Introduction to trading for programmers

I am starting a new series, Trading for Programmers (T4P), where I will cover topics related to trading and how programmers can leverage their existing skills. This is the first post in the series.

Why Programmers Should Explore Trading

Before diving into trading, it’s important to understand why programmers should consider getting into it, even if they aren’t particularly fond of trading.

Trading might seem like a world of its own, but it’s actually a great fit for those skilled in computers and numbers. At its core, trading involves buying and selling assets like stocks or cryptocurrencies to make a profit. For programmers, this can be especially intriguing because it’s akin to solving a puzzle with real-world outcomes.

Why is trading appealing for programmers?

1. Problem-Solving Skills : Just like coding, trading requires identifying patterns and making decisions based on data. It’s a great way to apply your logical thinking in a different context.
2. Automation: Programmers love automating tasks, and trading is no exception. You can write code to automate trades, creating your own trading bots to handle the work for you.
3. Data Crunching: If you enjoy working with data, trading offers a chance to analyze numbers and trends to make smart decisions. You can use your data skills to predict market movements and find good trading opportunities.
4. Earn Money: You can earn money by developing your own trading algorithms, taking on freelance projects to build trading tools, or offering consulting services to others in the trading space. If you search on websites like Upwork, you can easily get gigs that are in the range of $40-$150 per hour, sometimes even more!

Hope it has sparked a bit of interest in you about trading, so now let’s talk about what is trading all about and other related things.

What is Trading

Trading in simple language is all about buying securities: stocks, currencies, crypto, commodities, bonds, and derivatives. Traders can include individuals like you and me, financial institutions like banks, mortgage companies, investment banks, or institutional investors like hedge funds, insurance companies, and pension funds.

Stock Market History

Although today multiple markets exist, it wasn’t always that way. Here’s a timeline of major events in the stock market’s history:

• Late 1400s: Antwerp, now in Belgium, becomes a major hub for international trade. Merchants begin buying goods in anticipation of price increases, with some early bond trading also taking place.
• 1611: Amsterdam sees the creation of the first modern stock exchange with the Dutch East India Company. It becomes the first publicly traded company and dominates trading activity for years.
• Late 1700s: A group of merchants signs the Buttonwood Tree Agreement, marking the beginning of organized stock trading. This practice eventually evolved into what is now the New York Stock Exchange.
• 1790: The Philadelphia Stock Exchange is established, contributing to the growth of the U.S. financial sector and supporting the nation’s westward expansion.
• 1896: The Dow Jones Industrial Average is introduced, initially featuring 12 companies primarily from the industrial sector.
• 1923: The precursor to the S&P 500 is created by Henry Barnum Poor’s company, Poor’s Publishing. The index started tracking 90 stocks in 1926.

Types of Trading

• Day Trading : Buying and selling assets within the same trading day to profit from short-term price movements.
• Swing Trading : Holding positions for several days to capitalize on short- to medium-term trends.
• Scalping : Making numerous trades in a day to capture small price changes and accumulate profits.
• Position Trading : Holding assets for weeks, months, or even years based on long-term trends and fundamentals.
• Algorithmic Trading : Using computer programs and algorithms to execute trades based on predefined criteria.
• High-Frequency Trading (HFT): Executing a large number of trades at extremely high speeds using advanced algorithms.
• Trend Following : Trading based on the direction of market trends, buying in uptrends and selling in downtrends.
• Contrarian Trading : Taking positions that go against prevailing market sentiment, betting that trends will reverse.

Position in Trading

In trading and investing, a position refers to the amount of a particular asset that an individual or entity owns or has committed to in the market. Positions can be categorized into two main types:

• Long Position : This is when a trader or investor buys an asset with the expectation that its price will rise. They hold the asset with the intent of selling it later at a higher price for a profit.
• Short Position : This is when a trader or investor sells an asset they do not own, intending to buy it back at a lower price. They borrow the asset to sell it and hope to repurchase it later at a lower price, profiting from the difference.

Positions reflect whether someone is betting on the market to go up or down and determine the exposure to market movements.

What is Assets

In trading, an asset is anything you can buy or sell to make money. It could be something like a stock in a company, a piece of real estate, or even a cryptocurrency like Bitcoin. Essentially, it’s something valuable that you own or trade with the hope that its value will increase so you can sell it for a profit.

Here are some common types of assets:

• Stocks : Shares of ownership in a company, representing a claim on its earnings and assets.
• Bonds : Debt securities issued by governments or corporations that pay interest over time and return the principal at maturity.
• Real Estate : Physical properties like land, residential, or commercial buildings that can be bought, sold, or rented.
• Commodities : Raw materials or primary agricultural products, such as gold, oil, or wheat, that are traded on exchanges.
• Cryptocurrencies : Digital or virtual currencies using cryptography for security, like Bitcoin or Ethereum.
• Mutual Funds : Investment funds that pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities.
• ETFs (Exchange-Traded Funds): Investment funds traded on stock exchanges, similar to stocks, that hold a variety of assets like stocks or bonds.
• Cash and Cash Equivalents : Liquid assets like cash itself or short-term investments are easily converted to cash, such as Treasury bills.
• Derivatives : Financial contracts whose value is derived from the performance of underlying assets, such as options or futures contracts.

Trading Analysis and its Types

In trading, there are primarily three types of analysis that traders use to make informed decisions: technical analysis , fundamental analysis , and sentiment analysis. Each of these approaches offers unique insights into market behavior and can be used individually or in combination for a well-rounded trading strategy:

Fundamental Analysis

Fundamental analysis focuses on evaluating a security’s intrinsic value by analyzing financial statements, economic indicators, and other qualitative and quantitative factors.

Key aspects of fundamental analysis include:

• Company Financials: In stock trading, this involves examining earnings, revenue, and debt-to-equity ratios to assess a company’s health.
• Economic Indicators: For forex, analyzing interest rates, employment data, and inflation reports.
• Market Sentiment: Understanding how broader economic factors, like geopolitical events, affect markets.

Technical Analysis

Technical analysis involves evaluating past market data, primarily price and volume, to forecast future price movements. Traders use various tools, such as charts, indicators (e.g., RSI, MACD), and patterns (e.g., head and shoulders, triangles), to identify trends and potential trading opportunities.

Key components of technical analysis include:

• Price Action: Analyzing historical prices to spot trends and reversals.
• Indicators and Oscillators: Tools like moving averages, Bollinger Bands, and stochastic oscillators that help identify overbought or oversold conditions.
• Chart Patterns: Recognizing formations like double tops, flags, and wedges that suggest potential market moves

Sentiment Analysis

Sentiment analysis involves gauging the overall mood of the market or crowd to predict how future price movements might unfold. This approach looks at how optimistic or pessimistic traders feel about a particular asset or market in general. Sentiment can be measured using various tools, such as the put/call ratio, VIX (volatility index), or surveys.

Key components of sentiment analysis include:

• News Analysis: Monitoring headlines, social media, and public sentiment to gauge market mood.
• Contrarian Indicators: Tools like the Fear and Greed Index that highlight when the market may be overly emotional, suggesting a possible correction or reversal.

Signals

In trading, “signals” are indicators or clues that help you decide when to buy or sell an asset. These signals can come from various sources, like charts showing price movements, news about a company, or patterns that suggest a price might go up or down. Think of signals as helpful hints or tips that guide your trading decisions, making it easier to spot good opportunities and avoid mistakes.

Trading Strategy

A trading strategy is a plan you follow to decide about buying and selling assets. Think of it like a set of rules or guidelines that help you decide when to enter or exit a trade. This plan is based on things like market trends, price patterns, or specific goals you have. Having a strategy helps you make more consistent and informed decisions, rather than just guessing or reacting to the market at the moment.

Conclusion

In this post, we discussed the basic terminologies related to trading that will be helpful in future posts. If you’re curious, you can learn more about them on YouTube or other resources. My purpose was to provide a basic introduction to these terms. Stay tuned, as we’ll now cover how you can use your programming skills in the world of trading.

Originally published at https://blog.adnansiddiqi.me on September 13, 2024.