We all know that it is very difficult to master any game if you’re not aware of all the rules. As the world of exchanges and trading has many rules, new investors should learn these before they’ll be able to play the game properly.
The rules are fortunately not very complicated once they have been broken down and you know a bit of the history to understand why these rules are there in the first place. Olymp Trade provides all the required resources and tools to help you put your newfound knowledge to use.
Let’s first look at some definitions.
Exchange are essentially market places. As with any other marketplace, people come to an exchange to get something that they are willing to exchange for something else. Although markets can deal in anything, exchanges are focused on financial transactions.
The main purposes of financial exchanges is to provide a space to buy company stocks, or bonds for lending money to governments and companies, trade different currencies (Forex), exchange currency for commodities such as gold, oil, metals, and more.
Although most of the bigger exchanges such as Hong Kong, London, and New York deal with numerous financial assets and not only company stocks, other exchanges are more specialized and tend to focus on specific types of assets. Examples of this include the Chicago Mercantile Exchange (CME), which only deals in commodities, and Cryptocurrency exchanges.
The Start of Financial Exchanges in Europe
The first financial exchange was created in Venice when money lenders gathered to buy and sell the debts of government and other loans. This practice soon moved across the whole of Europe and an official exchange was opened in Belgium as far back as the 16th century.
Currencies and stocks were however not part of exchanges until the East India Companies (French, Dutch, and British) were formed. To finance their trading expeditions, these companies issued stock and paid investors “dividends” based on the profits made from the expeditions.
Even though stocks were being issued, there was still not an actual stock exchange until one was founded in London in 1773. This exchange still operates as the LSE (London Stock Exchange) today. This was followed about 20 years later by the founding of the NYSE (New York Stock Exchange). Since then, many other exchanges have been opened, serving mostly geographically areas and including places such as Canada, Tokyo, Hong Kong, etc.
In spite of the global competition, the LSE and NYSE are still the major exchanges. Although both have grown significantly over more than 2 centuries, the NYSE has risen to become the biggest of them all. The NYSE has the highest market capitalization of all companies listed on the exchange, and its total is more than the NASDAQ, Tokyo, and the LSE combined.
The Influence of Technology
Nowadays, it is easy for traders to obtain information on the price of currencies, stocks, bonds, commodities, or indices of these assets in REAL time, irrespective of where they are located globally. This has been made possible due to the existence of these exchanges, as they provide the information and enables users to view all stock details directly.
If this information were not published, only individuals with access to the trading floors of the exchanges would be able to peruse the latest data needed for making profitable trades. The technology that has enabled this connectivity has therefore not only been good for the markets, but it also allows average people to access the markets, and not only the rich or a privileged few.
Most of the biggest corporations globally are listed on stock exchanges, including for example BMW, Microsoft, and Coca-Cola. Commodities that are used on a daily bases such as oil can also be traded in several forms, including WTI crude and Brent oil. Companies listed on exchanges are not limited to only American and European companies, but many international companies, including for example Saudi Aramco’s stocks can be traded there as well.
How Exchanges Operate
As this topic contains many nuances and facets, we won’t go into too much detail, but suffice to say that exchanges are places to negotiate or barter.
Individuals or companies wanting to sell assets enter their offer price on the exchange (ask). This price is based on how they think the market is going to move and their own individual requirements. Their calculations and motives for determining the asking price are not publicly known, nor are they required.
On the other hand, buyers enter prices at which they want to buy assets (bid). This price is also based on how they think the market is going to move and their own individual requirements. Just like with sellers, their calculations and motives for determining the buying price are also not publicly known, nor are they required.
Exchanges connect buyers and sellers based on their “bid” and “ask” prices. If you are a seller and your “ask” price matches a buyer’s “bid” price, then a deal is made and the asset will automatically be transferred to the buyer, while the price the buyer offered will be deducted from their account. Likewise, the asset will be removed from the seller and their account credited with the selling price.
Olymp Trade Market Analysis
During the lifetime of exchanges, numerous innovative techniques have emerged to analyze the markets, while subsequent variations of these techniques have been developed and added to the list of available tools.
The advantage of market analysis is that it enables investors to identify behavioral patterns in the exchange over different periods. Those patterns often result in outcomes that are very predictable as people tend to repeat their behavior based on specific sets of stimuli.
Elliott Wave Theory
If we know that when A happens, exchanges normally respond by doing B, we will be able to invest with more confidence, and often profitably, when we see A happening. The biggest challenge of the process is of course to identify when A is happening correctly.
Ralph Nelson Elliott was one of the first people to consistently and successfully identify this type of pattern. Elliott started studying historical trading data in the 1930s by going back in history and then breaking down the trading charts of current markets. Soon thereafter, he developed the Elliott Wave Theory.
To explain the details of the theory and how to use it need a fair amount of practice and training, but the core principle of Elliott’s discovery is that the psychology of trading is more dependable than the incentives that triggers a response, and that people tend to do the same thing over and over again, irrespective of the era.
There are many different tools that have been created to assist traders in taking advantage of Elliott Wave Theory, as well as other theories of exchange behavior. These are all well worth looking into.
Conclusion
Modern exchanges offer many new opportunities to make money and thanks to online exchanges such as the Olymp Trade platform, everyone has access to financial markets, as well as the tools needed to take advantage of them.