What trading is and how a market works

Before talking about candles, indicators or strategies, you need a clear picture of what happens when someone buys or sells something in a market. Almost every beginner mistake is rooted in not understanding these mechanics: buying at a price you didn’t expect, not knowing why an order didn’t fill, or underestimating what each trade costs. This lesson builds that foundation.

Trading and investing are not the same

Both activities buy and sell financial assets, but they answer different questions. The investor asks: “Is this business worth more than it costs today, and will it grow over the years?” The trader asks: “Where is this price most likely to move over the next days or weeks, and how much am I willing to lose if I’m wrong?”

Neither one is superior. Many people do both in separate accounts: a long-term portfolio they barely touch and a smaller account for active trading. The problem appears when they get mixed up without noticing: a trade that went wrong turns into a “long-term investment” to avoid accepting the loss. That self-deception is one of the most expensive patterns in the market, and you’ll see it again and again in the interviews in lesson 1.2.

What you can trade

“The market” is really many markets. Each has different hours, costs, leverage and behavior. This course mostly uses U.S. stocks and ETFs for its examples because they’re accessible, very liquid and well documented, but the principles of technical analysis apply to almost any asset with price and volume.

How to read a quote

Before you look at any chart, an asset’s quote screen already tells you a lot. These are the fields you’ll see on almost any platform and what they mean for a trader:

Market cap is usually grouped into three rough categories, with boundaries that vary by source: large cap (companies worth tens or hundreds of billions of dollars), mid cap and small cap. As a practical rule, while you’re learning it’s better to trade large companies and broad ETFs: they move in a more orderly way, have minimal spreads and their technical patterns are more reliable.

How price forms: the continuous auction

A modern exchange is a continuous auction. At any moment there are people and institutions willing to buy at a certain price and others willing to sell at another. The price you see on screen is simply that of the last executed trade: the last point where a buyer and a seller agreed.

Intentions that haven’t executed yet pile up in the order book. On the buy side are the offers to buy, the bid. On the sell side are the offers to sell, the ask (also called the offer). The best bid is the highest price someone is willing to pay right now; the best ask is the lowest price at which someone is willing to sell. The difference between the two is the spread.

In this book, the spread is 100.03 − 100.01 = $0.02. If you buy “at market” right now, you pay the ask; if you sell at market, you receive the bid. That’s why, if you buy and immediately sell, you lose the spread even if the price hasn’t moved. It’s the first invisible cost of trading.

What happens with a large order?

Suppose you send a market buy order for 600 shares. Only 200 are available at the best ask. The order takes those 200 at 100.03 and the remaining 400 from the next level, at 100.04. Your average price works out like this:

You paid almost $0.007 more per share than the best ask showed. That difference between the price you expected and the price you got is called slippage. In very liquid assets with small orders it’s minimal; in thinly traded assets, or during moments of panic, it can be huge. Here’s the mechanical explanation of why price “moves”: when aggressive buyers consume everything at one ask level, the next traded price is higher. When aggressive sellers consume the bids, the price falls.

Who is on the other side

Every time you buy, someone sells to you. It’s worth knowing who that someone usually is, because it determines who you’re competing against.

• Institutional investors. Pension funds, mutual funds, insurers, hedge funds. They move most of the volume. When a large fund accumulates or distributes a position over weeks, it leaves visible footprints in price and volume. A big part of technical analysis is spotting those footprints.
• Market makers. Firms that constantly post bids and asks and earn money partly by capturing the spread. Thanks to them, there’s almost always someone to trade with.
• High-frequency traders. Algorithms that trade in microseconds. They compete on speed, not on daily chart analysis; that’s why retail traders shouldn’t try to beat them on their own turf (scalping over seconds).
• Hedgers. Companies or producers that use futures and options to protect themselves from a business risk, for example an airline locking in today’s fuel price. They’re not trying to win the trade; they’re looking for stability.
• Retail speculators. People like you who trade their own money. Today they have access to tools that only professionals had thirty years ago, but they also face professionals on every trade.

The practical consequence: your edge isn’t speed or inside information. A disciplined retail trader can have an edge in patience (they don’t have to trade every day or report quarterly results), in flexibility (they can enter and exit small positions without moving the price) and in picking clear opportunities. This entire course is designed to build that kind of edge.

Liquidity and volatility

Liquidity is how easily you can buy or sell a reasonable amount without moving the price much. You recognize it by three signs: high daily volume, a tight spread and depth in the order book. A large index ETF can trade tens of millions of shares a day with a one-cent spread. A small stock may trade a few thousand shares with spreads of several cents or more.

Volatility is the typical size of price movements. An asset that moves 0.5% on a normal day has low volatility; one that moves 6% is very volatile. Volatility is neither good nor bad: it’s the trader’s raw material (no movement, no profit) and also the source of risk. In Phase 2 you’ll learn to measure it with Bollinger Bands and other tools; in Phase 4 you’ll learn to size your positions according to it.

Market hours

The regular session of the U.S. stock exchanges (NYSE and Nasdaq) runs from 9:30 a.m. to 4:00 p.m. New York time. Before and after there are extended sessions (pre-market from early morning and after-hours into the evening), but with much less volume, wider spreads and sharp moves on news. Many brokers only accept limit orders during those hours.

If you’re in another time zone, convert it. In U.S. Central Time (Chicago) the session runs 8:30 a.m.–3:00 p.m. all year, because both cities change their clocks together. In Central America (UTC−6, no daylight saving time) it’s 7:30–14:00 while the U.S. is on daylight saving time (roughly March to November) and 8:30–15:00 the rest of the year. Adjust for your own time zone.

Other markets keep different hours: the main index futures trade nearly 24 hours from Sunday afternoon to Friday, with a daily pause; forex trades 24 hours, five days a week; crypto never closes. The first and last hour of the stock session usually concentrate the day’s highest volume and volatility; midday tends to be quieter.

How a trader makes and loses money

There are two possible directions. Going long means buying in the hope that price rises so you can sell higher. Going short means first selling an asset borrowed from your broker, hoping it falls so you can buy it back cheaper and return it.

Leverage: the amplifier

Many products let you control a position larger than your capital: a stock margin account, futures or options. Leverage doesn’t change the probability of being right; it only multiplies the result. If a position leveraged four times moves 5% against you, your capital drops 20%. It’s the number one reason small accounts disappear quickly.

The costs that always exist

• Commissions: what the broker charges per trade. Many U.S. brokers no longer charge commissions on stocks, but they do on options and futures, and on some plans.
• Spread: you pay it every time you enter or exit at market.
• Slippage: the difference between the expected price and the filled price.
• Financing: interest for using margin or for holding a short.
• Taxes: they depend on your country of residence and the asset’s country. Check with a local accountant.

A trader who trades a lot with high costs needs a bigger edge just to break even. In derivatives such as futures and options, the game is roughly zero-sum among participants before costs (what one wins, another loses), and negative after costs. In practice, the evidence regulators publish is consistent: in leveraged retail products, such as CFDs in Europe, where providers must disclose the figure, most retail accounts lose money.

A complete trade, start to finish

Put everything above together in a concrete case. A trader with a $5,000 account decides to buy 100 shares of an ETF quoted with a bid of 49.98 and an ask of 50.00. Her broker charges a $1.00 commission per trade.

1. Entry. She buys 100 shares at market. There are enough shares at the ask, so it fills at $50.00. She pays 100 × 50.00 = $5,000 plus the $1.00 commission.
2. Monitoring. Three days later the last price is $52.40. Her unrealized gain, calculated on the last price, is (52.40 − 50.00) × 100 = $240.
3. Exit. She decides to sell at market. The bid at that moment is $52.38: she sells at that price and pays another dollar in commission.
4. Result. (52.38 − 50.00) × 100 = $238 gross, minus $2.00 in commissions = $236 net, 4.7% on the $5,000 position.

Notice two things. First, the real result was lower than what the screen showed, because on exit she received the bid rather than the last price, and she also paid commissions. Second, the trader put all her capital into a single position: if the ETF had fallen 10%, she would have lost $500, 10% of her account, on one trade. In Phase 4 you’ll learn to size positions so that a losing trade costs around 1% of the account, not 10%.

Realistic expectations

Trading isn’t a salary or a lottery. It’s more like a business with high variability: there are good months, bad months and a long learning curve in which you normally pay “tuition” in the form of small losses. Three ideas to take with you from now on:

1. Statistical edge. A strategy has an edge if, repeated many times, it wins more than it loses after costs. No single trade proves anything; a hundred trades start to say something.
2. Survival first. The goal of your first months isn’t to make money but to avoid losing your capital while you learn. That’s why this course goes through simulators and paper trading before touching real money, and then starts with 1% risk per trade.
3. Your own method. There’s no single correct style. There are styles that fit, or don’t fit, your time, your capital and your temperament. Phase 3 exists so you can choose with information, not because of a trend.