For a person just entering the trading arena, all the terms and abbreviations can be confusing. Mastering basic trading terminology will let you make your way in the markets and independently make the right decisions.
Be it stock trading, forex, or cryptocurrencies, mastering the general terms used in trading will provide you with the very foundation on which to build a successful trading strategy. In this article, we’ll explore the must-know trading terminology for beginners and explain them in a simple and straightforward way.
1. Asset
An asset is any item or resource that holds value and can be traded in the financial markets. This could include stocks, bonds, commodities, real estate, currencies, or cryptocurrencies. Traders buy and sell assets in the hope of making a profit by taking advantage of price fluctuations.
For example, the stock of a company is considered an asset because it has some value, and it can be sold or purchased in the stock market.
2. Bid and Ask
When trading, bid and ask are terms used for the buying and selling prices of an asset, respectively.
- Bid Price: Bid is the price at which the buyer is willing to pay for an asset.
- Ask Price: Ask is the price at which a seller wants to sell the asset.
The difference between the bid and ask price is called spread. It may influence the price of entry and exit from trades.
3. Bear Market
A bear market is a market in which the prices are either falling or expected to fall. This term, though generally applied to stocks, can be applied to any kind of market in which the trend is downwards.
For example, if the stock prices have continuously gone down over a period of time, the market is in a bear phase.
4. Bull Market
The bull market, in turn, is the opposite to a bear market, meaning conditions when prices move upwards or are expected to grow. Traders and investors usually feel optimistic about the market in such periods, and this very period can present extraordinary opportunities for profit.
For example, a bull market reflects increasing stock prices, which become an excellent moment for buying and holding an asset.
5. Candlestick Chart
The candlestick chart is one of the popular ways in which price movement is charted in trading. It uses a candlestick format to represent a period of pricing, such as hourly, daily, or even weekly. It depicts four values of price inside each candle, namely:
- Open Price: The price at which the asset started trading during the period.
- Close Price: The price at which the asset stopped trading during the time period.
- High Price: The highest price reached during the period.
- Low Price: The lowest price reached within the period
A candlestick chart is essential to a trader, as it determines trends and reversals or a trading signal.
6. Leverage
Leverage lets one control an oversized position using less capital. That is a simplification: in other words, leverage equates to a way of borrowing to increase a size of the trade. Amplification of the leverage is equal in both gains and losses.
For example, when you have a 10:1 leverage, you can now control a $10,000 position using just $1,000 of your own money. However, this will increase the potential losses as well.
7. Margin
Margin is money required to open and maintain a leveraged position. It’s a kind of deposit or collateral that you leave with your broker for cover in case of loss.
If your position starts losing value and your equity falls below the required margin, you may get a margin call from your broker, which would require you to deposit more money to avoid closing your position.
8. Pips
A pip is a short form for “percentage in point,” and it is the smallest unit of measurement of currency price movement in the foreign exchange market. It is the value change between two currencies. For most currency pairs, one pip comprises 0.0001.
For example, if the EUR/USD currency pair moves from 1.1000 to 1.1050, it has moved 50 pips.
9. Stop Loss and Take Profit
Both stop loss and take profit are orders that work to manage the risk of a trade.
Stop Loss: A stop loss order automatically closes a trade at a certain price level, thereby limiting your losses. For example, if you open a trade at $50 and set a stop loss at $40, in case the price drops to $40, the position will be closed, which limits your loss to $10.
Take Profit: A take profit order is an order that automatically closes the trade once the price has reached a certain level, which helps to lock in the profit. For example, if the take profit order is selected at the price of $60, the trade opens at that price level.
10. Volatility
Volatility refers to the quantity of the variation in the price of an asset during a time period. Highly volatile means that the price of the asset changes quickly in an unpredictable way. Low volatility is said to have an infrastructure where the price variation is stable. Volatility happens to be one of the most important risk determinants in any market or instrument.
For instance, cryptocurrency markets are rather very volatile. On the other hand, blue-chip stocks are less volatile.
11. Risk Management
Risk management refers to the stage of identifying, assessing, and controlling a potential risk with the view of realizing minimum loss. In trading, it involves stop-loss orders, proper position sizing, and having a clear trading plan.
For example, with risk management strategies, traders can cut losses if the market moves against them, thus preserving capital for long-term success.
12. Spread
The spread is the difference between the bid and the ask prices of an asset. It’s basically the price you pay for a trade and is usually given in pips if it’s forex trading or in points if it’s stocks. The spread can be wide, larger, or narrow, smaller, depending on the state of the market, liquidity, and the asset being traded.
For example, the spread would be 2 pips when the bid price is 1.1050 and the ask price is 1.1052.
13. Swing Trading
Swing trading is a trading strategy wherein traders attempt to catch short- to medium-term gains through the exploitation of price swings in the market. Swing traders generally hold positions for a few days up to weeks and try to take advantage of movements or fluctuations in an asset’s price.
For example, swing traders mainly utilize technical analysis and chart patterns in order to know the most ideal entry and exit.
14. Day Trading
Day trading is opening and closing trades within the same day. Generally, day traders do not hold positions overnight but try to catch small movements in prices during the day. This approach requires fast decision-making, constant monitoring of the market, and a good understanding of technical analysis.
For example, a day trader may purchase a stock in the morning and sell it before the close of business to make a profit.
15. Pipette
A pipette is a sub-unit of a pip. It represents the fifth decimal place in the quote of most currency pairs. It shows the price movement more precisely in very liquid markets.
As for example, the price movement of the EUR/USD pair from 1.10501 to 1.10502 will be considered a one-pipette change.
Conclusion:
As a beginner, it is very important to understand common trading terms. Knowing what is meant by the asset, bid/ask, leverage, and stop loss, among others, will definitely make one feel confident while moving in the markets and making his or her own decisions. Learning the terminologies is the first step toward being a successful trader, and the more the practice of using such terminologies, the more comfortable one gets in his or her advancement.
Knowing this language of trade will make not only you more articulate with traders and brokers, but also able to understand analyses, charts, and strategies being thrown around effortlessly. Keep studying, stay tuned for new terminologies, and keep sharpening your trading axe.
