Trading Fundamentals #1

The most common trading operations and terms — by Daniel Boaventura

Hello everyone,

With the release of Auctus Trading, I’ll be writing a series of articles to share a few trading concepts. I want to help build a strong, mature and wealthy community by guiding those of our audience who aren’t familiar with trading fundamentals. Today I will begin with basic concepts, but gradually I’ll raise the posts to intermediate concepts like trading indicators and strategies. I’ll try to explain each concept in detail while still imagining that the reader knows nothing about them. I hope this series will be useful to everyone, but please feel free to reach out to me on Telegram with any questions or suggestions.

Today we’ll be covering:

Long and Short positions

Funding and Leverage

Bull and Bear markets

Shall we continue?

Long Position

To “go long” (or taking a long position) refers to when you enter a position related to a financial instrument (such as a stock, commodity or currency), expecting to take profits on its valuation. The general idea of a Long Position consists of buying an asset at a specific price and then selling it later at a higher price.

Short Position

To “go short” (or taking a short position) refers to when you enter a position related to a financial instrument (such as a stock, commodity or currency) expecting to take profits on its devaluation. The general mechanism of a Short Position consists of borrowing an asset from another individual and selling it, but expecting to rebuy the original quantity for a lower price in the future, returning the loan and profiting from the exceeding. Another mechanism is to close a “Short future contract” that consists of the agreement of someone compromising on buying one asset from you in the future, for a determined price. By the time of the execution of the contract, if the price is lower, you buy it at the market price and sell it for the counterpart at the higher agreed upon price from the contract, all while profiting on the difference.

Funding

The operation of funding is when you have the intention of keeping the custody of one financial instrument for a long time so that you can lend it to another investor. To clarify this I’ll explain with an example. Let’s say someone wants to short an asset, or trade leveraged, in this case, you lend the instrument for a specified period of time while the counterpart pays you the interest for that loan. Usually, the interest is paid daily and the period can variate between 2 and 30 days where the borrower can close it earlier (or in this case of a margin call/liquidation), but the lender cannot, so the only guarantee to have it back is by the end of the established period.

Leverage/Margin Trading

To trade leveraged refers to borrowing a financial instrument to be more exposed to the price variation of that instrument that would normally be possible with the same amount of money. This is a HIGH-RISK operation. That comes from the fact that the exchange that allows you to perform this kind of operation needs a guarantee that the loan will be paid.

Let’s imagine the following: You want to play with $1,000 USD and the price of BTC at the time is $10,000. So you want to join in on a long position with a 10x leverage. So you put your $1,000 in and the exchange lends you $9,000 (this money usually comes from other users that let their assets in funding) and you buy 1 BTC. Your margin in this operation is 10% since you put money that corresponds to only 10% of the position. So if BTC drops from $10k to $9k, you now have the exact amount of equity needed to pay back your loan, so the exchange automatically closes your position, selling the BTC for $9k to pay off the loan you took and your $1,000. The exchange will never keep your position if it drops below the value necessary to pay for the loan because they’ll never take the risk! This action is called “Margin Call” or “Liquidation”. So with a 10x Leverage position, you will lose all the money put on that trade with a 10% variation down.

In another scenario let’s imagine that you join the very same position, you put in $1k, exchange lends you $9k and you buy 1 BTC at $10k. If BTC valuates 10% and now is being traded at $11k and you want to close your position, then you sell the BTC at $11k. This means that you pay your $9k loan back and now have $2k in profit. So with a 10x Leverage position, you would have a 100% profit with 10% upwards variation.

Bear and Bull Markets

These expressions refer to the traditional battle between Bears against Bulls, where the bull attacks with their horns with a bottom-up movement and the bear attacks with their claws with a top-down movement. We call a Bear Market when the market has a devaluation tendency and shrouded by pessimism, so the prices are going down. A Bull Market stands for a growing market where the prices are going up and shrouded by optimism. It’s important to mention that these expressions don’t stand for the timeframes, and markets could have different outlooks depending on which time frame you’re looking at. That means, within a long-term bull market that could last months or even years, you could find several short-term bear markets and the same for the opposite.

The importance of practicing these concepts

Once you understand the basic concepts of trading, it is not wise to put all your money on trading (actually golden rule: never invest more than you can afford to lose!). That’s why having a sandbox environment for you to practice new strategies is of extreme importance. Auctus will release a virtual trading platform by the end of this year so you can start practicing everything we cover here now and in the future! So if you want free early access sign-up now.

I think that’s enough information for now! Expect more of these posts in the future but I hope these help in working towards creating a stronger and wealthier community!

Thanks,

Daniel Boaventura, Business and Operations at Auctus and cryptocurrency investor