Trading Explained in 3 Minutes!

Think about trading more tangible items

If you’ve bought a house – you’ve traded the property market – ‘long’ as we say – meaning, obviously as you may think, that if your property (as part of your regional property market) rises, then you will make a profit – nice eh!

However, there are ‘fees’ involved in buying and selling property, such as tax, agent fees, legal fees etc – so to make an overall net profit the value will have to rise by more than the fees involved in entering and exiting the ‘trade’.

And if you have used a mortgage then you have traded with leverage. So, with a 10% deposit, if the value of the property rises 10%, then the value of your deposit (before fees) will have risen 100% – easy money.

But… If the value of your property falls by 10% or more then you will have lost the whole value of your deposit if you have to sell – easy come, easy go. And you could owe even more – gulp!

So for such an ordinary transaction, it is surprising how people understand little about the risks that leverage exposes them to, hence sometimes people get stuck in a property transaction, taken at the peak of a market cycle, for many years and others seem to make a small fortune with more luck than intelligence.

Too risky for you? Well, you could rent, but then you are ‘short’ the property market, because instead of paying the bank interest, you pay the landlord and they will profit from increasing property prices, while your cost of purchasing a property in future gets increasingly more expensive, perhaps totally unaffordable until the next market down cycle, which could be many years. But if property prices are falling, you will actually profit as your purchasing power for property in future increases.

We’re all affected by exchange rates

Your wages and savings are also being traded constantly – as the currency they are in rises and falls, so does your purchasing power for foreign goods and holidays. And we all like to buy our holiday money when we get the best exchange rate.

Your money is already traded for you anyway

Keep money in an investment savings account or pay into a pension? Well, the chances are you are ‘long’ stocks, shares and indices as most investments buy these assets with your money. If they go up in value, so does your profit or return, but you are of course also exposed to the downsides – and because all markets move in cycles, it can be a lottery as to how well or not you do from your pension depending on the time in these cycles that you start and stop.

It is almost impossible not to trade – like it or not – and it can seem very frustrating how arbitrary it can be as to how well you will or won’t do from your savings and investments.

So, given market movements often affect the value of your purchasing power and financial flexibility in life, it’s probably worth learning a bit more on how to understand where different markets are in their cycles and hopefully avoid being the person that is paying the profits to those that either get luckier or do know more.

What do traders actually do then?

All we do as traders is to move our savings account into assets when we see them rising, such as; other currencies, commodities like gold and silver, indexes like the FTSE, Dax, S&P500 and Dow Jones, government bonds and sometimes ordinary company stocks and shares. The aim is of course to actively manage our savings and benefit from markets that are increasing in value more than our home currency (£s) and exit them before they fall again. Then we can also trade assets ‘short’ and profit when they are falling in value compared to our home currency. This is all hedge funds do – and it is certainly not as difficult as they would like you to believe.

From movements in the price of assets it is of course possible to be on wrong side and lose value – hence we have spent a lot of time on researching market movement patterns. As you might, we like to know more than the average passive investor so that we can increase our chances of protecting and growing our savings more than a bank or pension fund would.

Why not leave it to professional advisors?

Well, most investment professional’s pay is structured so that their financial interest is more aligned to making regular fees and commissions for selling products and giving you a small cut of the profits you might make, that is, they are making you more money from your money than you do.

That’s it really, not so complicated after all…

OK, it was probably more like 5 minutes but hopefully you’ll have found it worth reading and now see, it’s nothing new, complicated or to be scared of, because trading happens all the time and we are all affected by it whether we like it or not.

We do hope you’ll read on and at least learn a bit more about what should be possible from being a smarter investor without having to pay huge fees to the professionals – so you can benefit more from your hard earned money than the many people trying to give you reasons to make them money and help you give it away too easily.

And the great thing is, it is much easier, cheaper and quicker to trade your savings into and out of these assets nowadays thanks to the power of the internet – and cheaper than, for example; property taxes, agent fees and legal fees.

So hopefully you can make a bit more money from actively managing your savings – and your profits could make the fees involved in buying a nicer property more affordable too!

Want to find out more about how we invest?

Then please do keep reading, and find out about our Analytic Trading techniques and systems – they should all be just as easily understandable if you take the time to learn a bit more about how these things really work…

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