Trading, from the ground up

What is trading?

Trading is the act of buying and selling financial instruments — currencies, commodities, stocks, indexes — with the goal of profiting from changes in their price. Every market is simply a place where buyers and sellers meet, and the price you see is wherever the two currently agree to do business.

Prices move because of supply and demand. When more people want to buy than sell, price rises; when more want to sell than buy, price falls. What drives those decisions? News, economic data, interest rates, company results, global events, and plain human emotion — fear and greed.

One key idea sets trading apart from simple investing: you can profit whether prices go up or down. The next lesson shows how.

How a trade works: long, short, and the spread

Every trade has two possible directions:

• Going long (buying): you buy expecting the price to rise, then sell higher. Buy low, sell high.
• Going short (selling): you sell first — borrowing the instrument through your broker — expecting the price to fall, then buy it back cheaper. Sell high, buy low.

At any moment a market shows two prices: the bid (the highest price buyers will pay) and the ask or offer (the lowest price sellers will accept). You buy at the ask and sell at the bid.

Slippage is a related idea: in fast-moving markets, your order may fill at a slightly different price than you clicked. Both spread and slippage are why entry and exit prices matter.

Points and ticks

Traders need a precise way to measure how far price moves. In futures there are two words for it — the point and the tick — and getting them straight is the foundation of position sizing.

Point and tick

A point is a one-whole-unit move in the contract’s price. A tick is the smallest amount the price is allowed to move — the minimum increment set by the exchange. Each tick has a fixed dollar value, so every move translates directly into money.

So a gold contract that moves from 2400.0 to 2401.0 has moved one point, or ten ticks, worth $100 per contract. Knowing your tick value tells you exactly what each move is worth in dollars — the foundation of position sizing.

The futures market

A futures contract is a standardized agreement to buy or sell a specific asset, in a specific quantity, at a price agreed today, for delivery on a set date in the future. They trade on regulated exchanges such as the CME (Chicago Mercantile Exchange).

Futures exist on almost everything: gold, oil, natural gas, wheat, stock indexes (like the S&P 500), bonds, and currencies. Two groups use them:

• Hedgers — producers and businesses locking in a future price to protect against risk (a farmer fixing the price of next season’s wheat).
• Speculators — traders aiming to profit from price changes, with no intention of taking delivery.

Because every contract is standardized by the exchange (same size, same tick, same expiration rules), futures are deep and liquid. Each contract has an expiration date; traders who want to stay in the market past expiration “roll” into the next contract. Futures are leveraged — you control a large contract by posting a margin deposit, which we cover in Module 06.

Contracts and contract sizes

“How much am I actually trading?” In futures, the answer is the contract size — the fixed quantity of the underlying that a single contract controls.

Futures contract sizes

Each futures contract covers a fixed quantity set by the exchange — for example, 100 ounces of gold, or 1,000 barrels of crude oil. To make markets accessible, exchanges also offer smaller versions:

• Standard — e.g. GC gold = 100 oz.
• Micro / mini — e.g. Micro Gold (MGC) = 10 oz, one-tenth the size and risk.

Starting on the smallest contract lets a beginner trade the real market while keeping risk small. That is exactly how you should start.

Margin and leverage

Leverage lets you control a large position with a relatively small amount of money. Margin is that small amount — a good-faith deposit your broker requires to open and hold the position. It is not a fee; it is collateral.

In futures you will hear two margin terms:

• Initial margin — what you need to open the position.
• Maintenance margin — the minimum equity you must keep while it is open. Drop below it and you get a margin call — add funds or the position is closed (liquidated).

Leverage is the single biggest reason new traders blow up their accounts. Used carefully it is a tool; used carelessly it turns a small wrong move into a large loss. Treat it with respect — Module 11 shows how.

Order types

An order is an instruction to your broker. The four you must know:

• Market order — buy or sell right now at the best available price. Fast, but you accept whatever price the market gives (spread and slippage apply).
• Limit order — buy or sell only at a specific price or better. You control the price but may not get filled.
• Stop order (stop-loss) — an order that triggers once price reaches a level, used to cap a loss or protect a profit. A buy stop sits above price; a sell stop (your protective stop on a long) sits below.
• Stop-limit — a stop that, once triggered, becomes a limit order rather than a market order — more price control, but it can miss the fill.

Technical analysis

Technical analysis is the study of price itself — using charts of past price and volume to judge where price may go next. It contrasts with fundamental analysis, which studies the underlying value (economic data, earnings, supply and demand of the real asset).

Technical analysis rests on three classic assumptions:

• Price reflects everything — all known information is already in the price.
• Prices move in trends — a move in motion tends to continue until something changes it.
• History tends to repeat — because human behavior repeats, recognizable patterns recur.

Core tools include support and resistance (price levels where buying or selling repeatedly appears), trends and trendlines, chart patterns, and indicators like moving averages, RSI, and MACD. Most powerful of all for reading raw price are candlesticks — the subject of the next two lessons.

A short history of candlesticks

Candlestick charts were born in Japan, centuries before they reached Western markets. In the 1700s, Japanese rice merchants needed a way to track the price of rice as it rose and fell through each trading day. They developed a visual method that recorded not just where price closed, but where it opened and how far it swung in between.

The technique is often credited to a legendary rice trader named Munehisa Homma, who studied how the emotions of buyers and sellers drove prices — an early insight into market psychology that still holds today.

For centuries the method stayed largely within Japan. It was introduced to the Western trading world in 1991 by analyst Steve Nison, whose work brought Japanese candlestick charting to a global audience. Today candlesticks are the default chart for traders everywhere — on every platform, in every market.

Anatomy of a candlestick

A single candlestick summarizes one slice of time — a minute, an hour, a day, whatever timeframe you choose. It shows four prices: where that period opened, the high and low it reached, and where it closed.

• The real body — the thick block between the open and the close. A big body means one side won decisively; a small body means buyers and sellers fought to a near draw.
• The wicks (or shadows) — the thin lines above and below the body, marking the highest and lowest prices reached during the period.
• Color — when the close is above the open, the candle is bullish (commonly green). When the close is below the open, it is bearish (commonly red).

Because each candle records the open and close, it reveals the story of the fight between buyers and sellers in that period — not just the final score. Reading sequences of candles is one of the most useful skills a trader can build.

Risk management — the most important lesson

If you remember only one module, make it this one. Professional traders are not right most of the time; they survive and grow because they lose small and win bigger. Risk management is how.

• Risk a small, fixed percentage per trade. A common rule is no more than 1–2% of your account on any single trade. That way a string of losses can never wipe you out.
• Always define your exit before you enter. Know your stop-loss (where you are wrong) and your target (where you take profit) in advance.
• Use position sizing. Work backward: your stop distance and your tick value tell you exactly how many contracts keep your loss within that 1–2%.
• Mind your risk-to-reward. Aim for trades where the potential reward is larger than the risk — for example, risking 1 to make 2. With a good ratio you can be wrong more often than right and still profit.
• Protect your mindset. Discipline beats prediction. Most blow-ups come from oversized positions, revenge trading, and abandoning the plan — not from bad analysis.

Candlestick patterns & reversals

Once you can read a single candle (Module 10), the next step is reading combinations of candles. Certain shapes recur so often that traders gave them names and treat them as clues about what buyers and sellers may do next. Patterns fall into two families:

• Reversal patterns — hint that an existing trend is running out of steam and may turn.
• Continuation patterns — suggest a brief pause before the current trend resumes.

The reversal patterns below are the ones every new trader should learn to recognize first.

Single-candle reversals

A doji forms when the open and close are almost equal — neither side won, signalling indecision that can precede a turn. A hammer appears at the bottom of a downtrend: a small body with a long lower wick, showing buyers slammed the door on lower prices. Its look-alike the hanging man has the same shape but appears at the top of an uptrend and warns of a top. A shooting star is the mirror image — a long upper wick at a top — while the inverted hammer is its hopeful twin at a bottom.

Two- and three-candle reversals

Engulfing patterns are among the most reliable: a candle whose body completely covers the previous candle’s body, signalling that control just flipped from one side to the other. Tweezer tops and bottoms form when two candles share almost the same high (a top) or low (a bottom), marking a wall price could not pass. The three-candle morning star (a bottom) and evening star (a top) show a strong move, a small hesitation candle, then a strong move the opposite way — a clear handover between buyers and sellers.

Tick charts

Most beginners start on time-based charts, where a new candle forms every fixed period — one minute, one hour, one day — whether one trade happened or ten thousand. A tick chart works differently: it forms a new candle after a fixed number of transactions, no matter how long that takes.

Because the bars are driven by activity rather than the clock, a tick chart naturally speeds up and slows down:

• During busy periods — the market open, a news release — many trades occur, so bars print quickly and you see fine detail.
• During quiet periods — a slow lunch hour or overnight — few trades occur, so a single bar can take a long time to complete, and dead time is filtered out.

Why some traders prefer them

• Activity, not time: every bar represents the same amount of trading, which can make momentum and price action read more cleanly.
• Less noise: quiet periods don’t clutter the chart with meaningless bars.
• Popular with futures scalpers who want a fast, activity-based view of markets like the S&P 500 E-mini.

The trade-offs

• Bar counts aren’t standardized — different brokers and data feeds can produce slightly different tick bars.
• They can feel noisy and less intuitive while you’re starting out.
• Sessions are harder to compare, since a “day” no longer equals a fixed number of bars.