Trading: Definition, How It Works, and the Reality of Being a Professional Trader

What is trading and how does it work?

Trading involves buying and selling financial instruments with the goal of generating profits from price fluctuations. A trader is someone who performs these operations, either independently with their own resources or representing a financial institution. The universe of available assets is broad: from cryptocurrencies and currencies to stocks, bonds, commodities, derivatives, and stock indices.

It is essential to understand that trading is not the same as investing. While a trader seeks short-term profitability through active market operations, an investor acquires assets with the intention of holding them for extended periods. It should also not be confused with the work of a broker, who acts as an intermediary between buyers and sellers.

Trader vs. Investor vs. Broker: Key Differences

In the financial ecosystem, these three roles play different parts. The trader operates with their own capital aiming for quick gains through constant market analysis. They require significant risk tolerance and agile decision-making skills, though they do not necessarily have formal academic training.

The investor, on the other hand, conducts in-depth analysis of companies and economic conditions before committing their capital long-term. Their approach is more conservative and less volatile than that of a trader.

The broker is a regulated professional with university training in finance and must be licensed by regulatory authorities. They manage investments on behalf of third parties, offering an alternative for those who prefer to delegate these decisions.

The Path to Professional Trading: Fundamental Steps

Knowledge Acquisition

Becoming a trader requires a solid foundation of economic and financial knowledge. Intuitive operations are not enough; it is necessary to study specialized literature, stay updated on economic news, and understand how geopolitical events and technological advances impact markets.

Understanding Market Mechanisms

Understanding how trading works involves knowing what moves prices, the importance of liquidity, and the crucial role of collective psychology in market movements. The same economic data can be interpreted differently depending on the context and the risk aversion of participants.

Defining Strategy and Asset Selection

Each trader must design a strategy aligned with their risk tolerance, financial goals, and available time. Asset selection should be deliberate, not random. Some traders specialize in technology stocks, others in currency pairs, and others in commodities.

Mastery of Technical and Fundamental Analysis

Technical analysis examines charts and historical patterns to predict future movements. Fundamental analysis studies the financial health and prospects of companies or economies. Both are complementary: technical analysis offers timing, while fundamental analysis provides direction.

Risk Management: The Pillar of Sustainable Trading

This is the difference between traders who endure and those who disappear from the market. Never invest more than you are willing to lose. Essential tools include:

• Stop Loss: Automatically closes the position when a maximum loss price is reached
• Take Profit: Secures gains by closing the trade at the target level
• Trailing Stop: Dynamically adjusts the exit level according to favorable movements
• Diversification: Spreading capital across multiple assets reduces the impact of poor individual performance
• Margin Call: Alert system when available margin falls dangerously low

Types of Assets Available for Trading

Stocks: Represent fractional ownership in companies. Their price fluctuates based on corporate performance and macroeconomic conditions.

Bonds: Debt instruments where the trader lends money to governments or corporations in exchange for interest payments.

Forex (Forex): The largest and most liquid market in the world, where currency pairs are traded based on exchange rate variations.

Commodities: Raw materials like gold, oil, and natural gas offer exposure to economic cycles and climatic factors.

Stock Indices: Represent the overall performance of a group of stocks, allowing trading on the general market direction.

Contracts for Difference (CFDs): Allow speculation on price movements without owning the underlying asset, offering flexibility and leverage. The ability to open short (sales) and long (buys) positions makes CFDs versatile instruments for multiple strategies.

Trading Styles: Find the One That Fits You

Day Trading

Day traders open and close all their positions within the same trading day. Their focus is on capturing intraday movements, usually in stocks, Forex, or CFDs. While offering potential for quick profits, it requires constant attention and generates high commissions based on transaction volume.

Scalping

More aggressive than day trading, scalping involves dozens or hundreds of trades daily aiming for small but consistent gains. It benefits from liquidity and volatility, especially suitable for Forex and CFDs. The risk lies in small errors, multiplied by the high volume of trades, which can result in significant losses.

Momentum Trading

These traders identify assets with strong movements in one direction and trade in that trend. Success depends on precision in identifying the start and end of the move. CFDs, stocks, and Forex are common instruments for this strategy. The challenge is not to confuse brief corrections with trend changes.

Swing Trading

Swing traders hold positions for days or weeks to capitalize on price oscillations. It requires less dedication than day trading or scalping, allowing part-time trading. However, it involves greater exposure to overnight and weekend risks. Typical assets include stocks, CFDs, and commodities.

Technical vs. Fundamental Analysis

Some traders specialize solely in chart patterns and historical data (technical), while others study financial reports and macroeconomics (fundamental). Both methodologies can be profitable but require discipline and deep knowledge.

Practical Case: A Real Operation

Imagine a momentum trader interested in the S&P 500 index trading via CFDs. The Federal Reserve announces an interest rate hike, which historically pressures stocks. The trader observes the immediate market reaction and the S&P 500 begins a downward trend.

Anticipating that this decline will continue in the short term, they open a short (sell) position of 10 CFDs of the S&P 500 at 4,000 points. To protect themselves, they set a stop loss at 4,100 (maximum risk of 1,000 points) and a take profit at 3,800 (target gain of 2,000 points).

If the index drops to 3,800, the position closes automatically and profits are realized. If it rises to 4,100, it closes, limiting losses. This example illustrates how risk management is as important as identifying the correct market direction.

The Statistical Reality of Trading

The figures are revealing: studies show that only 13% of day traders achieve consistent positive profitability over six months. Only 1% generate sustained gains over five years or more. Additionally, nearly 40% of traders quit in the first month, and only 13% persist after three years.

These numbers highlight that professional trading is not a quick path to wealth. It requires ongoing education, extreme discipline, and the ability to learn from mistakes.

Future Trends: Automation and Algorithmic Trading

The market is evolving toward automation. Algorithmic trading currently accounts for between 60-75% of total volume in developed markets. These systems execute trades at speeds impossible for humans, increasing efficiency but also volatility. For individual traders without access to sophisticated technology, this presents both challenges and opportunities to specialize in niches where human intuition and analysis are still valued.

Final Considerations: Trading as a Secondary Activity

Trading offers flexible hours and potential for significant profitability but involves substantial risks. It should be considered as supplementary income, never as the sole source of income. Maintaining a primary job or solid income source is essential to preserve financial stability while developing trading skills.

Continuous education is mandatory. Markets change, new tools emerge, and competition constantly increases. The trader who stops learning quickly falls behind.

Frequently Asked Questions

Where do I start if I want to pursue trading?

The first step is to educate yourself on how trading works: study technical and fundamental analysis, follow economic news, and practice with simulators or demo accounts before risking real capital.

What features should a trading platform have?

A good platform offers competitive spreads, risk management tools (stop loss and take profit), a variety of assets, advanced charts, real-time analysis, and responsive customer support. Regulation is essential.

Can I trade while working another job?

Yes, many traders start this way, trading in their free hours. However, it requires discipline and should not interfere with your main job. Part-time trading still demands study and dedication.

What is the minimum capital to start?

It depends on your style and broker. Some allow starting with small amounts, but experts recommend having an emergency fund first, along with enough capital to diversify without taking excessive risks.

Does trading guarantee profits?

No. Trading is a risky activity. Losses are possible and common, especially during the learning phase. Only with discipline, education, and proper risk management does the probability of consistency increase.