EdgeQuant TradingFoundations Series

Guide 01 of 02

Bid, Ask, Risk

Everything that happens in a market comes down to three questions: what someone will pay, what someone will accept, and how much you can afford to be wrong. Twelve panels on how the machinery works.

This is education, not advice. Nothing here is a recommendation to buy or sell anything. Trading carries real risk of loss, and most short-term retail traders lose money. Talk to a licensed professional before putting capital at risk.

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One instrument, forty sessionsIllustrative daily candles

Generated sample data. Every price, ticker and figure in this guide is illustrative — none refers to a real instrument.

Mechanics

A trade is two people disagreeing about the same fact

Every completed trade has a buyer and a seller looking at identical public information and reaching opposite conclusions. One thinks the price is low. The other thinks it is high. The exchange's only job is to match them and record the price.

That recorded price is not "the value" of the thing. It is the last price at which two people disagreed strongly enough to act. Prices move because new information, new money, or new fear changes the balance between those camps — a process called price discovery.

You can only sell at a price someone will pay. If nobody is bidding, your position is worth whatever the highest bidder says — not what the screen said an hour ago.
In short-term trading your profit is roughly someone else's loss. You are not competing against "the market"; you are competing against the party on the other side of your order, often a professional firm.
Being right about the company, the economy, or the technology is not the same as being right about the price. Markets can price in your insight before you act on it.

How a print happensBuyers and sellers meeting

Orders rest at their own prices. Nothing trades until a buyer accepts a seller's price or a seller accepts a buyer's — that crossing is the print.

Instruments

What people actually trade

"Trading" covers several different games with different rules, hours, and risks. The instrument determines how much leverage is built in — and leverage is what turns a bad week into a wiped-out account.

A useful rule: the further down the chart you go, the faster you find out you were wrong. Beginners who start at the bottom usually do not get a second attempt.

Leverage built into the instrumentTypical retail maximum, ×

Indicative only. Actual limits vary widely by jurisdiction, broker and account type — several regions cap retail forex and CFD leverage far below the figures shown.

Instrument	What you own	Built-in leverage
Stocks	A fractional share of a company, with voting rights and any dividends	None by default
ETFs / funds	A share of a basket that tracks an index or theme	None, unless explicitly leveraged
Bonds	A loan to a government or company, repaid with interest	Low
Options	The right — not the obligation — to buy or sell at a set price before a set date	High; can expire worthless
Futures	An obligation to exchange an asset at a set price on a set date	Very high; losses can exceed deposit
Forex	One currency priced against another	Very high
Crypto	A token on a blockchain; custody rules vary by venue	None spot; very high on derivatives

Quotes

Reading a quote

There is no single "price." There are two, and the gap between them is a cost you pay every time you trade.

Bid — the highest price a buyer will pay. Sell into this. Here 102.02.
Ask — the lowest price a seller will accept. Buy at this. Here 102.05.
Spread — the gap. Buy and immediately sell and you are down the spread. Narrow means liquid and competitive; wide means you are paying for the privilege of trading.
Size — how many shares rest at each price, shown by the bar behind each row. Want 5,000 and only 600 are offered on top? Your order eats into worse prices as it fills.
Last — the most recent completed trade. History, not an offer.
Volume — how much traded today. Low volume means wide spreads and a real chance you cannot exit when you want to.

Order bookACME · depth by price level

102.14900

102.091,400

102.05600

Spread0.03

102.021,100

101.982,300

101.91750

Bar length shows resting size at each level. A thin top-of-book with size stacked further away is exactly the shape that produces slippage on a large market order.

Execution

Order types, and what each one gives up

Every order type trades certainty of price against certainty of execution. You cannot have both.

Slippage

The difference between the price you expected and the price you got. It grows with order size, with volatility, and with illiquidity. For most beginners, slippage plus spread costs more per year than commissions do.

Where each order fillsOne price path, four instructions

The market order fills at once at whatever is available. The limit waits for its price. The stop sleeps until the trigger, then becomes a market order — which is why its fill can land below the level you set.

Order	What it does	The trade-off
Market	Fills immediately at the best price available	Guarantees you get in; guarantees nothing about price. Dangerous in thin or fast markets.
Limit	Fills only at your price or better	Guarantees price; may never fill, or fill only partially.
Stop	Dormant until price hits your trigger, then becomes a market order	Caps losses in normal conditions; in a gap or crash it fills far below the trigger.
Stop-limit	Triggers at one price, then works as a limit at another	Protects you from a terrible fill — at the cost of possibly not exiting at all.
Trailing stop	Follows price up, staying a fixed distance behind	Locks in gains automatically; ordinary volatility can shake you out early.
Day / GTC	Durations, not types: expires at the close, or stays live until cancelled	Forgotten GTC orders fill on news you never saw.

Direction

Long and short are not mirror images

Going long means buying first and hoping to sell higher. Your maximum loss is what you paid — a stock can go to zero and no further. Your upside has no ceiling.

Going short means borrowing something, selling it, and hoping to buy it back cheaper. Now the arithmetic inverts: your maximum gain is capped at 100% — price can only fall to zero — while your loss is theoretically unlimited, because there is no upper bound on price.

You also pay borrowing fees for as long as you hold, and the lender can demand the shares back at the worst possible moment. This asymmetry is why short squeezes exist, and why professional short sellers size positions far more conservatively than long ones.

The asymmetry, drawnReturn on a $100 position

Profit Loss

Both lines are drawn on the same axes. The long position's loss stops at −100%; the short position's loss keeps going, because the price above it has no ceiling.

Risk

Risk management is the whole job

Beginners look for entries. Survivors think about size. The first skill worth learning is deciding, before you enter, exactly where you are wrong and what that costs.

The standard formula: pick a maximum loss per trade as a share of the account, measure the distance from entry to stop, and divide. That gives the position size at which those two numbers agree.

Losing streaks are not hypothetical — a strategy that wins 50% of the time throws six losses in a row reasonably often over a few hundred trades. The chart shows what that streak leaves you at each risk setting.

Account left after six straight lossesStarting equity = 100%

Compounding, not subtraction: each loss is taken on the reduced balance. At 20% risk per trade a six-loss streak leaves roughly a quarter of the account.

Account size

Risk per trade %

Entry price

Stop price

Target (optional)

Position size—

Capital deployed—

Risked if stopped—

Reward : risk—

A tighter stop buys a larger position for the same risk — which is why stop placement matters more than entry price. And a reward-to-risk ratio below 1.5 demands a high win rate merely to break even after costs.

Costs

What trading actually costs you

"Zero commission" describes one line item out of six. The rest are still there, and they are subtracted before you see a result.

A strategy that looks profitable on paper frequently is not once these come out. Test any idea with realistic costs included, never idealized fills.

Gross to net, one active yearIllustrative, % of starting equity

Gross Deducted Net

Worked example, not a measurement: a hypothetical 20% gross year for a frequent trader, reduced by each cost layer in turn. Your own figures depend entirely on turnover, instrument and jurisdiction.

Cost	When you pay it
Spread	Every round trip, invisibly. The single largest cost for most active traders.
Slippage	Whenever your order moves the price, or the price moves first.
Commissions	Per trade or per contract, depending on broker and instrument.
Financing	Daily, on any leveraged or overnight position. Compounds quietly.
Borrow fee	Daily, on short positions. Spikes on exactly the names you most want to short.
Tax	At settlement. Short-term gains are often taxed far more heavily than long-term — rules vary by country.

Analysis

Two ways people decide what to buy

Both camps have serious practitioners and enormous amounts of nonsense written about them. What matters is knowing what each assumes.

A third view — the efficient-market position — holds that neither reliably beats simply buying a broad index fund after costs, and decades of data on retail performance are uncomfortably supportive of it. Worth sitting with before committing capital.

Where each approach livesTypical holding period

The horizons overlap but the centres of gravity differ. Mismatching your method to your holding period is a common and expensive error.

	Fundamental	Technical
Looks at	Earnings, cash flow, debt, margins, industry position, management	Price history, volume, trend, volatility, patterns
Assumes	Price eventually converges on business value	Price already reflects everything, and behaviour repeats
Time frame	Months to years	Minutes to months
Fails when	The market stays irrational longer than you stay solvent	The pattern was noise, or everyone watches the same level

Charts

Reading a candlestick

Each candle compresses one period — a minute, a day, a week — into four numbers: where price opened, where it closed, and the extremes reached in between. The body spans open to close; the wicks show the range that got rejected.

A long upper wick means buyers pushed price up and were beaten back before the close. A body tiny relative to its wicks means the period ended roughly where it started after a fight in both directions.

That is all a candle says. Everything beyond it — the named patterns, the signals — is interpretation, and interpretation is where opinions diverge sharply.

Anatomy of a candleFour numbers per period

A hollow body means the close finished above the open; a filled body means it finished below. Colour conventions vary by platform — read the body, not the hue.

Failure modes

Where beginners lose money

The mistakes are remarkably consistent, and none of them are about picking the wrong stock. Most trace back to one piece of arithmetic people never run: losses and the gains needed to undo them are not symmetric.

Lose 10% and you need 11% to get back. Lose 50% and you need 100%. Lose 70% and you need 233% — which is not a bad quarter away, it is a different lifetime. This is why capping the size of any single loss matters more than finding good entries.

The gain needed to undo a lossReturn required to get back to even

Pure arithmetic, no assumptions: a 100 account down 50% is 50, and 50 must double to be 100 again.

Trading size that makes you emotional

If a position keeps you awake, it is too large. Fear closes winners early and holds losers too long, in that exact order.

Moving the stop

The stop was your definition of being wrong. Widening it as price approaches is not conviction; it is refusing a small loss and converting it into a large one.

Averaging down without a plan

Buying more of a falling position feels like a discount. Sometimes it is. It is also the standard mechanism by which a manageable loss becomes an account-ending one.

Revenge trading

Winning a loss back immediately, in larger size, on a worse setup. The next trade has nothing to do with the last one.

Confusing leverage with opportunity

Leverage does not improve your edge. It multiplies whatever edge you have, including a negative one, and compresses the time you have to be right.

Mistaking a bull market for skill

When everything rises, every method works. The test of an approach is how it behaves in the drawdown — and you cannot know that until you have lived through one.

Reference

Glossary

Liquidity: How easily you can trade meaningful size without moving the price.
Volatility: How much price moves, either direction. Not the same as risk, but related.
Drawdown: The decline from a peak in account value to the following trough.
Leverage: Controlling a position larger than your capital, via borrowing or a derivative.
Margin call: Your broker demanding more cash — or liquidating you — because losses ate the collateral.
Gap: A jump between one close and the next open, with no trading in between. Stops do not protect across one.
Market maker: A firm continuously quoting both bid and ask, earning the spread for providing liquidity.
Order book: The live list of all resting bids and asks at each price level.
Backtest: Running a strategy against historical data. Easy to fool yourself with; assume it flatters you.
Edge: A repeatable reason your expected return is positive after all costs. Most people do not have one.
Expectancy: Average profit per trade over many trades: win rate and average win against loss rate and average loss.
Settlement: When the trade legally completes and cash and asset change hands, typically a day or two after execution.

One last time. This guide explains mechanics. It contains no strategy, no signals, and no view on any market. Understanding how orders and risk work is a prerequisite for trading — not a reason to start.

EdgeQuant Trading · Foundations series · Guide 01 of 02