Trading Terminology
If you're interested in trading, you're likely familiar with some of the key terms that traders use. From buying and selling to market orders and limit orders, the language of trading can be complex and confusing. But understanding the terminology is crucial for successful trading.
ADRs
ADRs are American Depository Receipts for reign companies that trade in the US.
Ask
Ask, on the other hand, is what people selling stocks are looking to get for their shares.
Authorized Shares
This is the total number of shares that a company can trade. It’s always bigger than the public float.
Averaging Down
This is when investors buy more of a stock as the price goes down. This results in a decrease of the average price at which the investor purchased the stock.
Bear Market
A bear market is one in which investors expect stock prices to fall. This is where short sellers shine.
Bearish
In trading “bear” basically means your bias is “down” or “downtrending.”
Beta
A measurement of the relationship between the price of a stock and the movement of the whole market. If stock XYZ has a beta of 1.5, that means that for every 1 point move in the market, stock XYZ moves 1.5 points and vice versa.
Bias
Prejudice in favor of or against one thing. In trading, it is dangerous to have a bias that doesn’t agree with the trend.
Bid
Your bid is what you’re willing to pay for a stock.
Bid-Ask Spread
The bid-ask spread is the difference between what people have to spend and
what people want to get. The spread must be resolved before the transaction can take place.
Blue Chip Stocks
These are the large, industry-leading companies offering stable dividend payments.
Broker
A person who buys or sells an investment for you, in exchange for a fee.
Bull Market
A bull market is a market condition that means stock prices are expected to rise.
Bullish
In trading “bull” basically means your bias is “up” or “uptrending.”
Buy
Means to take a position or to buy shares in a company.
Capitalization
Market capitalization refers to what the market thinks a company’s value is.
Chop
Range-bound price action. Trend traders can get “chopped up” or “whipsawed” trying to jump on trends only to have them quickly fizzle out. When trend trading is important to avoid sideways chop and focus on entering sustained trends.
Confluence
A situation in which two or more things come together. For example, two buy or sell signals happen at the same time.
Curve-fitting
Fitting a strategy to the data at hand for the best possible outcome. In essence, producing a “overfit strategy” that doesn’t work outside of the single example it has been built on.
Day Order
Day Order means that your order is only good for the day when it’s placed.
Day Trading
The Practice of buying and selling within the same trading day, before the close of the markets on that day.
Dividend
This is a portion of a company’s earnings that is paid to shareholders, the people that own the company’s stock, on a quarterly or annual basis.
Dogs of the Dow
Dow Jones stocks that pay dividends; a traditional go-to choice for long-term investors.
Drawdown
The amount of a portfolio, fund, or position lost from one high point to the following low point. The performance of a strategy usually uses its max drawdown as a form of measurement.
Equity Curve
A graphical representation of your account balance over time.
ETF
ETF’s are exchange traded funds. They’re like stocks, because you buy and sell shares, but they’re also like mutual funds, because they track an index.
Exchange
An Exchange is a place in which different investments are traded. The most well-known in the United States are the New York Stock Exchange and the NASDAQ.
Execution
When an order to buy or sell has been completed. If you put in an order to sell 100 shares, this means that all 100 shares have been sold.
Forex
FOREX - or “Foreign Exchange” - involves trading different currencies.
Fundamentals
This is a very broad term and covers many different aspects but typically it refers to a company’s issuance, product launch, earnings, or impact of new regulations. This can also be interpreted as any metric used for measurement that is not the asset price alone.
Going Long
You’re betting that the company’s stock will increase in price so that you can buy low and sell high.
Good till cancelled order:
A GTC order means that your order stands until you cancel it and it will be executed whenever the stock comes to your price - even if that’s 2-3 weeks down the road.
Hedge Funds/ Mutual Funds
Hedge funds and mutual funds are two different types of investment accounts that you can buy into. They turn around and invest your money in dozens, hundred or even thousands of stocks.
IPO
An IPO is an initial price offering, which happens when a private company becomes a publicly-traded company, in order to raise money.
Limit Order
A limit order provides instruction to only execute at or under a purchase price or at or above a sale price. Always use limit orders, not market orders.
Line of Best Fit
Fitting a trendline to price action. Trying to find the line of best fit can lead to subjectively drawn trend lines that deviate from a standard ruleset, thus creating inconsistency with results.
Liquidity
Liquidity is how easily you can get into and out of a stock.
Margin
A margin account lets a person borrow money (Take Out A Loan) from a broker to purchase an investment. The difference between the amount of the loan and the price of the securities is called the margin.
Market Order
A Market order provides instruction to execute, as quickly as possible, a translation at the present, or market price. Don’t use market orders.
Mean Reversion
The belief that an asset’s price will return to its average despite upward and downward volatility (for example in a range-bound market).
Momentum
The rate at which price is accelerating compared to a previous period of time (example: “the momentum of the current candle compared to the last 14 candles is X”).
Moving Average
A stock’s average price-per-share during a specific period of time.
Orderblock
Order Blocks are created after price breaks away from a trend with momentum. They tend to mark market tops and bottoms; these levels often act as support and resistance later.
Pennant
A pattern formed by converging trendlines.
Portfolio
A collection of investments owned by an investor.
Position Sizing
The amount of trading capital committed to a single trade; mostly mentioned when referring to methods of managing risk.
Probability
The likelihood that something will occur. We can’t see the future, so we always try to consider situations based on probable outcomes.
Public Float
This is the number of shares that can actually trade, once shares that insiders (Like the company’s C-suite and early investors) Control are subtracted.
Rally
A rapid increase in general price level of the market or of the price of an individual stock.
Range
A place on the chart where price action has consolidated or is consolidating between a swing high and swing low.
Range-bound
Trading within a range.
Resistance
A level or range where price has seen reactions before and as such is likely to react again. This term refers to stock history as a predictor of future outcomes. Price must be below this area in order for it to be considered resistance.
Risk management
The process of limiting your losses to ensure capital preservation. The key to trading is achieving small consistent profits over time and not blowing up your account, even if you hit a losing streak. Most gurus and traders who brag about big gains generally aren’t using proper risk management, they will either have to change their style or will eventually lose it all (that or they are lying about their gains).
Risk-to-Reward Ratio (R:R)
The amount you can lose compared to the amount of possible gain from a single trade.
Rule-Based System
A repeatable set of criteria that if followed will result in predictable results.
Sector
A group of stocks that are in the same business. An example would be the “Technology Sector, including companies like Apple and Microsoft.
Secondary Offering
If a company’s stock is doing well, they may do another offering, in order to sell more stock and raise more money.
Sell
Getting rid of the shares that you purchased, either because you’ve achieved your goal or because you want to cut your losses.
Shorting
Opposite of going long, short selling involves borrowing a security and selling it on the open market. You then purchase it later at a lower price, pocketing the difference after repaying the initial loan.
Stock Symbol
A one to four Character alphabetic root symbol that represents a publicly traded company on a stock exchange.
Stop Loss
An order that usually, once triggered, the market sells an entire position at the best available price. Used to limit losses when a trade goes against you (the direction you did not expect).
Support
A level or range where price has seen reactions to before and such is likely to react again. Price must be above this area in order for it to be considered support.
Support / Resistance Flip (S/R Flip)
When previous support becomes resistance or previous resistance becomes support.
Support and Resistance (S&R)
Levels or ranges that have been identified on the chart where price has done something noteworthy such as made multiple highs or lows, broken away from a range with momentum, seen a significant amount of trading volume, consistently reacted for some reason, or even more generally where there is an indication that there should be a reaction in the future based on past occurrences.
Swing High
A peak was reached before a notable decline in price.
Swing Low
A low was reached before a notable increase in price.
Swing Trading
A style of trading often referred to as obtaining gains over the course of multiple days, weeks or even months. Typically a trading style that is longer than day trading.
Systematic
Acting according to a fixed plan or system.
Technicals
The technicals refer to studying price action. Technical Analysis (TA) is studying charts at a technical and not at a fundamental level.
Trade Setup
A pre-planned and pre-evaluated trading plan with entry(s), exit(s), stop(s), that are decided before the trade is taken. This allows you to calculate risk / reward before you trade and build a trading plan.
Trading Capital
The amount of money you can have available to trade with.
Trading Edge
To have an advantage on the rest of the market. Traders often refer to this as to one of the main reasons they are profitable, or a large contributing factor.
Trading Volume
Trading volume is the number of shares being traded each day - a factor that has huge implications for a stock’s liquidity.
Trend
The direction of an asset’s price over a specific time period.
Trend Line
Connecting specific price points on a chart with a line to indicate the trend visually. An upper trendline is created by significant highs of price, a lower trendline is created by significant lows of price.
Trend Trading
Going long in an uptrend, short in a downtrend, and being flat when there is no trend.
Volatility
The process of measuring how much price is moving.
Volatility
Volatility is simply how fast a stock moves up and down.
Win Rate
The rate of wins to losses when trading.
Quote:
Information of a stock’s latest trading price. This is sometimes delayed by 20 minutes, unless you are using an actual broker trading platform.
Yield
This refers to the measure of the return on an investment that is received from the payment of a dividend.
In summary, trading terminology can be complex and confusing, but understanding the basics is crucial for successful trading. From buying and selling to market orders and limit orders, traders need to be able to communicate effectively to make informed decisions. By staying up-to-date on trading terminology and continually learning and growing as a trader, you can increase your chances of success in the market.
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