---
watermark: ORIRO
disable-model-invocation: true
name: finance-trading
provider: ORIRO.ai
copyright: Copyright (c) 2026 ORIRO.ai
description: >
  Financial markets and trading — market structure, order types, technical
  analysis, risk management, trading psychology. Activate for questions about
  how markets work, order types, reading charts, trading strategies, risk
  management, or understanding market mechanics. Sources: SEC investor education,
  CME Group educational content, FINRA investor education.
  Trading involves substantial risk. This is education, not trading advice.
---

# Financial Markets and Trading

## Market structure

### Order types

**Market order:** Execute immediately at best available price. Guaranteed fill, not guaranteed price.
**Limit order:** Execute at specified price or better. Guaranteed price if filled; not guaranteed to fill.
**Stop order:** Becomes market order when stop price reached. Used to limit losses or protect profits.
**Stop-limit:** Becomes limit order when stop triggered. May not fill if market gaps past limit.

### Bid-ask spread

Bid: highest price buyers will pay. Ask: lowest price sellers will accept.
Spread = ask - bid = cost of immediate entry and exit.
Liquid markets (S&P 500 ETFs): very tight spreads. Illiquid markets (small stocks): wide spreads.

### Market participants

Market makers: Provide liquidity by quoting both bid and ask. Profit from spread.
Institutional traders: Mutual funds, hedge funds, pension funds. Move markets.
Algorithmic traders: Computerized execution. Dominant in modern markets.
Retail traders: Individual investors. Typically price takers.

## Technical analysis

Study of price and volume to identify patterns and trends.
**Trend identification:**
Uptrend: higher highs and higher lows.
Downtrend: lower highs and lower lows.
Range/consolidation: no clear directional pattern.

**Moving averages:**
Simple MA (SMA): Average of closing prices over N periods.
Exponential MA (EMA): Gives more weight to recent prices.
**Golden cross:** Short MA crosses above long MA — bullish signal (e.g., 50-day above 200-day).
**Death cross:** Short MA crosses below long MA — bearish signal.

**Support and resistance:**
Support: price level where buying has historically stepped in.
Resistance: price level where selling has historically stepped in.
Broken resistance becomes support (and vice versa).

**Volume:** Confirms price movements. Volume should increase in the direction of the trend.

**RSI (Relative Strength Index):** Momentum oscillator 0-100.

> 70: overbought (potential reversal). <30: oversold (potential reversal).
> More reliable as divergence signal than absolute levels.

**MACD (Moving Average Convergence Divergence):**
Difference between 12-period and 26-period EMA.
Signal line: 9-period EMA of MACD.
Crossovers and divergences as signals.

## Risk management — the most critical component

**Position sizing:**
Risk per trade: 1-2% of capital maximum (risking $100-200 per $10,000).
Position size = (Account risk in $) / (Entry price - Stop price)
Example: $10,000 account, 1% risk = $100 risk. Entry $50, stop $48 ($2 risk per share). Position = 50 shares.

**Risk/reward ratio:**
Minimum 1:2 risk/reward before entering a trade.
If risking $100, target minimum $200 profit.
At 50% win rate with 1:2 R/R = profitable over time.

**Stop losses:** Pre-defined exit if trade moves against you. Set BEFORE entering the trade. Never move stops against your position.

**Drawdown management:**
Maximum drawdown: largest peak-to-trough decline.
At 20% loss, need 25% gain to break even.
At 50% loss, need 100% gain to break even.
Protect capital above all else.

## Trading psychology

**The three enemies:** Fear, greed, hope (when applied to losing positions).
**FOMO (Fear of Missing Out):** Enters trades late, chases price. Fix: Define criteria before markets open.
**Revenge trading:** Increasing size after loss to recover quickly. Fix: Daily loss limits.
**Overtrading:** Taking low-quality setups out of boredom. Fix: Define minimum criteria; if not met, don't trade.

**Process over outcome:** Good process can lead to bad outcomes (bad luck). Bad process can lead to good outcomes (good luck). Evaluate yourself on process, not individual trade outcomes.

## Futures basics (relevant to commodities and index trading)

Futures: Agreement to buy/sell an asset at a future date at a price agreed today.
Standardized contracts traded on exchanges (CME, ICE).
Leverage: Control large notional value with small margin deposit.
Mark-to-market: Daily settlement of gains and losses.
Margin call: If account equity falls below maintenance margin, must add funds or close positions.

**Contango:** Future price > spot price (most common — storage costs, time value).
**Backwardation:** Future price < spot price (indicates tight supply or high demand for immediate delivery).

Sources: SEC investor education (sec.gov/investor), CME Group education (cmegroup.com/education),
FINRA investor education, Investopedia technical analysis content, Jack Schwager "Market Wizards" principles