Trading Definitions & Language
Certain terms in trading can sometimes be difficult to understand, therefore we have created this page with trading definitions and trading language where you can read a short description and definition for each trading term. Trading lingo is something that every trader should understand to be able to keep a conversation with another trader and to be able to express an idea or a situation in the market. Use this article to learn some of the most important trading definitions we use on Leverage Trading to understand the full context. These are trading definitions for stocks, forex, crypto, options, commodities, futures, and CFD traders. I recommend spending some time each day to learn a few of them until you have filled your vocabulary and your trading language is on top.
Altcoin, Alternative coin
An altcoin is any other cryptocurrency that is not Bitcoin, hence the name, alternative coin. There are over 20,000 cryptocurrencies in circulation at the moment where all of them except Bitcoin are altcoins. Altcoins are traded on crypto exchanges all over the world and they are usually characterized by a lower market capitalization. Altcoins are seen as a high-risk investment due to high volatility and low liquidity.
Arbitrage in trading is seen as a risk-free trade. Arbitrage trades can usually be found when transacting between stock exchanges or other platforms to take advantage of price differences on the two platforms. Arbitrage trades were very popular between 2015 and 2018 in cryptocurrency trading where the price of Bitcoin was different on many exchanges. You could simply buy Bitcoin in Europe for $4500 and sell it in Asia for $4700 and make a $200 arbitrage profit.
An asset class in trading or investing is a type of investment that goes under the same laws and regulations in a country. For example, stocks are one asset class and are regulated the same way in each country. Commodities are another asset class that has another regulation and is treated differently from stocks. Currencies, metals, and bonds are examples of other asset classes.
Automated trading refers to the automation of a trading portfolio through computer coding or through a pre-coded program. Automated trading lets the trader input certain criteria for when to buy and when to sell. After the criteria have been put in, the computer will execute trades automatically based on these criteria. For example, a trader might add criteria to buy a stock based on a technical indicator and then sell based on another technical indicator. This is all done automatically and the trader only has to supervise and manage the criteria.
A bear in trading is an individual who is pessimistic about the future price development for a certain financial asset. Bears have a negative outlook on the market environment and are often prone to short-sell securities. A bear usually thinks the market is overvalued or overheated and thinks that a market correction is around the corner. Bears can have a long-term negative view or a short-term negative view of the market.
A bear market refers to a market environment that has been declining more than -20% from recent highs and has stayed negative for a longer period of time causing most investors to distrust the future growth. Bear markets can last between 6 months up to several years. During bear markets, most retail traders and investors sell their stock and other securities due to the lack of trust in the markets. Bear markets are usually very emotional for novice traders but for professional investors, it is a season to look for potential financial assets that are on sale.
Blue-chip stocks are high-quality stocks and are often seen as a safer investment compared to other financial instruments. Blue-chip stocks are large-cap stocks with high market capitalization. They are well-recognized names such as Coca-Cola, IBM, American Express, Microsoft, and Apple. Blue-chip stocks are run by companies with great reputations and well-established management.
A bond is a corporate-issue interest-bearing financial asset that companies use as a way of taking a loan from investors. Bonds are seen as a fixed-income instrument and are one of the safest long-term investments available today. When a company issues a bond, the company will receive a payment for the bond that is later paid back to the investor, plus interest. Companies use bonds to access more capital due to expansion or to raise money for another cause.
Break-even in trading refers to a position that has no profit and no loss, it is in equilibrium. Once a position goes above break-even it is generating a profit and when it goes below break-even it is causing a loss. Break-even has often been seen as a psychological level for many traders that acts as a safe zone where they close out a recent bad trade. If a break-even trade is closed out it makes no gain and no loss, however, you always lose out on a break-even trade due to the trading fee you pay to enter and exit the market.
A broker is a financial institution that handles transactions of securities such as stocks, forex, commodities, and cryptocurrencies. A broker is an intermediary where investors and traders can find different kinds of asset classes to trade. Brokers provide liquidity and a safe platform to transact with other individuals. A broker’s main income is from trading fees generated by all the investors and traders that use the platform to buy and sell financial assets.
A bull in trading or investing is a person with an optimistic view of the market. Bulls are cheering for the upside and have strong beliefs that the market will keep rising in the future. Bulls are what keep the stock market going into new highs year in and year out and without bulls, the stock market would be an empty playground with very little activity. Bulls fuel prices and keep the financial markets in a positive trend even when there is negative short-term news coming out.
A bull market is a market that has been in a positive trend for a longer period of time and is expected to keep on rising in the future due to positive sentiment among investors. Bull markets can last from a few years to over a decade depending on the economic activity. A bull market is fueled by bulls who keep buying the market pullbacks and spreading positive rumors about new highs. Bull markets usually end in a parabolic at all-time highs when investors get greedy.
Buying power refers to the trading capital or investment capital you have in your trading or investment account. Your total account size is your maximum buying power. If you have $1000 in your investment account, your total buying power is $1000. The more buying power you have the bigger your overall return will be when marking a positive investment. New traders and investors usually start with less buying power.
CFD stands for Contract For Difference and is a financial instrument that lets investors speculate on an underlying asset by trading a mirrored contract. CFD contracts are not the real underlying financial asset but instead, it’s a contract that follows the price of a security. For example, you can trade an Apple CFD contract that gives you the opportunity to profit from the Apple stock price movement but you will not own the underlying Apple stock itself. CFD contracts are traded on CFD brokers and often have added leverage.
Collateral is the initial investment you put up when taking a loan. Collateral in trading is often seen in leverage trading where initial margin collateral is needed to use borrowed funds. Margin collateral in leverage trading is necessary to access leveraged funds and the ratio is different depending on how much leverage you are going to use. For example, if your leverage is 1:5 your margin collateral will be 20% of the total borrowed funds.
Commission in trading refers to the fee you pay to make transactions and open and close positions. Whenever you enter or exit the market you are paying a commission to the broker or platform that you use. Commissions are what brokers use to make money and they are essential for the system to work. Commissions are continuously being pushed lower and some brokers even offer 0% commission. Read our guide on leverage trading fees for more information on the cost of trading with borrowed funds.
A cryptocurrency is a digital asset that is used to transact on the blockchain and carries the full value of the blockchain. Due to the rise of blockchain technology, cryptocurrencies were added as a medium of transfer for value. Cryptocurrencies can be used to make transactions, purchase goods or services, and are also used in trading to speculate on price. Cryptocurrencies are seen as high-risk investments and should be traded with caution. Cryptocurrencies typically have very high volatility due to the low liquidity on cryptocurrency exchanges.
A crypto exchange is a platform where cryptocurrencies are bought and sold. Crypto exchanges are intermediaries where investors and traders gather to buy and sell digital assets. There are two types of crypto exchanges, centralized, and decentralized. A centralized crypto exchange is controlled by a central authority whereas decentralized crypto exchanges are controlled by the community. During the last years, crypto exchanges are becoming more accepted and some of them have even been granted government regulations and licenses.
Day trading is a way of trading the financial markets where the trader only keeps the positions open for one trading day. A day trader uses the daily volatility to trade and profit from intraday market moves and then closes out all positions before the market closes for the day. Day trading is done in all kinds of financial markets such as stocks, forex, commodities, cryptocurrency, ETF, and metals. Day trading is a short-term trading style that requires great focus, good preparation, a fast trading platform, and a strict trading plan.
Full guide: Guide to day trading with leverage
Demo trade, or paper trade, is a way of trading the financial markets without risk. Demo trading is done in a practice environment with fake money and a fake market that simulates the actual market. Many traders demo trade to try out their strategies before they go live with real money in the real markets. Many traders also demo trade to test a new broker or stock exchange when choosing a new platform. Demo trading is 100% risk-free and is done with simulated money.
Derivatives are a type of financial vehicle that derives their value from an underlying asset. The underlying asset can be anything from a stock, an index, interest rates, or a currency pair. A derivative is generally used to access specific financial markets where the value is derived from a specific asset. Derivatives are often associated with leverage and therefore increase the potential risk and reward. Many crypto exchanges offer derivatives trading for cryptocurrencies to add leverage.
An economic report overviews the current state of the economy for an individual, institution, or nation. Economic reports are released quarterly and annually to give investors information. An economic report shows indicators of many factors such as supply, demand, costs, market conditions, etc. During periods of growth, most economic reports show positive changes while during economic depreciation most economic reports show negative numbers.
Elliot Wave Theory
Elliot wave theory is a type of technical analysis where investors and traders analyze price chart patterns in certain wave structures. Elliot wave theory analyzes cycles within the price patterns to predict both long and short-term price cycles. Elliot wave theory derives from the behavior of humans and how they behave in groups. It is a type of mass psychology analysis of price patterns.
ETF stands for Exchange Traded Fund which is a fund that is electronically traded and easier to buy and sell than normal mutual or index funds. Usually, an ETF derives its value from an underlying financial asset such as a commodity, a stock, or a cryptocurrency. When you buy an ETF you are not buying the underlying asset but instead a contract that mirrors the price movement of the underlying security.
Many financial instruments such as futures and options have expiration dates which is the final day of trading that contract. For example, if a trader holds a future contract, he or she must close out the contract before the last day (expiration date) to realize the profit. After the expiration date, the futures or options contract is no longer valid and holds no value.
Fintech is the combination of the two words Financial and Tech. Fintech aims to replace all the traditional financial services such as transactions, deposits, lending, borrowing, investing, and active trading. Fintech is a new technology that optimizes the current financial system by in many cases removing the need for a third party due to the efficiency of blockchain technology. Fintech lowers the cost of transactions, lowers the time to delivery, and in many cases increases the safety of transactions through the use of smart contracts.
The term float in trading refers to the number of stocks issued by the company that is available for the public to trade. For example, if a company makes an IPO and issues 5 million stocks for the public to trade with, then the total float is 5 million. A stock with a low float is a stock with few stocks issued for the public investors to trade with. A stock with a high float has a higher number of issued stocks for investors to trade.
Forex, or FX, stands for foreign exchange and is the marketplace where government-issued currencies are traded. The forex market is the biggest and most liquid market in the world with a daily volume of over $5 trillion. Forex brokers offer to trade with currencies and act as an intermediary for traders and investors who are looking to invest or trade forex. The forex market determines the exchange rates of all national currencies in the world.
Fundamental analysis is the study of a company’s true value by analyzing the balance sheet, financial statement, and employment. When doing a fundamental analysis the investors look at several factors such as interest rate, earnings, production trends, and the management of the company. Fundamenta analysts seek to find the intrinsic value of a company by looking at its overall financial health of a company.
Futures are a type of financial derivative contract where a buyer and seller agree upon a certain price to transact on a future date and a set price. Futures are traded on certain stock exchanges and also on crypto exchanges. Futures trading usually involves leveraged products and is seen as a risky investment vehicle. Futures have traditionally been used as a short-term tool to hedge certain positions in the stock market when the market makes sudden downturns.
Gap up refers to when the price of a stock gaps up at the opening of the trading day. A gap up causes the price of a stock to skip several price levels and starts trading much higher than the previous day’s close. For example, if the stock of Apple closes at $120 on Monday evening and there is positive news released after the market close it is possible for the Apple stock to start trading on Tuesday at $125 by gapping up $5. A gap up is seen as a very positive event in the stock market.
A gap down happens when the price of a stock gap down at the opening of the trading day. It causes the price of a stock to fall several price levels and starts trading much lower than the previous day’s close. For example, if the stock of Microsoft closes at $250 on Thursday evening and there is negative news released after the market close it is possible for the Microsoft stock to start trading on Friday at $240 by gapping down $10. A gap down is seen as a negative event.
A golden cross refers to when a short-term moving average crosses a longer-term moving average causing a technical buy signal. The golden cross is a well-known technical signal and is often followed by the general public trading a stock. The most famous golden cross is when the 50-day moving average crosses the 200-day moving average causing a strong buy signal.
A growth stock is a stock that is continuously growing and generating revenue year in and year out. Growth stocks are generally big companies that expand their business across the world with a well-established product. Growth stocks are traditionally seen as a safe investment. Growth stocks are usually expected to grow faster than other competitors in the same niche due to high revenue and good cash flow.
Head and Shoulder
Head and shoulder is a well-known technical reversal chart pattern that investors and traders use to make price predictions. The word comes from the formation in price that looks like two shoulders and a head in the middle. The head and shoulders pattern is a negative reversal pattern when seen at highs. When seen at lower prices it is a positive reversal pattern and is usually called a reversed head and shoulder.
Hedge is a term that means protect and is done in investing and trading when you don’t want to close out your current position but you fear that the market is going to move against you in the near term. For example, if you have bought a stock and there is negative news released that could affect the stock negatively in the near term you can choose to hedge your buy position by short-selling the same amount of the same stock. In the case of a market downturn, you would lose on your buy position and gain on the short position. Once the negativity is over you collect the profits from your short position and let you buy position free.
A hedge fund is a financial institution, similar to an investment fund that invests money from other investors. Hedge funds are similar to mutual funds with some differences such as a more aggressive investment strategy, they have the option to short the market, the management fee is higher, and the profit-sharing model is more expensive. Hedge funds use leverages to improve returns and they are traditionally seen as a riskier investment.
ICO stands for Initial Coin Offering and is the equivalent of an IPO in traditional stock trading when a company goes public and gets listed on a stock exchange. During an ICO, a crypto company releases its coin or token to the public and the retail investment scene. ICOs are a way of raising money for the project by giving away a percentage of the company and letting investors invest money. ICOs are traditionally used by blockchain projects as a starting ramp for future growth when they are in need of capital.
An index fund is an investment fund that passively invests in stock indices such as NASDAQ, S&P 500, and NIKKEI. Index funds are passively managed and usually have a lower management fee than other funds. Index funds are often seen as medium-risk investments. Index funds are solely investing in indices of different nations where some of the indices have more weight towards some sectors such as IT, commodities, or real estate.
Inflation means price appreciation of goods and services. When prices rise in our daily life such as the food we buy or pay for the bus it is due to the cause of inflation. When prices rise, the purchasing power of people in society falls and things get increasingly more expensive. Inflation is good when it comes in mild increments because it keeps the economy growing over time but when inflation grows too fast it becomes a problem.
The initial investment in leverage trading refers to the first deposit made by the trader or investor. The initial investment is also called margin capital and is necessary to be able to access leveraged funds. The initial investment is used as risk capital and without the initial investment leverage trading is not possible. The size of your initial investment decides how much leverage you will be able to access. The more money you deposit in your initial investment the more purchasing power you are going to get.
Insider trading is an illegal act of investing with insider information that is not accessible to public investors. For example, if you work for a company and you know there is positive news to be released in the upcoming weeks such as a merger of your company or a great quarterly earnings report, it is illegal to buy stocks of your own company to benefit from the good news.
Interest is the charge in percentage a bank asks of you when you borrow money. Interest can also be earned through interest-bearing financial products such as fixed-income assets or staking products in cryptocurrency investing. Interest is usually paid out monthly or yearly. Interest is based on the interest rate set by the central bank in a region.
IPO stands for Initial Public Offering and this is the process of taking a company public by selling a part of the company as stocks to investors. When a company makes an IPO it releases a part of the ownership as stocks for other investors to invest in. Companies use IPO to raise capital in order to expand and increase productivity through strategic investments.
Isolated margin means that you isolate your margin capital to one position only. This means that the loss of this position can only affect the amount of margin capital used in the position. The opposite is crossed margin which implies that all positions have access to all the margin capital in your account. Isolated margin is less risky since the loss of one position can only affect the margin capital used to open that position.
A junk bond is a bond with a very low credit rating given by agencies that are usually below investment grade. Junk bonds traditionally have a very high yield to offset the added risk of a poor credit rating. The reason a junk bond receives such a low credit rate is because of the risk of default and this brings high risks for investors.
Large-cap stocks are stocks with a high market capitalization. Large-cap stocks are seen as high-quality stocks and on some occasions even blue-chip stocks. Large-cap stocks have a market capitalization of over $10-$15 billion. Large-cap stocks are traded on the biggest stock exchanges in the world such as NASDAQ, Dow Jones, S&P 500, and NIKKEI. Some examples of large-cap stocks are Coca-Cola, Microsoft, Google, Facebook, and Netflix.
A limit order is an order type that lets the investor or trader enter the market at a preset price either over or under the current price. For example, if the current price of the Coca-Cola stock is $350, you can add a limit order of $5 below the price and wait for the price to drop. If the price drops $5 to your limit order the trading platform will execute a buy order automatically. Limit orders can be used to both buy and sell financial assets.
Liquidity is the measurement of available cash or capital. In trading, liquidity is used to measure how many available orders there are in the order book of a certain stock or financial instrument. The more liquid a stock is the more capital is added to the order book for other investors to buy or sell. Stocks with a higher market cap are usually more liquid. Small-cap stocks are less liquid.
Liquidation in trading and investing refers to when a position is closed out due to insufficient margin funds in the account to back up the losses. During liquidation, the position has incurred higher losses than there is margin capital available in the account and the position is closed out in a 100% loss. Liquidation is the loss of all capital in the margin account that is currently being traded. Read our full guide on leverage trading liquidation for more information.
Margin is a term in leveraged trading that refers to your own deposited capital. When trading with leverage you access more funds by borrowing capital from your broker or trading platform and funds are always based on the initial margin you deposit to the platform. Many platforms have a margin requirement to be able to trade with leverage.
Market capitalization is the total value of a stock or cryptocurrency and is calculated by adding the total amount of stocks or coins with the current price. For example, if the Apple stock is worth $200 and there are 50,000,000 stocks in circulation the total market capitalization of Apple is $200 x 5,000,000 = $1,000,000,000.
A market order is an order type that directly buys or sells the first bid or ask order from the order book. The market order is the fastest route in and out of any given market and is often called a one-click trade order. If you buy a financial asset with a market order you will automatically buy from the first seller in the order book and if you sell with a market order you will automatically sell to the first buyer in the order book.
A margin call is a notification from your broker telling you that you are running out of margin, or capital, in your current position. When you trade with leverage and put up initial margin funds, these funds are always used as risk capital. If a position goes against you the losses are always taken from your margin funds. If a position goes against you too much you can lose all your margin funds in your trading account and before you lose everything your broker will send you a margin call to let you know that you are running out of margin.
A market marker in trading is an individual or institution that adds liquidity to the order book and provides both sellers and buyers with a counterpart. Market makers are needed in today’s financial markets due to high demand. Without market markers, it would be difficult to buy and sell large amounts of stock or any other security.
A moving average in trading is a technical indicator that shows the average price by plotting out another price line in the chart. Moving averages have different settings depending on the time period you want to analyze. You can choose to see the 200-day moving average which will then plot out a price line with the average closing price for the last 200 days. A 50-day moving average will show a shorter-term average of the change in price.
Negative balance protection
Negative balance protection is a risk management tool that stops your trading account from falling into negative numbers. Some brokers have a system where it is possible to fall in debt to the broker if your losses grow further than your total account size. For example, if your trading account size is $1000 and you lose $1500 on a trade, you would owe the broker $500, but with a negative balance protection system, you will never fall below the $0 balance.
Net income refers to the total income of an individual or institution after deducting all expenses, taxes, payments, interests, and other costs. Net income is used to measure the total earnings for a company. Net income is calculated by taking the gross income and deducting all costs and expenses.
Noise is a term in trading that refers to everything that is not important in an analysis such as rumors, news, excessive technical indicators, etc. Noise gives false inputs to a trader or investor and should at all times be avoided. It can sometimes be difficult to distinguish noise from good analytical information.
Novice is simply put a beginner trader or investor. When starting out as a trader you always start out as a novice and then you grow your experience and become a seasoned trader. Novice traders or investors are usually inexperienced and make many beginner mistakes before learning the real craft of investing and trading the markets.
Options are financial instruments that derive their value from an underlying asset. Options let the speculator bet on the future price movements in both directions of a security at a specific strike price and a set date in the future. Options are very common in the financial markets and are often used to get a rigid risk/reward ratio. The only risk you pay when buying an option is the premium price. If you sell options your risk profile is theoretically unlimited.
An order type is used to enter or exit the financial markets. Different order types will execute your position in different ways. For example, a market order type will instantly buy or sell the first order in the order book while a limit order type lets you buy or sell at a specific price that you select. There are both simple and very complex order types that can help investors and traders achieve the best outcome for their strategy.
An overheated market is a market that has seen exponentially increasing prices and is bound for a reversal. When a market becomes overheated it is usually to unnatural levels of hype. A market can be overheated both short-term and long-term. Overheated is a term used when a market seems to have gone too and is ready for a pullback.
Overbought is a term used in trading and investing when talking about a financial asset or security that has increased too much. Overbought comes from the word buy and it means that buyers have been pushing the price up to a level that seems too high at the moment. An overbought state of a market is considered an expensive price to pay for that security.
Oversold is used in trading and investing when explaining a financial asset or security that has decreased too much. Oversold derives from the word sell and it means that sellers have been selling the price down to a level that is considered too low. An oversold state of a market is considered a cheap price to pay for that security and can sometimes be used as a buying opportunity.
Paper trade refers to the practice of trading a simulated account, or demo account, with fake money. Paper trading is traditionally used to practice trading or investment strategies or to try out a new broker for the first time. Not all brokers offer traders to paper trade. When you sign up for paper trade you are given an amount of “paper money” to use in a simulated trading environment.
A penny stock is a stock that is generally valued under $5. A penny stock traditionally has a market capitalization under $10 million and is considered a risky investment. Day traders use penny stocks to day trade due to the high volatility during trading hours. Penny stocks have been recognized as speculative securities and are often invested by retail investors.
Perpetual swaps are a certain type of derivative instrument for financial assets that are similar to futures contracts. Through perpetual swaps, an investor speculates on a future price without an expiration date. Perpetual swaps are very common in leverage trading and often carry high leverage. Perpetual swaps are seen as risky investments and are often traded by retail traders.
A professional trader is considered an individual that has education and long experience trading or investing in the financial markets. Professional traders traditionally work for big institutions like hedge funds or other investment funds. Professional traders have a strict trading strategy and are usually specialized in a certain market and investment product.
QE, Quantitative easing
QE stands for quantitative easing and is a monetary policy where the central bank of a nation injects cash or capital into a monetary system by buying long-term dated bonds. QE is used to aid and expand the economic situation of a country and directly expand the money supply. During the housing bubble of 2008 the central bank of the United States, the FED, initiated a QE program that turned the whole market around and alleviated the crash.
A quarterly report is a public report published by a company to let investors and shareholders know about the earnings of a company. Quarterly reports are released once per quarter and they include the financial statements such as the income statement, balance sheet, and cash flow. In order to make a fundamental analysis of a company, the quarterly report is used to gauge the financial health of a company and determine its intrinsic value.
A quote is simply the name and price of a financial asset. Quotes are visible on the floor of stock exchanges as numbers on a screen, in newspapers, and on online trading platforms such as stockbrokers, forex platforms, and cryptocurrency exchanges. Quotes are used to signal to investors and trades the changes in certain markets.
A retail trader is a non-professional trader. Most of the everyday traders are retail traders as they do not have a degree or education in economics or in investing in financial assets. Retail traders are typically novices and struggle to make money trading in the financial markets. Most forex brokers, stockbrokers, and crypto exchanges are directly created for retail traders.
Regulation in the financial markets is a law that prevents unfair methods of competition and bad acting operators. Regulators are often government-owned and are here to protect the end-user from fraud or any other deceptive behavior from individuals or institutions. Regulation puts rules and boundaries on both traders and trading platforms that need to be followed to create a safe environment for everyone.
A resistance level is a level in price where many investors previously have sold their shares or assets. Resistance levels create a psychological barrier in price that is often viewed by other traders and investors. When the price is getting close to a resistance level, many investors and traders sell their shares in anticipation that the price will fall once again when reaching the level.
Return is simply another term for profit. When you make a return on an investment you profit from the investment and make money. You can announce your return in terms of a dollar value or in terms of percentage. For example, my return on my last investment was $500 or 2,5%.
Risk is a common term in trading and investing and it refers to the possibility of losing money on a given trade or investment. Risk cannot be avoided when investing in financial assets since the future price movement is always unknown and there is always a possibility that the security can decline in value. It is always important to control your risk when investing or trading in the financial markets.
Risk appetite refers to the level of risk an investor is comfortable taking. Some investors are comfortable with taking on a lot of risks and therefore have a high risk appetite. Other investors are only comfortable taking on low levels of risk and therefore have a low-risk appetite. Depending on your risk appetite you have to structure your position size and stop-loss levels.
Risk management refers to how you manage your risk when trading or investing. There are several ways of managing your risks such as controlling your position size, using risk management tools, or simply spreading out your account in several different sectors or trades. Risk management is a key skill for any investor or trader who is going to make it in the long term.
To learn more, read our full guide on risk management in leverage trading.
Scalping is a short-term trading strategy where the trader benefits from very small price movements and makes money with the use of leveraged accounts. “Scalpers” tend to stay in the market for only a few seconds up to a few minutes. Through the use of highly leveraged positions and tight risk management scalpers profit when the market moves up or down by a few ticks. Scalping is considered a high-risk investment strategy.
Short-sell is a term that refers to betting on declining prices. When you short-sell a stock or a currency pair you are essentially betting that the price will fall. If you short-sell a market and the price falls you make a profit. Short-selling is considered a risky investment strategy and should only be attempted by professional or experienced traders.
Related: Short selling with leverage
Spread is the difference in price. For example, when trading a forex currency pair there is always a difference between the buy and the selling price. This difference in price is called the spread. Spread is also seen as the fee or commission you pay in order to execute trades on certain brokers. A low spread means that prices are closer to each other and a high spread means that prices are farther away from each other.
A stock is a piece of ownership of a company that is publicly traded. A stock represents small ownership for the shareholder that owns the stock. When companies raise the money they typically do so by issuing stocks to the public and let investors buy their stock to access more capital. Stock is what gives a company its valuation on the stock market together with the number of stocks issued to the public.
A stock exchange is a financial institution where transactions of stocks are being made. Stock exchanges are seen as intermediaries where investors can come to buy and sell stocks. Stock exchanges traditionally make money by taking a small fee for each transaction made by investors that buy and sell stock on the platform.
A stock index tracks the performance of the largest stocks in a certain country. For example, NASDAQ is a stock index in the United States that is made up of several stocks such as Apple, Microsoft, and Google. The combined movement of all stocks in a stock index is what gives the index its price. If all stocks that make up an index fall, then the stock index will as well. Stock indices are seen as a medium-risk investment.
A stop loss is a risk management order type tool that protects the downside of a position. When buying stocks you can add a stop loss that will protect the risk of downside movement in the stock. Stop losses work by automatically selling the stock you have bought if the price reaches the price that you have chosen to add to the stop loss. When this price is reached, the stop loss will active and automatically sell back your stock and protect you from more downside movement. The stop loss is the most used risk management tool by traders.
A support level in trading is a level in price where previously buyers have been buying a financial asset such as a stock or a currency pair. Support levels are psychosocial barriers in price that traders and investors view and respect. When the price is approaching a support level, several investors will get ready to buy in anticipation that the price will rise again,.
Swing trading is a term that refers to investors or traders that have a medium-long time horizon on their investments. Swing traders typically hold their position between 1-90 days. Swing trading is an investment strategy that suits investors that are methodical and like to analyze their future investments well before investing. Swing traders are not very active traders since they hold their positions for several days and sometimes weeks.
Technical analysis is a form of analysis that is based on the price chart and technical indicators. Technical analysts use price charts to draw trend lines and use indicators to determine the possible outcomes. There are several different ways to do technical analysis but all of them have the use of a price chart or graph in common.
A tick is the smallest movement or increment in the price of financial assets. When a stock moves one tick up or down it makes the smallest possible movement, sometimes in cents, up or down. Scalpers and day traders focus on the ticks of securities to make decisions on whether to buy or sell.
Trade management refers to how a trader manages a position once he or she has entered the market. Traders are not always right when entering the market and need to deploy good trade management to handle unforeseen events in the market. Trade management is crucial to any trader that wants to succeed in trading.
A trading range is an area in price where the security has been trading for the past couple of hours, days, or weeks. A trading range is a consolidation area in price where it stays during a period. For example, if the price of a stock has been trading between $8 and $9 for a couple of weeks it’s considered to be trading in a trading range between these price intervals.
A trading strategy is a thought-out plan on how and when to execute trades in a financial asset. Trading strategies vary depending on the trader and can be both long-term and short-term. Without a trading strategy traders are entering and exiting the market blindly without a plan. A trading strategy is based on several different inputs from a market where all the aspects of the trade are predetermined such as the entry, the management, and the exit.
Upside refers to the potential of a financial asset to increase in price and the potential profit an investor stands to make. Traders and investors talk about the upside when they determine something that has not yet happened. An upside is a future event that is currently not clear for anyone but it can always be analyzed in different ways.
Underlying asset refers to the value of what a financial instrument is derived from. For example, perpetual swaps, futures, or options are different investment vehicles that have their value derived from an underlying asset such as a stock, a commodity, a currency pair, or a cryptocurrency.
VIX, Volatility index
VIX, or the volatility index, is the most popular measurement of the volatility of the S&P500 stock index. The VIX tells the expected volatility of the stock market in America. When negative news floods the stock market the VIX usually spikes and indicates increased volatility. The VIX derives its value from how much volume has been traded on the short-term short options of the CBOE.
Volatility is the measurement of the rate of price fluctuations in a financial asset. If the volatility for a stock or currency pair is high, the rate and the magnitude of the price fluctuations are high. A volatile market is often seen as a market with fast and wild price swings. A market with low volatility is calmer and doesn’t move much.
Volume in trading and investing is the measure of the number of contracts traded for a given trading day. Each purchased and sold stock adds a number to the volume by adding the amount bought or sold. For example, if a stock is traded heavily during a day the volume is increased and if a stock is traded thinly the volume is low.
Yield in investing and trading is the potential return in percentage for a given financial asset. When you earn a yield from a security you earn an income in percentage based on the investment made. The higher yield you stand to earn the bigger the percentage gain will be. Yield is a measurement of the interest earned from any financial asset.