With these 5 terms, you will be ready to dive into the amazing world of financial trading. They are building blocks of basic knowledge which will create a fundamental understanding framework for your mind. So let’s begin.
5 Absolutely Crucial And Basic Financial Trading Terms
Trading is not easy, it takes a lot of practice, theoretical knowledge, and discipline. Because of this, understanding basic terms are critical. also, if you want to become a funded trader these terms will help you pass the evaluation period.
- Bid and Ask prices – whenever you open a price chart on any trading platform what you will see are two prices, one is the Bid and the other is the Ask price. What are they? The bid price is the highest price the buyer is willing to pay. To explain it in simpler terms, the bid is the price you sell any asset on the financial market, like stock, cryptos, or currency pairs. The asking price is the lowest price the seller is willing to accept. In simpler terms, Ask is the price at which you buy the asset. The bid price is always lower than the asking price, making it always profitable for the market intermediaries when you trade. The difference between Ask and Bid is called spread, and it is the main source of income for financial market brokers. For more detailed information, check this bid and ask price definitions which will increase your understanding. Any trader has to understand the Bid and Ask prices and memorize their meaning.
- Long and Short positions – another staple for financial trading terms. When you buy an asset, you are in a long position. When you sell the asset, you are in a short position. Short positions are also called short selling or shorting. When a trader longs the asset, they are waiting for the price to increase and then will close or sell back the position to generate profit. When traders short the asset, they are waiting for the price to fall and then buy back the asset and make a profit. In some markets, like real stocks, traders can not immediately sell the stocks they don’t own. For short-selling the asset right away, there are other specific assets or trading instruments enabling traders to short-sell the asset right away.
- Stop Loss and Take Profit orders – are the two main risk management tools in financial markets. Stop loss and take profit are stop orders meaning when a trader buys or sells the asset they can set stop loss and take profit. Take profit closes the position when a certain price is hit and profit is made, while the stop loss limits the loss traders can accumulate by closing the trade at a certain price. So, both stop loss and take profit to play a major role in controlling risk and profitability.
- Trends. There are two main trends when considering the financial markets. Downtrend and uptrend. An uptrend is called a bullish trend, and downtrends are often called bearish markets or bearish trends. An uptrend is when prices are moving higher, or technically speaking higher highs and higher lows. Downtrends happen when the price is making lower lows and lower highs on the price charts.
- Bulls and bears and related terms. Bull is the symbol of optimism and upward price movement. Bears are the opposite and are symbols of falling prices. Bulls or bullish traders are traders who are buying the asset for future gains. Bears on the other hand are sellers who are shorting the markets to gain profits. The bullish trend is the upward trend, while the bearish trend refers to the downward trend.
Advanced Financial Trading Terms You Can’t Avoid
- Risk management – risk management refers to the practice of calculating the possible return and possible loss for each trade and setting maximum risks and profits to maintain a healthy ratio. Another important thing in this matter is to consider how many trades are you expecting to win on average. This is called win rate and it is critical. Traders generally try to risk 1 to get double the profit, or a 1:2 Risk to reward ratio. 1:2 RR means you risk $1 to get a potential $2 profit. With a strategy that has a win rate of 50% and 1:2 RR, you are expecting to make a profit in the long term. Risk management defines if a trader is a winner or loser in the long term. Leverage plays an important role when managing risks during trading.
- Margin – defines how much money you need in your account to open a trade. Margin is money, a trader needs to put forward to place a trade and maintain the position.
- Leverage – refers to the practice of borrowing money from the broker to increase the buying power of the account balance. A leverage of 1:100 means the balance is multiplied by 100 times. A $1000 trading account with a leverage of 1:100 can buy up to $100 000 worth of assets. Leverage is like a double-edged sword, it increases the potential profits or returns of the investment. But the leverage also amplifies the potential losses, making it critical to properly control risks with stop loss and take profit orders.
Summary
Understanding the most basic terms and their workings is the first step toward understanding any field. In the financial trading world, the above terms are the most basic building blocks that no trader is allowed to miss. So make sure to memorize them.