must maintain discipline and stick to their strategies to avoid making impulsive trades. One aspect of risk management is to keep and use a trading log to spot patterns in your trading and avoid trading in situations where you are more likely to fall prey to emotional trading, e.g. when you are very tired, intoxicated, or have recently incurred substantial losses.

Regulatory Environment

The regulatory environment for stock trading vary between the different jurisdictions, so it is important to find out which rules that pertain to your particular situation.

Examples:

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