There are many terms that financial traders love to use on a daily basis. In order to make it simpler for beginners below are ten simple and absolutely essential online trading terms that beginners will have to memorize in order to start trading education.
Equity – Knowing the meaning of equity in financial trading is critical as it helps you understand more complex terms. Simply put, equity is the total amount of the trading account balance, including profits and losses from all opened positions. When a trader opens a trade the platform automatically locks aside a certain amount of money from the trading balance which is called the required margin. A margin call happens when there is not enough money to maintain all open positions. Brokers ask traders to add funds when a margin call happens, if a trader is unable to add funds then a stop-out happens, meaning all the trading positions are closed. Equity, margin, and leverage are all important terms in trading. Leverage refers to how much the broker is amplifying the trading account buying power of a trader. The leverage of 1:5 means the trader can open a position 5 times their trading account balance.
Trading positions – Trading position means buying or selling the asset. When you buy or sell the stock or crypto you are opening a trading position. In order to open a trading position, traders usually buy and sell the assets at Ask and Bid prices.
Bid and Ask prices – The bid price is the highest price a buyer is willing to pay for a security at a given time. Aks price on the other hand is the lowest price a seller is willing to accept for a security at a given time. To simplify Bid and Ask prices, when you click on a buy button you are buying the asset at the Ask price. The Ask price is the price at which the market sells you the asset and the Bid price is the price at which the market buys an asset from you. The difference between Bid and Ask prices is known as the spread and it plays a crucial role in trading profitability. It is better to have lower spreads.
Bull and bear markets – When prices move upwards, traders call this a bull market or bullish movement. Bulls and bears are popular terms in financial markets, and traders love using these words. Bear market on the other hand is the complete opposite of a bull market and means when prices are falling. Bulls and bears are constantly fighting each other in financial markets to make a profit. There are other important terms, but the ones given here are the most basic and the first ones to memorize.
Trends – Trends are phenomena that occur in financial markets and are characterized by prices moving in a certain direction for a while. An uptrend or bullish trend is when the price tends to move higher and higher. Uptrends are defined by prices making higher highs and higher lows. Downtrends or bearish trends are defined as lower highs and lower lows. Trends are your friend as long as they continue. But the downside of trend trading is that they are occurring only about 30% of the time. In the majority of cases, prices are just moving sideways in what’s called range markets.
Orders – The most common order is called the market order and it means to buy or sell the asset at current market prices. Market orders are great for immediately initializing a trading position. But there are other order types to allow traders to manage their trading positions or enter the market at a specific price. Pending orders or stop orders are orders when the position is opened after the price reaches a certain predetermined price point. The most popular form of stop orders is stop loss and take profit orders. They help traders manage risks and predetermine the target profit.
Stop loss and take profit – Stop loss means closing the open position when the price hits a certain price point. Stop loss is used to limit loss. If you open a position and the price moves in the opposite direction you will lose money. To limit how much you lose traders employ a stop-loss order. Take profit order is the opposite order that closes trade when a certain profit is reached. If you shorted the market and the price started to move upwards stop loss will be triggered at your predetermined price to limit losses.
Going short or long – Buying an asset means going long or entering a long position. On the other hand, shorting the market means selling the asset. Short selling is only possible for certain asset classes including Forex and CFDs.
CFDs – Contracts for Difference are popular instruments that can be used to speculate on the prices and make money. When trading with CFDs you are buying the derivative and short or long the market without owning the underlying asset of CFD. For example, when shorting the Apple CFD you are not actually selling the Apple shares, instead, you are speculating on the price of the underlying Apple stocks. CFDs offer traders great flexibility to make money on both bear and bull markets but are super risky assets.
Exchanges – Exchanges are places where the assets like Forex pairs, stocks, cryptos, and others are traded. Nowadays, the trading floors are long gone and all trading transactions are executed electronically by computers. Modern exchanges are located on servers and do not have one physical location like it was before.