Demystifying Trading Terminology:
A Beginner’s Guide to Market Jargon
The world of trading comes with its own unique language, filled with terms and expressions that might seem like a foreign tongue to newcomers. Understanding trading terminology is essential for anyone wanting to learn how to trade and venturing into the financial markets. In this guide, we’ll demystify some key trading terms to help beginners navigate the exciting but often complex landscape of trading.
1. Broker, Commission and Online Trading Platform
Broker: A person/company who is paid a commission to execute your orders when buying or selling stocks, options or futures contracts.
Commission: The fee paid to your broker to buy or sell stocks, options or futures contracts.
Online Trading Platform: Is a digital software or web-based interface that allows investors and traders to execute financial transactions, analyse market data, and manage their investment portfolios through the internet, allowing users to buy or sell assets in real-time. They facilitate the monitoring of live market prices, execution of trades, and the placement of orders. Investors can access these platforms from their computers, tablets, or smartphones, offering flexibility and convenience in managing their financial investments.
2. Bull Market and Bear Market
Bull Market: A bull market refers to a period of rising prices and optimism in the financial markets. Investors are confident, and the overall sentiment is positive.
Bear Market: Conversely, a bear market signifies a period of falling prices and pessimism. Investors are generally cautious or pessimistic about the market’s future.
3. Long and Short Positions:
Long Position: When an investor takes a long position, it means they are buying an asset with the expectation that its value will increase over time.
Short Position: On the other hand, a short position involves selling an asset with the anticipation that its value will decrease. This is a way to profit from a declining market
4. Margin, Leverage and Margin Call:
Margin: Margin is the amount of money or collateral required to open or maintain a trading position. Trading on margin allows investors to control larger positions with a smaller amount of capital.
Leverage: Leverage is the ability to control a large position with a relatively small amount of capital. While it can amplify gains, it also increases the risk of significant losses.
Margin Call: A margin call is a demand from a broker for a trader to deposit additional funds into their margin account when the value of their positions falls below the minimum margin requirements.
5. Liquidity:
Liquidity: Liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. High liquidity means there are many buyers and sellers, while low liquidity indicates the opposite.
6. Volatility:
Volatility: Volatility measures the degree of variation in the price of an asset over time. High volatility indicates large price fluctuations, while low volatility suggests more stable prices.
7. Market Orders and Limit Orders:
Market Order: A market order is an instruction to buy or sell an asset at the current market price. It guarantees execution but does not guarantee the price.
Limit Order: A limit order is an instruction to buy or sell an asset at a specific price or better. It ensures price control but does not guarantee execution.
8. Diversification:
Diversification: Diversification involves spreading investments across different assets to reduce risk. A diversified portfolio is less vulnerable to the poor performance of a single investment.
David Bowden, Founder of Safety in the Market suggests that trading a stock, a commodity, an index and a currency is a good mix of markets.
9. Technical and Fundamental Analysis:
Technical Analysis: Technical analysis involves evaluating securities based on historical price and volume patterns. Traders use charts and technical indicators to make informed decisions.
Fundamental Analysis: Fundamental analysis involves evaluating an asset’s intrinsic value by examining financial, economic, and other qualitative and quantitative factors.
10. Stop-Loss:
Stop Loss: Serves as a crucial risk management tool in trading, enabling traders to limit potential losses on a position. When entering a trade, a trader sets a specific price level, known as the stop-loss level, at which they are willing to automatically sell or buy an asset. If the market price reaches or surpasses this pre-determined level, the stop-loss order is triggered, prompting the broker to execute a market order and close the position.
This proactive approach helps traders minimise losses and adhere to a disciplined risk management strategy. (At Safety in the Market we suggest ALWAYS using a stop-loss and putting it in place at the same time as placing your order to open your position!)
11. Bid and Ask
Bid Price: The highest price at which traders are willing to buy a stock, option or futures contract at any given time. (The opposite of ‘Ask’)
Ask Price: The lowest price anyone wants to sell a security for, at a given time. (The opposite of ‘Bid’)
12. Spread:
Spread: The difference between the bid and ask prices is known as the “spread.” A narrower spread generally indicates higher liquidity in the market, while a wider spread may suggest lower liquidity.
13. Bar Chart:
Bar Chart: A chart on which each period’s data is plotted as a vertical line joining the high and low prices for that period. The opening and closing price are plotted as small horizontal dashes to the left and right of each bar, respectively. Bar charts can show data from as little as one second up to one year.
14. Swings and Swing Chart:
Swings: The measurement of movement of the price of a tradable stock or commodity between extreme highs and lows
Swing Chart: A swing chart is a technical analysis tool used in trading to identify the overall trend of an asset by focusing on price fluctuations. Unlike traditional price charts that display every price movement, swing charts filter out short-term noise to highlight the more significant price swings or “swings” in the market. The chart connects consecutive highs and lows, creating a visual representation of trend direction. Swing charts help traders identify trend reversals and turning points, providing valuable insights into potential entry and exit points for trades. This simplified approach to charting is particularly useful for swing traders and investors looking to capture medium-term trends while filtering out day-to-day market fluctuations.
15. Inside and Outside Days:
Inside Day: Can also be called a ‘Within Day’. A bar on a daily bar chart which has a lower high and a higher low than the previous day.
Outside Day: A bar on a daily bar chart that has a higher high and a lower low than the previous day.
16. Accumulation, Distribution, Consolidation and Breakout:
Accumulation: Additions to a trader’s original market position. The first of three distinct phases in a major trend in which investors are buying.
Distribution: A phase in the market cycle where a security or market as a whole is considered to be in the process of being sold or distributed by investors who had previously accumulated it. This phase typically occurs after a prolonged uptrend, during which smart money or institutional investors accumulated positions. As the to less-informed market participants.
Consolidation: A pause that allows investors in a market to re-evaluate. A series of trading days in which there is no significant, sustained upwards or downwards movement in price. This market does not demonstrate a clear trend.
Breakout: The point at which the market moves out of a consolidation area or a trend channel.
17. Daily Range:
Daily Range: The difference between the high and low price during one trading day.
18. Trader, Day Trader, Speculator and Investor:
Trader: A trader is willing to take higher risks for higher returns, is mainly interested in price movement rather than interest payments or dividends and intends to hold the securities for only days, weeks or at the most months.
Day Trader: A speculator who trades during the day, but closes out all trades before the close of each trading day. They trade short sharp movements in the market on an intra day basis.
Investor: An investor is someone who owns investments in the stock market but who doesn’t actively follow the performance of their investments and nor do they buy and sell on a regular basis. An investor is generally more conservative and the comfort factor is a major influence in their approach to the market. They generally seek returns from the securities of established companies, make decisions on the understanding of a company’s past performances and future prospects, and purchase and hold securities for a year or more.
An investor’s goals may include earning income from interest payments and dividends, and capital appreciation.
19. Volume:
Volume: The number of stocks or contracts traded in a security or an entire market during a given period.
20. Trend and Trend Reversal:
Trend: A sustained movement in one direction. An upward trend is defined as successive higher tops and higher bottoms on a swing chart. “The Trend is your friend.”
Trend Reversal: A change in the direction of the trend. From an up trend to a down trend, or from a down trend to an up trend. The trend can also be ‘Uncertain’ where the market is making higher tops and lower bottoms. This is the time to be out of the market and wait for a clear trend to be established.
21. Volatility:
Volatility: Market Volatility refers to how much a stock price fluctuates on a day to day basis. If the market moves dramatically up and down from day to day it is said to be highly volatile. (A volatile market is ideal for us as Swing Traders as it gives us more swings in the chart and presents more trading opportunities!)
22. Support and Resistance:
Support: is a price level where buying is strong enough to interrupt or reverse a downtrend. Support is represented on a chart by a horizontal or near-horizontal line connecting several bottoms. The more times a support line has ‘held’ prices from going downward, the stronger that support line is said to be.
Resistance: is a price level where selling is strong enough to interrupt or reverse an up-trend. Resistance is indicated on a chart by a horizontal or near-horizontal line connecting several tops. If you look at your chart you’ll often see occasions where a market moves up to a certain price, falls back and moves up again only to be turned back, once again, from the same price. When this happens at a particular price area we can say that the market is meeting ‘resistance’.
23. Paper Trading:
Paper Trading: you carry out all of the actions of preparing for, monitoring and evaluating a trade, without risking real money by actually taking a trade. It’s called Paper Trading as it was mostly undertaken manually with pen and paper by diligent would-be traders – well before the abundance of online trading platforms we see today. Most online trading platforms offer free paper or ‘demo’ accounts for you to practice with – it looks and feels just like trading in real-time. If you’re new to trading, ‘Paper Trading’ can be a great way to build your confidence.
24. CFDs or Contracts for Difference:
CFDs/Contracts for Difference: They are an agreement based on an underlying asset to settle the difference in cash between the buy and sell price of the contract. CFDs are not traded on a regulated exchange. Instead, the institution that provides the CFD market acts as the exchange and the market maker all in one. CFDs are effectively a way to profit from the movement of an underlying asset, without ever actually owning it. The major risk in trading them relates to the integrity and financial viability of the CFD provider itself. As nothing tangible is owned, there is nothing to recover if the provider goes out of business.
Share CFDs are traded per share just like the stocks they are based on. Share CFDs typically move point for point with the underlying stock.
CFDs only require a margin in order to take a position. This is generally between 5% and 50% depending upon the underlying asset you are trading and the provider used. Profit is calculated on the entire value but risk is magnified as any losses are calculated on the total value of the underlying asset held, not your margin. In short, you can stand to lose more than just your margin. ALWAYS protect yourself with a stop loss.
25. Futures:
Futures: A Futures Contract is a legally-binding agreement made between two parties to buy or sell a commodity (including a financial commodity) at an agreed price, on a specific date in the future.
The contract’s terms allow for either market or cash settlement. In modern futures trading, over 95% of trades do not result in delivery of the actual underlying commodities or assets. An example of some popular futures markets to trade are Oil, Gold, Silver, and Coffee just to name a few.
26. Stocks/Shares and Dividends:
Stocks/Shares: Used interchangeably, a ‘stock’ or ‘share’ represents an ownership of that company. If you own stock in a company, let’s call it say the ‘Next Boom Manufacturing Company’, you own a piece of that company. You own part of its plant, its production – a part of everything in the company. If the ‘Next Boom Manufacturing Company’ has 1,000 units of stock, and you own 10 stocks, you own one hundredth of the company, or one percent of it. If you own one percent of the Next Boom Manufacturing Company, you own one percent of what it earns. Normally some of those earnings or profits will be paid out to you and the other stockholders as dividends – $X per stock. The rest of the earnings will be put back into the business – to do more work; to make higher earnings: to make higher dividends.
Dividends: An amount of money a company pays, per stock held, to its stock holders. The money usually comes from the company’s earnings.
27. Reward to Risk Ratio (RRR):
Reward to Risk Ratio: The Reward to Risk Ratio measures the potential returns expected from a trade, against any loss that you might incur (managed through using a stop-loss) if the trade goes against you. At Safety in the Market, we suggest risking no more than 5% of your account on any one trade (2% risk is an even better!) – especially when you are learning and building your confidence as a trader. We suggest ALWAYS using a stop loss order to help manage your risk. Knowing your potential reward from a trade will help you know when to trade and more importantly, when not to trade. We teach our students to focus on high probability and highly profitable trades. We encourage our new students to aim for 10:1 RRR on their trades as a minimum.
As you embark on your trading journey, familiarising yourself with these terms is a crucial first step. While this guide covers some foundational concepts, remember that the world of trading is vast, and continuous learning is key to mastering its terminology and intricacies.
At Safety in the Market, We Train Traders.
We’ve been teaching students since 1989 to trade with more safety while increasing their profits!