The Bear Necessities: Decoding Financial Jargon

As we touched on earlier, a major turn-off for new traders is the overwhelming amount of phrases and financial jargon thrown around by ‘experts’ in the day trading universe. In my experience most of these terms are useless and are simply meant to confuse you so you place your faith in whichever product is on offer.

However as a novice trader it’s essential that you understand some key trading terminologies before you get started. This stack introduces some fundamental terms and concepts used in Daytrading, providing you with some of the tools to communicate effectively within the trading community and comprehend basic trading strategies.

Let's explore some of the key trading terminologies that you'll come across.

Pips: A pip is a standard unit for measuring price changes in currency pairs. For most currency pairs, a pip represents the fourth decimal place, e.g., 0.0001. Exceptions include currency pairs involving the Japanese yen, where a pip is typically represented by the second decimal place, e.g., 0.01.

Points: Points are used to measure price changes in other financial markets, such as stocks and indices. In stocks, a point usually represents a one-dollar change in the stock's price.

Ticks: Ticks refer to the price changes of assets traded on exchanges. A tick represents the smallest price movement for that particular asset.

Leverage: We will go deeper into Leverage in a future section given it’s importance in day trading, however at its core, leverage is a powerful tool offered by brokers that allows traders to control larger positions with a smaller amount of capital by ‘borrowing’ part of the overall position size. It enables traders to magnify potential profits, but it also increases the level of risk and potential downside.

Leverage Ratio: The leverage ratio determines how much capital a trader can control relative to their initial margin. For example, a leverage ratio of 1:100 means that for every $1 of trader's capital, they can control $100 in the market.

Margin: Margin is the amount of money required by a broker to open and maintain a leveraged position. It is expressed as a percentage of the total position size and serves as collateral to cover potential losses.

Long Position: Taking a long position means buying an asset with the expectation that its price will rise. Traders profit from a long position when the asset's price increases.

Short Position: Taking a short position involves selling an asset that the trader does not own, with the expectation that its price will decline. Traders profit from a short position when the asset's price decreases.

Stop-Loss: A stop-loss order is placed to automatically close a trade when the market moves against the trader beyond a predetermined level. It is used to limit potential losses and prevent excessive drawdowns.

Take-Profit: A take-profit order is placed to automatically close a trade when the market moves in favor of the trader up to a specified level. It allows traders to secure profits at a favorable point.

Market Order: A market order is an instruction to buy or sell an asset at the best available price in the market. When executed, the trade is immediately filled at the prevailing market price. For example, let’s assume the current market price for the AUS200 CASH is 7000/7001. If we place a market BUY order, our order will be filled immediately at 7001. If we place a market SELL order, we will be filled immediately at 7000.

Limit Order: A limit order is an instruction to buy or sell an asset at a specific price or better. It allows traders to control the price at which their trade will be executed but may not guarantee immediate execution if the market does not reach the specified price. Using the previous example, we could set a LIMIT SELL order at 7010, and this order would remain in place until the BID price hit 7010 at which point it would execute. If the market never goes to this price, your order remains unfilled.

Stop Entry Order: A stop entry order is an instruction to buy or sell an asset at a specific price, if the price moves through this level. Instead of waiting for a better price to execute, the strategy is to go WITH the price move. Generally used for significant data releases or events, range trading, or trend following strategies. In the above example, we could set a SELL stop entry order at 6995, and the order would only be executed if / as the market falls through this price level.

Entry Point: An entry point is the specific price level at which a trader decides to open a position. It is determined based on the trader's analysis and trading strategy.

Exit Point: An exit point, also known as a target price, is the specific price level at which a trader decides to close a position to take profits or cut losses. It is based on the trader's trading plan and risk management strategy.

Risk-Reward Ratio: The risk-reward ratio is a measure of the potential profit relative to the potential loss of a trade. It helps traders assess the risk they are taking on for the potential reward they could achieve.

Volatility: Volatility refers to the degree of price fluctuations in a financial market. Higher volatility implies larger price swings, while lower volatility suggests more stable, predictable price movements.

Liquidity: Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. Assets with high liquidity have ample trading activity and narrow bid-ask spreads.

Bid and Ask Price: The bid price is the highest price at which a buyer is willing to purchase an asset, while the ask price is the lowest price at which a seller is willing to sell the asset. The difference between the bid and ask prices is known as the bid-ask spread.

Spread: The spread is the difference between the bid and ask prices of an asset. It represents the transaction cost for trading that asset and varies based on the asset's liquidity and market conditions. This is where brokers make their money.

Equity: In trading, equity refers to the value of a trader's account, taking into account open positions and unrealized profits or losses.

Margin Call: A margin call occurs when a trader's account balance falls below the required margin level to maintain open positions. To prevent positions from being automatically closed, the trader must deposit additional funds to meet the margin requirements, or manually close out positions to reduce the margin required.

Slippage: Slippage refers to the difference between the expected price of a trade and the actual price at which it is executed. It can occur during periods of high market volatility or low liquidity, such as either side of data releases or major announcements.

Position Size: Position size is the number of units or contracts traded in a single transaction. It is determined based on the trader's risk management strategy and the size of their trading account.

Regular Trading Hours (RTH) refers to the regular trading session hours available for an instrument on a specific exchange or market center.

Futures Price: On products like the AUS200 Cash when out of RTH, this is the market clearing price that traders expect the XJO to trade at when RTH resume, after considering all the known data and events occurring up to that time. This is where major price dislocations and trading opportunities occur. For example, if speculators move futures significantly higher overnight expecting a flurry of buying on open, and this doesnt eventuate, the AUS200 price must quickly adjust down to the ‘Real’ price of where the physical market is trading at (eg XJO).

Maintenance Margin: The minimum amount of equity that must be maintained in a trading account to keep a futures position open. If the account drops below this level, a margin call is triggered.

Hedging: A strategy used to offset potential price movements in an asset by taking an opposite position in a related futures contract.

Speculation: Engaging in risky financial transactions with the expectation of significant returns. Speculators in the futures market aim to profit from price changes in futures contracts.

Direct Market Access (DMA): Allows traders to place trades directly into the order books of major exchanges. Some CFD providers offer DMA, providing greater transparency.

Gapping: Refers to a situation where the price of an underlying asset moves sharply up or down with no trading activity in between (eg when there’s a major data release like CPI, or RBA Decision etc). This can result in a significant difference between the expected price of a trade and the price at which it's executed. Price may also Gap through stop losses on existing positions, resulting in a larger than expected loss.

Over-the-Counter (OTC): Refers to the fact that CFDs are traded directly between two parties (the buyer and the seller) through a broker, rather than through a centralized exchange.

Day Trading: The practice of buying and selling financial instruments within a single trading day, ensuring that all positions are closed before the market session ends.

Scalping: A day trading strategy that aims to profit from very small price changes. Traders, known as scalpers, execute a large number of trades throughout the day, hoping to capture a few pips of profit from each trade.

Momentum Trading: A strategy in which traders buy or sell assets based on the strength of recent price trends. Momentum traders bet that an asset price that's moving strongly in a given direction will continue moving in that direction until the trend starts losing strength.

Breakout Trading: A strategy where traders enter a position when the price of an asset moves outside of a defined support or resistance level with increased volume. The expectation is that once a breakout occurs, price will continue in the breakout direction.

Pullback: A short-term move in the opposite direction of the prevailing trend. For day traders, pullbacks provide potential opportunities to enter or exit positions.

High-Frequency Trading (HFT): A type of algorithmic trading that involves making thousands or even millions of trades in a single day, using powerful computing systems to execute orders in fractions of a second.

Timeframes: Day traders use different timeframes for analyzing charts. Common day trading chart timeframes include 1-minute, 5-minute, and 15-minute charts.

Level II Quotes: Also known as market depth, it shows the number of buy and sell orders at different price levels. It's used by day traders to gauge the short-term direction of the market.

Stop Hunting: A situation where the price is driven to a level where many traders have set stop orders, either stop losses or take profits. Once these levels are hit, they can cause significant price movements as multiple stop orders are triggered simultaneously.

I would also encourage you to use CHATGPT or a similar product extensively. It’s an incredible tool in every aspect of our lives these days, and this is true for trading as well. Simply copy and paste anything you don’t understand that you see on twitter / websites / course etc, ask for it to be explained to you like a 10 years old, and you’ll be up to speed in no time!

Cheers

Marto