Free Trading School · Level 1: What Is Trading?
How traders make (and lose) money
There are only two directions. Going long means buying first and selling later: you profit if price rises. Going short means selling first and buying back later: you profit if price falls. Brokers make shorting possible by lending you the asset or by offering contracts that track its price.
Long profits when price rises. Short profits when price falls.
You buy 50 shares at $40.00 and sell them at $43.00. Profit is 50 × ($43.00 − $40.00) = $150, minus commissions. Had the price fallen to $38.00 and you sold, the loss would be 50 × $2.00 = $100.
Notice that how much you make or lose depends on two things: how far price moves and how big your position is. You cannot control the first. You fully control the second, which is why position size is the most important decision in trading (you will learn to calculate it in Level 5).
The costs nobody mentions
- Spread: the gap between the buy and sell price, paid on every trade.
- Commissions and fees charged by the broker.
- Financing (swap) costs when you hold leveraged positions overnight.
- Slippage: getting filled at a worse price than you expected in a fast market.
- Taxes on profits, which depend on where you live.
A strategy only works if it beats its costs. The more often you trade, the more the costs matter.
Quick answers
There are only two directions. Going long means buying first and selling later: you profit if price rises. Going short means selling first and buying back later: you profit if price falls. Brokers make shorting possible by lending you the asset or by offering contracts that track its price.
A strategy only works if it beats its costs. The more often you trade, the more the costs matter.
The spread. You pay the spread every time you enter a trade at market.
Next lesson: Brokers, accounts and practising for free