The trading world has unique terms that every beginner trader should learn in order to understand what is going on in this world. Before beginners can try and practice anything trading related it is critical to have a basic knowledge of the most important terms. Traders love using slang and terms which may sound different to newbies. So, let’s dive in and explain the most fundamental terms in this guide.
Basic financial trading terms
When you first enter the trading world one of the few words you will hear constantly are indicators, trends, range markets, bull and bear markets, stop loss, take profit, and bid and ask prices. Let’s explain each one of them to have a better understanding of how this world operates.
Most fundamental risk management orders that traders use are called stop loss and take profit orders. These orders are set by traders and they close an open position when the price hits a predetermined point. Stop loss and take profit are the two most important risk management tools that traders are using on a daily basis. The stop loss and take profit explained in more detail here will help traders properly use these essential tools. Stop loss helps traders to control risks by closing positions at a certain price and traders can exactly plan their losses ahead. Limiting losses with predetermined amounts gives traders the ability to stay in the trading business for long periods of time.
Indicators are often used to analyze price charts and make sense of what’s going on in the markets. Bulls and bears are called traders who buy and sell the markets. Bulls always try to make prices higher and make profits from these movements, while bears prefer the falling markets to sell and then buy cheaper.
Ask and Bid prices, Spread
Every asset in Forex and other financial markets is given in two prices, one is what you pay if you would buy the asset and another one is the price in which you sell the asset. The market price you pay for buying the asset is called the Ask price. The ask price is what the other participant is willing to sell their asset to you. The bid price is the price you are given when you sell the asset. The asking price is usually higher than the bid price, meaning whenever you open your trading position the market makers make money from this difference.
Market makers are entities that enable participants to buy and sell assets. The difference between Ask and Bid prices is called the spread and it is the main income source of brokers who are middlemen between traders and financial exchanges. The spreads are crucial for brokers, if they offer zero spreads then usually they charge commissions on trading volume. Exchanges are places where traders buy and sell their assets and are usually electronically traded. The old days of the trading floor are long gone and all trading activities are done through computers.
Leverage, Equity, Margin, margin call, and stop-out levels
When Forex and stock markets were young the minimum contract size was 100 000 dollars, and it was impossible to participate in these markets without considerable capital which many average humans do not possess. Brokers introduced leverage in order to allow traders with smaller capital to participate in financial markets. The leverage is simply a credit that is given to the trader during the opening of the trading position. Traders can only use the leverage during trading processes and it amplifies the buying power of the trading account many times over. With the leverage of 1:30 traders can open a position 30 times their trading account balance. This gives enormous power to traders to amplify profits, but it also amplifies the potential losses, this is why the leverage is a double-edged sword and should be used wisely.
Equity is the total value of the trading account including open positions profits and losses.
Margin is the amount of trading account which is put aside for each opened trading position. When a trader opens a position, the trading platform automatically locks part of the trading balance while the position is opened. When this required margin becomes lower than the equity because of losing positions brokers ask for more funds in order to maintain opened positions. This is called a margin call and if the trader does not add funds then a stop-out happens. Stop-out means the broker liquidates or closes all open positions. Stop-out can seriously harm trading profitability and should be avoided with wise risk management strategies. One way of avoiding margin calls and stop-out is to use proper stop loss and limit losses for each trading position. These trading terms are the most basic ones every newbie trader should memorize.
Trends, bullish and bearish markets
Trends are the market’s tendency to move in a certain direction for some time. They are defined as higher highs and lower lows. Meaning every consecutive higher swing is higher than the previous ones and every consecutive lower swing is higher than the previous swing lows. Markets do not move in only one direction and they tend to create swings along the way. Analyzing these swings allows traders to define if a market is in an uptrend (moving upwards) or in a downtrend (moving downwards). Trends are traders’ friends as long as they continue. But most of the time markets are what’s called in range. Range markets or sideways markets do not move in a definite direction and are characterized by price moving in channels. It is generally accepted that trends are only occurring 30% of the time and traders should be extra careful when using trend trading strategies. Uptrends are sometimes called bullish trends or bullish markets and downtrends are called bearish markets or bearish trends. Traders love using bullish and bearish instead of uptrends and downtrends.