Trading: What It Is, How It Works, and How to Get Started in This World

The Trader, the Investor, and the Broker: What Is the Real Difference?

In financial markets, three figures constantly drive capital movement: the trader, the investor, and the broker. Although these terms are often confused, their functions and approaches are fundamentally different.

A trader is someone who operates financial assets with their own resources, typically with short-term horizons. Their goal is to capitalize on price fluctuations in volatile markets. Unlike the investor, who seeks long-term returns and lower exposure to risk, the trader requires significant risk tolerance and the ability to make quick decisions based on data analysis.

The broker, on the other hand, is a regulated intermediary that executes trades on behalf of clients. They require formal academic training and licensing from regulatory authorities, serving as the bridge between traders, investors, and financial markets.

What is trading? Fundamental Concepts

Trading is the activity of buying and selling various financial instruments: currencies, cryptocurrencies, stocks, bonds, commodities, derivatives, stock indices, and Contracts for Difference (CFDs). What trading is and how it works depends on the market type, strategy, and the trader’s time horizon.

The most traded assets include:

• Stocks: Corporate ownership shares whose prices fluctuate based on company performance
• Forex: The most liquid and voluminous currency market in the world
• Commodities: Gold, oil, natural gas, and other essential goods
• Stock indices: Indicators of the overall performance of specific markets
• CFDs: Contracts that allow speculation on price movements without owning the underlying asset, offering leverage and operational flexibility
• Bonds: Debt instruments that generate interest for the holder

First Steps: How to Become a Trader from Scratch?

To start understanding what trading is and how it works in practice, following a structured path is essential:

Phase 1: Education and Analysis
Build a solid foundation of economic and financial knowledge. This includes familiarizing yourself with technical analysis (charts and price patterns) and fundamental analysis (assessment of economic fundamentals of assets). Staying updated on economic, corporate, and technological news is critical, as these events constantly move markets.

Phase 2: Define Strategy and Select Assets
Based on market understanding, the trader should establish a personal strategy aligned with risk tolerance, investment goals, and specific knowledge.

Phase 3: Choose a Regulated Platform
Access to a reliable and regulated broker is essential. Serious platforms offer demo accounts to practice before investing real capital.

Phase 4: Master Risk Management
Never invest more than you are willing to lose. Setting loss limits protects capital.

Trading Styles: Find Your Approach

There are multiple ways to operate, each with its own characteristics:

Day Trading: Multiple transactions during a session, closing all positions before the market closes. Promises quick gains but demands constant attention and generates high-volume commissions.

Scalping: Executing numerous trades aiming for small but consistent profits. Requires meticulous risk management and high concentration, especially in CFDs and Forex where liquidity is abundant.

Momentum Trading: Capturing gains by leveraging market inertia, trading assets showing strong directional movements. Success depends on precisely identifying trends and determining optimal entry/exit points.

Swing Trading: Holding positions for days or weeks to capitalize on price oscillations. Requires less time than day trading but involves higher risk due to overnight and weekend exposure.

Technical and Fundamental Analysis: Traders who base decisions on chart patterns and/or evaluation of economic fundamentals. Provide in-depth analysis but demand high financial knowledge and precise interpretation.

Essential Risk Management Tools

Once the strategy is defined, applying effective risk management minimizes potential losses:

• Stop Loss: An order that automatically closes a position at a specified price, limiting losses
• Take Profit: An order that secures gains by closing the position when the target price is reached
• Trailing Stop: A dynamic stop loss that adjusts to favorable market movements
• Margin Call: An alert when margin falls below a minimum threshold, indicating the need to close positions or add funds
• Diversification: Trading multiple assets to mitigate the impact of poor performance of individual assets

Practical Case: Momentum Trading in the S&P 500

Let’s consider a momentum trader operating CFDs of the S&P 500. The Federal Reserve announces an increase in interest rates, typically interpreted as negative for stocks due to limited corporate borrowing. The index begins an accelerated downward trend.

Anticipating the persistence of this trend, the trader opens a short position (sell) on 10 contracts of the S&P 500 at a price of 4,000. They set a stop loss at 4,100 to limit losses if the market recovers, and a take profit at 3,800 to secure gains if the decline continues.

Scenario 1: Index falls to 3,800 → Take profit is triggered, closing the position with a profit
Scenario 2: Index rebounds to 4,100 → Stop loss is triggered, closing the position to limit losses

The Realities of Professional Trading: Important Statistics

Trading offers potential profitability and flexible hours, but the statistical reality is revealing:

Only about 13% of day traders achieve consistent positive returns over six months. Even more restrictive: only about 1% generate sustained profits over five years or more. Nearly 40% abandon trading in the first month, and only 13% persist after three years.

The market is increasingly oriented toward algorithmic trading, which accounts for approximately 60-75% of trading volume in developed markets. This automation improves efficiency but increases volatility and challenges individual traders without access to cutting-edge technology.

Final Considerations

Trading involves significant risks and should not be considered as the sole source of income. Maintaining a primary job or a solid income source is fundamental for financial stability. Viewing trading as a secondary or supplementary activity is a realistic and prudent approach.

Continuous education, discipline in risk management, and adaptation to changing conditions are pillars of success in this constantly evolving field.