The markets are a source of many valuable opportunities and they prove to be successful only when individuals trade in them. People often take up the activity of trading to effectively use the available market facilities like
- To invest and to borrow
- Exchange their assets
- Hedge away and distribute any associated risk
- Enjoy the pleasure of gambling
- To speculate and conduct dealings
It is much important to take up an appropriate trading strategy for conducting an efficient trading. For this, be sure of why you want to trade as this realization may help you to become a good trader and an effective money manager.
In an accounting sense, the trading course is often referred to as a ‘zero-sum’ game. This is so-called because the combined profits and losses of both the buyer and the seller always aggregate to zero. It means if a buyer gains from a particular trade, the seller fails the opportunity to profit out from the same by the same amount. So a positive should understand the implications of this concept.
In addition, you should thoroughly study the market structure and be able to distinguish clearly what the market demands like which market favor what type of trade.
The category of traders can be classified into
- Profit-motivated traders are those who trade with the only incentive of making profits. For example the Speculators and dealers.
- The second type is the Utilitarian traders, who expect to make some other kind of benefit from trading besides profits. The examples of this type include investors, borrowers, gamblers, hedgers and asset exchangers.
- The third type is theFutile traders who believe to be the first type but their expectations are not rational.
In accordance with the trading zero-sum concept, both the utilitarian and the futile lose on an average to the profit-motivators.
- Informed traders who have trustworthy opinions on fundamental values of an instrument. They speculate on their available data by buying undervalued items and selling of the overvalued. Uninformed traders do not have any idea on fundamental under or values of an instrument.
The full review of a fundamental value can be stated as a value upon which traders would agree based on analysis of all the available information about the instrument. The rate is said to be undervalued if the market price is below the fundamental and is overvalued if the market price is above. Since nobody truly knows this particular value, traders can really estimate them.