Market Basics: How Trading Works
How Markets Function
Before diving into strategies, you must understand how financial markets actually work. This foundation will help you make informed decisions regardless of which asset you trade.
The Trading Ecosystem
Market Participants
Financial markets consist of various participants, each with different goals and resources:
- Retail Traders: Individual traders like you, typically trading smaller positions
- Institutional Traders: Banks, hedge funds, and large firms with massive capital
- Market Makers: Provide liquidity by constantly buying and selling
- Algorithmic Systems: Automated trading programs executing pre-programmed strategies
How Prices Move
Prices move based on supply and demand imbalances. When more traders want to buy than sell, prices rise. When selling pressure exceeds buying interest, prices fall. This applies universally across all markets.
Price Discovery Across Markets:
- Stocks: Centralized exchanges (NYSE, NASDAQ) match buyers and sellers
- Crypto: Decentralized exchanges and CEXs operate 24/7 globally
- Commodities: Futures exchanges (CME, ICE) set benchmark prices
Understanding Order Types
Market Orders
Execute immediately at the best available price. Fast but no price guarantee.
Example: "Buy 100 shares of AAPL at market" - fills instantly at current ask price
Limit Orders
Execute only at your specified price or better. Price control but no fill guarantee.
Example: "Buy 100 shares of AAPL at $150 limit" - only fills if price reaches $150 or lower
Stop Orders
Trigger a market order when price reaches specified level. Used for exits and entries.
Example: "Sell 100 shares of AAPL at $145 stop" - becomes market order if price drops to $145
Stop-Limit Orders
Trigger a limit order when stop price is reached. Combines stop and limit features.
Example: "Sell at $145 stop, $144 limit" - triggers at $145, only fills at $144 or better
Trade Execution Realities
Bid-Ask Spread
The difference between buying price (ask) and selling price (bid). This spread is a hidden cost in every trade:
- Tight Spreads: Liquid assets like Apple stock ($0.01-0.02 spread)
- Wide Spreads: Illiquid assets or volatile conditions ($0.10+ spreads)
- Impact: You lose the spread immediately upon entry
Slippage
The difference between expected and actual execution price. Common causes:
- Fast-moving markets during news events
- Large orders exhausting available liquidity
- Low liquidity periods (after-hours, pre-market)