BASIC TRADING BOOK
In this basic trading manual, we will address over 50 questions along with their answers, aiming to familiarize you with the concepts commonly used by traders. Through this material, we will focus on providing a more technical and formal language to enhance understanding and application of these concepts in the field of trading
What is a financial market?
A financial asset is a security or simply a book entry, whereby the buyer of the security acquires the right to receive future income from the seller. Stocks, currencies, bonds, cryptos, etc.
1) What financial markets exist?
Direct operation market. Buyers and sellers must meet directly for the purchase and sale of financial assets.
Brokerage market. There are specialized brokers that put buyers and sellers in contact with each other, charging a commission for the service.
Dealer market. The dealer buys the asset and sells it to a buyer,
i.e. takes positions on his own account. His profit is in the margin he obtains between the purchase price and the sale price (Spread).
Blind market (market makers). The market maker publishes the prices at which he is willing to make buying and selling operations. His profit is in the margin he obtains.
2)Who regulates the trading activity?
Commodity Futures Trading Commission, better known by its acronym CFTC. It regulates and supervises the options and futures market.
3)What are shares?
A share in the financial market is a security issued by a corporation or limited partnership by shares that represents the value of one of the equal fractions into which its capital stock is divided.
The shareholder investor expects the company to receive the maximum possible dividends and, from this, to create a generalized demand from the investing public for the paper, which produces an increasing valuation in its share price.
4)What is Forex?
The foreign exchange market, also known as Forex, FX or Currency Market, is a global and decentralized market in which currencies are traded. This market was born with the objective of facilitating the flow of money derived from international trade.
5) What are futures?
A Future is a transaction agreed at a given maturity (every end of the month - being the last trading day of the month) at a given price.
The buyer of a future has the expectation that the quoted value or SPOT, at maturity, will be at least above the agreed future value.
The seller of a future has the expectation that the price or SPOT at maturity will be at least below the agreed future value.
6)What are options?
Anything publicly traded can have options. Options, like stocks, can be traded every day, and this is what "liquidity" depends on, i.e., if there are no buyers and sellers, there are no options.
One option could be:
Call = Buy. Symbolically "C". Put = Sale. Symbolically "V".
7) What are cryptocurrencies?
A cryptocurrency is a centralized digital financial asset that uses cryptographic encryption to guarantee its ownership and ensure the integrity of transactions, and to control the creation of additional units, i.e. to prevent someone from making copies as we would do, for example, with a photo or a banknote.
8) What is a Japanese candlestick?
Candlesticks are a graphical representation of the financial market price in the form of candlesticks. They represent the price action over a set period of time. They are composed of a body and 2 shadows.
9) What is a candlestick chart?
In economics, the candlestick or candlestick chart is a type of chart widely used in technical analysis of the stock market. It reflects: the opening price of a security, the closing price of a security, the high and the low of that security.
10) What does it mean to trade short?
To trade short is to sell an asset that you do not own in the hope that its price will go down and you can close the trade at a profit. It is also called going short, taking a short position, going short.
11) What does it mean to trade long?
Trading long refers to taking a buying position in a financial asset. It is the opposite of going short.
12) What is a trend?
Market trends can be defined as the direction in which a market moves in a sustained manner over a given time interval.
13)What is a range?
A trading range is a band defined by two horizontal lines (one at the top as "resistance" and one at the bottom as "support"), which encompasses the price values of a tradable asset over a given period.
14) What is a spread?
A spread is an injection of purchases into the market that generate a strong upward price movement.
15) What is a lot?
A lot is a standardized group of assets in which an investment is made. Often, the actual value of an asset or security prevents you from trading it in units. Example: One lot of gold equals 100 ounces.
16) What is a contract?
a futures contract is an agreement, traded on an exchange or organized market, that obligates the contracting parties to buy or sell a number of goods or securities at a future date, but with a price established in advance.
17) What is the expiration of a contract?
Futures contracts have an expiration date, which is the date on which the contract must be settled. As the expiration date approaches, the price of the futures contract is adjusted to reflect the price of the underlying asset at that time.
18) What is a swap?
A swap is a contract in which two counterparties agree to exchange obligations or cash flows in order to achieve a benefit.
19) What is a tick?
A tick is the smallest price change that can occur in a market. It is represented in points and is always placed to the right of the decimal place. Each market has its own tick and this measure is widely used in the futures market.
20) What is a pip?
The term pip is short for "Point in Percentage". It is the measure of the smallest movement of the exchange rate of a currency pair in the foreign exchange market.
21) What is leverage?
Leverage is a tool that allows to increase the potential return of an investment by contracting a debt. In the specific case of trading, the broker undertakes to advance the trader a capital to invest in an operation, against the deposit of a guarantee, which is called margin.
22) What is a market order?
A market order is an order to buy or sell immediately at the best possible price. It needs liquidity to be filled, which means that it is executed against limit orders already created in the order book.
23) What is a limit order?
A limit order is an instruction given to execute a trade at a level that is more favorable than the current market price. There are two varieties of limit orders: entry orders (which consist of opening a position) and close orders (which terminate an open position).
24) What is an indicator?
Trading indicators are mathematical calculations that are represented in various forms on a price chart and can help investors identify certain signals and trends within the market.
25) What is technical analysis?
Technical analysis is a system for examining and predicting price movements in financial markets based on historical data and market statistics.
26) What is fundamental analysis?
Fundamental analysis is a methodology of stock market analysis, intended to determine the true value of the security or stock, called fundamental value. This value is used as an estimate of its value as a commercial utility, which in turn is supposed to be an indicator of the expected future performance of the security.
27) What are chartist figures?
the word chartist refers to "chart" in English, so we can specify that the chartist figures are those candlestick formations that form certain patterns that allow us to foreshadow where the trend of an asset could go.
28) What is a support?
Support is a level on a market chart where the price recovers in a downtrend. Let's say an asset is falling, but there is a price beyond which it will not fall. Every time it reaches that price, buyers take control and the market goes back up, this would be a support level.
29) What is a resistor?
Resistance is an area on a market's chart that is difficult to break through to reach new highs. Resistance is the opposite of support.
When an asset reaches it, sellers take control and drive its price back down.
30) What is a divergence?
Divergences are behaviors of other assets that act opposite or similar to the main asset. These divergences will give us extra confirmation when trading.
31) What is a gap?
In the stock market, a GAP represents a gap between two successive quotations, caused by the lack of transactions in a given period: this gap can also be represented by a news item that has a significant impact on the price of the security.
32) What is market risk?
Trading in the stock market must be full of Risk, Daring and Passion. As a generalized meaning, every financial operation carried out by an investor involves some risk. Financial Trading takes place in an environment of uncertainty that may generate unfavorable results or results different from those projected. This risk has two sources: uncertainty and probability.
33) What is risk management?
Risk management is a strategy that reduces risks in order to operate with peace of mind.
34) What are risk management strategies based on?
In order to have a correct risk management, you must first define your monthly target.
Second, we must define how much of our capital we are willing to risk.
Third, look for an adequate ratio (risk/reward) that allows us to have a low percentage of success in the operations but that compensates the losses with the profits.
And finally, how much we are going to risk per operation.
35) What is profitability?
Profitability is the gain you make after selling an asset in which you invested money. This means that, if you buy a stock index futures contract costing $10 USD, which subsequently increases in price to $13 USD and you sell it, you would be earning a return of
$3 USD.
The profitability you can obtain in trading depends on several factors such as the level of risk to which you expose your operations, the capital, the type of market, the financial asset, the level of leverage you use, the experience you have and your strategy.
36) What is a trading platform?
Trading platforms are tools that allow traders to trade over the network in real time. Each platform has its own features. Most of them offer information about the market, allow to schedule trades and offer different paid versions.
37) What is a timeframe?
The time frame in trading is the time interval or time frame in which a price chart is analyzed and ranges from ticks to months. It is a fundamental concept in the technical analysis of the financial market, it is a period of time in which the price data of an asset is examined.
38) What is a trading strategy?
Trading strategies are the action plans that traders use to trade in the financial markets.
These strategies are based on technical analysis, fundamental analysis or a combination of both, and define the entry, exit, risk and capital management rules that the trader must follow.
39) Types of trading strategies
There are many types of trading strategies, but they can be classified according to the time frame in which they are applied, the trading style they follow or the indicators they use
Some of the most common classifications are as follows:
According to the time frame: a distinction can be made between long term trading strategies (positional trading), medium term (swing trading) or short term (day trading or scalping). Each of these strategies involves a different level of frequency, duration and profit per trade.
Depending on the trading style: a distinction can be made between trend trading strategies, which seek to follow the dominant market direction, or counter-trend trading strategies, which seek to take advantage of market changes or corrections. There are also neutral trading strategies, which do not depend on the market direction.
Depending on the indicators: a distinction can be made between trading strategies based on technical indicators, which are mathematical tools that are applied to prices to generate buy or sell signals, or trading strategies based on price action, which are those that only use the patterns and formations drawn by prices on the charts.
40) What is stop loss?
The stop loss is a type of conditional order, which executes the sale of a certain asset if its price falls below the market limit. It is the investor who sets this price level through his broker, thus establishing the maximum level of loss that he is willing to assume.
41) What is the trailing stop?
The trailing stop is a type of order that makes your stop loss behave dynamically and evolve with the trend. The maximum loss tolerated is adjusted to the maximum price recorded, and is not anchored to the price of your entry.
42) What is take profit?
Take profit refers to limit orders that seek to sell above the level that was bought or buy below the level that was sold.
43) What is benefit bias?
Partializing profits refers to taking partial profits before reaching our take profit order. This is done to lock in profits in case our trade does not go to take profit.
44) What is breakeven?
The breakeven is an operation that is performed by moving the stop loss price to a price that guarantees that if the market moves against it and the operation is exited by stop loss, no money will be lost. It is usually moved to the entry price of the trade.
45) What types of trading are there?
Intraday trading Swing trade Scalping
Long-term trading Arbitration
Carry trade
46) What is intraday trading?
Intraday trading is a short-term strategy that aims to profit from small price fluctuations during the day, rather than long-term market movements.
47) What is the swing trade?
The swing trade is a type of trade that uses the charts that the price of assets draws session by session to detect trends, whether bullish or bearish, and follow the market, taking advantage of them to make money when the market rises or falls.
48) What is scalping?
Scalping is a type of trading that involves buying and selling financial assets quickly. Traders who trade using this method often seek to generate small profits on each transaction and hold their positions for a short period of time.
49) What is psychotrading?
Trading psychology is a term used to refer to the state of mind and emotions that can influence success or failure when investing in securities. It also represents the trader's capacity for self-control, based on the emotional component he/she employs in the decision making process.
50) What is an anchored account?
Funded accounts, also called funded accounts, are used to start trading without a deposit, i.e. the company that offers them provides the initial capital so that the selected trader can invest in the markets, generally in financial derivatives.
51) What is a trade log?
In trade logs, traders keep all the trades they make, with details of the trade such as date, asset, entry, stop loss, take profit, etc.
What is a financial market?
A financial asset is a security or simply a book entry, whereby the buyer of the security acquires the right to receive future income from the seller. Stocks, currencies, bonds, cryptos, etc.
1) What financial markets exist?
Direct operation market. Buyers and sellers must meet directly for the purchase and sale of financial assets.
Brokerage market. There are specialized brokers that put buyers and sellers in contact with each other, charging a commission for the service.
Dealer market. The dealer buys the asset and sells it to a buyer,
i.e. takes positions on his own account. His profit is in the margin he obtains between the purchase price and the sale price (Spread).
Blind market (market makers). The market maker publishes the prices at which he is willing to make buying and selling operations. His profit is in the margin he obtains.
2)Who regulates the trading activity?
Commodity Futures Trading Commission, better known by its acronym CFTC. It regulates and supervises the options and futures market.
3)What are shares?
A share in the financial market is a security issued by a corporation or limited partnership by shares that represents the value of one of the equal fractions into which its capital stock is divided.
The shareholder investor expects the company to receive the maximum possible dividends and, from this, to create a generalized demand from the investing public for the paper, which produces an increasing valuation in its share price.
4)What is Forex?
The foreign exchange market, also known as Forex, FX or Currency Market, is a global and decentralized market in which currencies are traded. This market was born with the objective of facilitating the flow of money derived from international trade.
5) What are futures?
A Future is a transaction agreed at a given maturity (every end of the month - being the last trading day of the month) at a given price.
The buyer of a future has the expectation that the quoted value or SPOT, at maturity, will be at least above the agreed future value.
The seller of a future has the expectation that the price or SPOT at maturity will be at least below the agreed future value.
6)What are options?
Anything publicly traded can have options. Options, like stocks, can be traded every day, and this is what "liquidity" depends on, i.e., if there are no buyers and sellers, there are no options.
One option could be:
Call = Buy. Symbolically "C". Put = Sale. Symbolically "V".
7) What are cryptocurrencies?
A cryptocurrency is a centralized digital financial asset that uses cryptographic encryption to guarantee its ownership and ensure the integrity of transactions, and to control the creation of additional units, i.e. to prevent someone from making copies as we would do, for example, with a photo or a banknote.
8) What is a Japanese candlestick?
Candlesticks are a graphical representation of the financial market price in the form of candlesticks. They represent the price action over a set period of time. They are composed of a body and 2 shadows.
9) What is a candlestick chart?
In economics, the candlestick or candlestick chart is a type of chart widely used in technical analysis of the stock market. It reflects: the opening price of a security, the closing price of a security, the high and the low of that security.
10) What does it mean to trade short?
To trade short is to sell an asset that you do not own in the hope that its price will go down and you can close the trade at a profit. It is also called going short, taking a short position, going short.
11) What does it mean to trade long?
Trading long refers to taking a buying position in a financial asset. It is the opposite of going short.
12) What is a trend?
Market trends can be defined as the direction in which a market moves in a sustained manner over a given time interval.
13)What is a range?
A trading range is a band defined by two horizontal lines (one at the top as "resistance" and one at the bottom as "support"), which encompasses the price values of a tradable asset over a given period.
14) What is a spread?
A spread is an injection of purchases into the market that generate a strong upward price movement.
15) What is a lot?
A lot is a standardized group of assets in which an investment is made. Often, the actual value of an asset or security prevents you from trading it in units. Example: One lot of gold equals 100 ounces.
16) What is a contract?
a futures contract is an agreement, traded on an exchange or organized market, that obligates the contracting parties to buy or sell a number of goods or securities at a future date, but with a price established in advance.
17) What is the expiration of a contract?
Futures contracts have an expiration date, which is the date on which the contract must be settled. As the expiration date approaches, the price of the futures contract is adjusted to reflect the price of the underlying asset at that time.
18) What is a swap?
A swap is a contract in which two counterparties agree to exchange obligations or cash flows in order to achieve a benefit.
19) What is a tick?
A tick is the smallest price change that can occur in a market. It is represented in points and is always placed to the right of the decimal place. Each market has its own tick and this measure is widely used in the futures market.
20) What is a pip?
The term pip is short for "Point in Percentage". It is the measure of the smallest movement of the exchange rate of a currency pair in the foreign exchange market.
21) What is leverage?
Leverage is a tool that allows to increase the potential return of an investment by contracting a debt. In the specific case of trading, the broker undertakes to advance the trader a capital to invest in an operation, against the deposit of a guarantee, which is called margin.
22) What is a market order?
A market order is an order to buy or sell immediately at the best possible price. It needs liquidity to be filled, which means that it is executed against limit orders already created in the order book.
23) What is a limit order?
A limit order is an instruction given to execute a trade at a level that is more favorable than the current market price. There are two varieties of limit orders: entry orders (which consist of opening a position) and close orders (which terminate an open position).
24) What is an indicator?
Trading indicators are mathematical calculations that are represented in various forms on a price chart and can help investors identify certain signals and trends within the market.
25) What is technical analysis?
Technical analysis is a system for examining and predicting price movements in financial markets based on historical data and market statistics.
26) What is fundamental analysis?
Fundamental analysis is a methodology of stock market analysis, intended to determine the true value of the security or stock, called fundamental value. This value is used as an estimate of its value as a commercial utility, which in turn is supposed to be an indicator of the expected future performance of the security.
27) What are chartist figures?
the word chartist refers to "chart" in English, so we can specify that the chartist figures are those candlestick formations that form certain patterns that allow us to foreshadow where the trend of an asset could go.
28) What is a support?
Support is a level on a market chart where the price recovers in a downtrend. Let's say an asset is falling, but there is a price beyond which it will not fall. Every time it reaches that price, buyers take control and the market goes back up, this would be a support level.
29) What is a resistor?
Resistance is an area on a market's chart that is difficult to break through to reach new highs. Resistance is the opposite of support.
When an asset reaches it, sellers take control and drive its price back down.
30) What is a divergence?
Divergences are behaviors of other assets that act opposite or similar to the main asset. These divergences will give us extra confirmation when trading.
31) What is a gap?
In the stock market, a GAP represents a gap between two successive quotations, caused by the lack of transactions in a given period: this gap can also be represented by a news item that has a significant impact on the price of the security.
32) What is market risk?
Trading in the stock market must be full of Risk, Daring and Passion. As a generalized meaning, every financial operation carried out by an investor involves some risk. Financial Trading takes place in an environment of uncertainty that may generate unfavorable results or results different from those projected. This risk has two sources: uncertainty and probability.
33) What is risk management?
Risk management is a strategy that reduces risks in order to operate with peace of mind.
34) What are risk management strategies based on?
In order to have a correct risk management, you must first define your monthly target.
Second, we must define how much of our capital we are willing to risk.
Third, look for an adequate ratio (risk/reward) that allows us to have a low percentage of success in the operations but that compensates the losses with the profits.
And finally, how much we are going to risk per operation.
35) What is profitability?
Profitability is the gain you make after selling an asset in which you invested money. This means that, if you buy a stock index futures contract costing $10 USD, which subsequently increases in price to $13 USD and you sell it, you would be earning a return of
$3 USD.
The profitability you can obtain in trading depends on several factors such as the level of risk to which you expose your operations, the capital, the type of market, the financial asset, the level of leverage you use, the experience you have and your strategy.
36) What is a trading platform?
Trading platforms are tools that allow traders to trade over the network in real time. Each platform has its own features. Most of them offer information about the market, allow to schedule trades and offer different paid versions.
37) What is a timeframe?
The time frame in trading is the time interval or time frame in which a price chart is analyzed and ranges from ticks to months. It is a fundamental concept in the technical analysis of the financial market, it is a period of time in which the price data of an asset is examined.
38) What is a trading strategy?
Trading strategies are the action plans that traders use to trade in the financial markets.
These strategies are based on technical analysis, fundamental analysis or a combination of both, and define the entry, exit, risk and capital management rules that the trader must follow.
39) Types of trading strategies
There are many types of trading strategies, but they can be classified according to the time frame in which they are applied, the trading style they follow or the indicators they use
Some of the most common classifications are as follows:
According to the time frame: a distinction can be made between long term trading strategies (positional trading), medium term (swing trading) or short term (day trading or scalping). Each of these strategies involves a different level of frequency, duration and profit per trade.
Depending on the trading style: a distinction can be made between trend trading strategies, which seek to follow the dominant market direction, or counter-trend trading strategies, which seek to take advantage of market changes or corrections. There are also neutral trading strategies, which do not depend on the market direction.
Depending on the indicators: a distinction can be made between trading strategies based on technical indicators, which are mathematical tools that are applied to prices to generate buy or sell signals, or trading strategies based on price action, which are those that only use the patterns and formations drawn by prices on the charts.
40) What is stop loss?
The stop loss is a type of conditional order, which executes the sale of a certain asset if its price falls below the market limit. It is the investor who sets this price level through his broker, thus establishing the maximum level of loss that he is willing to assume.
41) What is the trailing stop?
The trailing stop is a type of order that makes your stop loss behave dynamically and evolve with the trend. The maximum loss tolerated is adjusted to the maximum price recorded, and is not anchored to the price of your entry.
42) What is take profit?
Take profit refers to limit orders that seek to sell above the level that was bought or buy below the level that was sold.
43) What is benefit bias?
Partializing profits refers to taking partial profits before reaching our take profit order. This is done to lock in profits in case our trade does not go to take profit.
44) What is breakeven?
The breakeven is an operation that is performed by moving the stop loss price to a price that guarantees that if the market moves against it and the operation is exited by stop loss, no money will be lost. It is usually moved to the entry price of the trade.
45) What types of trading are there?
Intraday trading Swing trade Scalping
Long-term trading Arbitration
Carry trade
46) What is intraday trading?
Intraday trading is a short-term strategy that aims to profit from small price fluctuations during the day, rather than long-term market movements.
47) What is the swing trade?
The swing trade is a type of trade that uses the charts that the price of assets draws session by session to detect trends, whether bullish or bearish, and follow the market, taking advantage of them to make money when the market rises or falls.
48) What is scalping?
Scalping is a type of trading that involves buying and selling financial assets quickly. Traders who trade using this method often seek to generate small profits on each transaction and hold their positions for a short period of time.
49) What is psychotrading?
Trading psychology is a term used to refer to the state of mind and emotions that can influence success or failure when investing in securities. It also represents the trader's capacity for self-control, based on the emotional component he/she employs in the decision making process.
50) What is an anchored account?
Funded accounts, also called funded accounts, are used to start trading without a deposit, i.e. the company that offers them provides the initial capital so that the selected trader can invest in the markets, generally in financial derivatives.
51) What is a trade log?
In trade logs, traders keep all the trades they make, with details of the trade such as date, asset, entry, stop loss, take profit, etc.
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