What Is Trading and How Does It Work: Trades, Profit and Risk

If you ask what trading is, the answer fits into a single action. A trader buys an asset at one price and sells it at another, and the difference between the two prices, minus fees, becomes their profit or loss. The trade goes through an exchange, where buyers' and sellers' orders meet, and the price moves because the balance of supply and demand moves. Below we walk through how trading works, step by step, using one such trade.

We already covered the definition of crypto trading itself, its types and typical strategies in What is crypto trading and how it actually works. The task here is narrower and more practical. We need to show what happens between pressing the Buy button and the number on your balance.

What a trader's job consists of

A trader does not produce goods or provide a service. The job comes down to two things. First, deciding when and at what price to buy or sell an asset. Second, controlling risk while the position is open. Everything else, from chart analysis to reading the tape, serves these two tasks. To put it in plain terms, trading is work with probabilities and costs, not with predictions.

Asset, price and market participants

In crypto trading, an asset is written as a trading pair, for example BTC/USDT. The first part of the pair shows what is being bought or sold, the second shows what the price is counted in. The exchange does not set the price itself. It only matches orders. Buyers post the prices they are willing to pay (the bid), sellers post the prices they are willing to accept (the ask). The difference between the best bid and the best ask is called the spread. A trader gives this difference to the market the moment they buy at the ask and sell at the bid.

The list of all waiting orders is called the order book. When there are many orders at different levels, the asset is liquid, and a large amount can be bought without a noticeable shift in price. When the order book has little liquidity, even a small market order runs through several levels at once, and the trader gets a worse price than the one they saw on screen. This difference is called slippage.

Market participants are not all alike. Among them are market makers, who keep orders on both sides at all times and earn the spread, funds and exchange algorithms, retail traders and long-term investors. Each has their own goals and time horizon, so in the very same trade both the buyer and the seller can be happy with the result.

Why the price moves

The price moves when someone agrees to worse terms. If a buyer wants to enter right now and places a market order, they take the sellers' orders from the book at the ask. If their volume is enough to exhaust the nearest level, the next trade goes through higher. A seller in a hurry to exit does the same thing in the opposite direction. News, reports, regulators' decisions and liquidations of leveraged positions affect the price not directly, but through people and algorithms that start buying or selling aggressively after such events.

For a trader, this leads to a practical conclusion. The task is not to guess the "fair" price, but to understand which side the pressure is coming from right now and whether the opposite side can withstand it. That is why scalpers look not only at the chart, but also at the tape, where actually executed trades are visible, and at density levels in the order book, that is, the levels where large limit orders sit.

How a single trade works

Any trade, from a thirty-second scalp to a week-long swing trade, follows the same sequence.

Anatomy of a single trade

• Idea. The trader sees a situation in which, by their estimate, a move in one direction is more likely than in the other.
• Plan. The entry price, size, stop-loss level (where to admit the mistake) and take-profit level (where to lock in the result) are set in advance.
• Entry. A buy or sell order is placed. The exchange charges a fee for execution.
• Holding. The position is open, its result changes with the price, but for now this is only "paper" profit or "paper" loss.
• Exit. The stop-loss or take-profit is triggered, or the trader closes the position manually. The exchange charges a second fee.
• Result. The difference between the entry and exit prices, minus the two fees, is credited to or debited from the balance.

Entry, size, exit and fee

Let's take a hypothetical example on the spot market. A trader buys an asset for $100. The exchange fee in the example is also hypothetical, 0.1% of the amount on each side of the trade, charged separately on entry and on exit. Real fees depend on the exchange, the order type (limit orders are usually cheaper than market orders) and the account tier, so before trading you check them on the exchange's own website.

Amounts are rounded to the cent. Two conclusions follow from the table. First, the result is asymmetric. A 2% move up brings $1.80, while the same move down takes $2.20, because fees are charged on both sides regardless of the outcome. Second, just to break even the price has to move roughly 0.2% in the right direction. For swing trading that is a trifle, but for scalping, where the target of a trade may be 0.3–0.5%, the fee takes a noticeable share of the result. Add the spread and slippage, and it becomes clear why the entry point is chosen so carefully and why many scalpers enter with limit orders.

Where the loss comes from

A loss appears when the exit price is worse than the entry price after fees. The causes vary, and it helps to tell them apart.

• Market cause. The assessment was reasonable, but the market went against it and the stop-loss closed the position. This is a normal part of the job and is built into the plan in advance.
• Execution error. A market order into an order book with little liquidity, a stop-loss too close to the current price, an order of the wrong size.
• No plan. The position is opened "by feel", there is no stop-loss, and a small loss grows because admitting the mistake gets harder with every percent.
• Emotions. After a series of losses, the trader increases size to win it back. This state is called tilt, and it destroys accounts faster than any weak strategy.

On spot, the maximum loss is limited to the amount invested. On derivatives, the picture is different. A futures contract lets you open a position with a notional value of, say, $1,000 on $100 of margin, that is, with 10x leverage. A 2% price move against the position then means minus $20, or 20% of the margin, and a 10% move wipes out the margin entirely. On most crypto exchanges the position is forcibly closed at that point (liquidation), and the US regulator CFTC notes in its advisory on the risks of virtual currencies that in an adverse move a leveraged trader may lose more than they deposited. That is why the notional value of a position and your own capital are always counted separately. For more on the differences between the two modes, read What's the difference between spot and futures: the pros and cons of each, what to choose to get started.

Trading, investing and gambling

All three involve money and uncertainty, which is why they are often confused. The difference lies in the source of the result.

An investor buys an asset expecting its value to grow over months or years along with the development of the project or network. They make few trades, and short-term swings barely interest them. A trader earns on those very swings, their horizon runs from seconds to weeks, and their edge is made up of liquidity analysis, execution discipline and risk management. A gambler places a bet with a negative expectation from the start, where the house earns on every round and there is no way to influence the probability of the outcome.

This is also where the common misconception comes from that the market is always a zero-sum game. On spot it is not. If an asset has risen, all of its holders have become richer, and no particular person paid for their profit. On futures, one side's profit on a contract really does equal the other side's loss, and once fees are included the sum for the participants is even negative. Trading turns into gambling at the moment a person's plan disappears and only hope remains.

What you need to work with the market

You need little to start, but every element is mandatory.

• An exchange account with completed verification and two-factor authentication enabled.
• Capital whose loss will not change your life. For learning, $100 of spare money is better than $5,000 set aside for housing.
• Rules. What percentage of the account you are willing to lose in one trade, where the stop-loss sits, after what series of losses you stop trading for the day.
• A tool for watching the market. The exchange interface shows a chart and a simplified order book. A trading terminal such as Secret Terminal connects to the exchange via API keys and displays the full order book, the tape, clusters and the density map in one window. The basic version is free, runs on Windows and macOS, and the data is stored locally on your computer.
• A trade journal that shows what works and what does not.

A separate word on demo accounts. A demo is useful for learning the interface and not mixing up the buttons, but a simulation does not convey the main thing. Virtual money triggers neither the fear of losing nor the urge to win it back, and order execution in a demo is often cleaner than in reality. So once you know the interface, it makes sense to move to a small real amount you are prepared to lose, for example $10–20, after first checking the minimum order size and the fee on your chosen exchange. Increasing leverage to "compensate" for a small deposit is not a good idea. Leverage multiplies not only profit, but also the speed at which the account goes to zero.

Short glossary

FAQ

• Can you trade without an exchange?

  Yes, but for active trading it is inconvenient. Cryptocurrency can be bought and sold directly from another person through a p2p platform or an exchanger. Such a deal has no order book with depth, the spread is wider, and the price is tied to a single counterparty. Decentralized exchanges are closer to full trading, and some of them also work through an order book, but in that case there is still an exchange, just without a central operator. A centralized exchange provides liquidity, execution speed and tools such as stop orders, which is why trading in the usual sense happens there.

• Why does buying an asset not guarantee a profit?

  Because after the purchase the price can go either way, and that is not known in advance. The purchase only fixes the entry point, while the result is determined by the exit price, which is set by the market, not by the trader's wishes. Add the spread and two fees, and it turns out that right after the purchase the position is already slightly in the red and first has to recover those costs.

• Where does a profitable trader's money come from?

  From other market participants who sold them the asset cheaper than they later sold it, or bought it from them at a higher price. On spot, the seller is not necessarily at a loss, since they may have bought even cheaper and simply locked in their own profit. On futures, one side's profit on a contract equals the other side's loss. In both cases, part of the money goes to the exchange as fees.

• What does a trading terminal do?

  It shows market data in more detail and faster than the standard exchange interface. In Secret Terminal, for example, you get an order book with large orders highlighted, the tape, clusters, charts, funding rate data and a built-in trade journal, and the list of supported platforms already includes more than ten exchanges, including Binance, Bybit, OKX and WhiteBIT. The terminal does not make decisions for the trader and does not affect the price. It only makes visible what is happening in the market.

If you want to see this mechanism on real data, watch the free first lesson on exchanges and futures on the Secret Terminal YouTube channel and the terminal's own materials.