Maybe the Traveling Merchant is Skeletron Prime. Like, think about it. Skeletron posseses someone, so it's entirely possible SP does it too. And, the TM only comes at day, while SP only comes at night.
Lore wise? To other foreign lands & worlds. Likely another place similar, in a lot of ways to Terraria, but with an "Asian" aesthetic. He already sales the Dynasty Wood sets, which are impossible to get in-game without buying them from him & he'll also have Bamboo sets, which kinda confirms this theory. I'm sure he goes to quite a LOT of different places, but I'm pretty certain about the "Asian-themed" worlds.