Whether you are an investor, day trader, swing trader, or trade stocks, forex, futures, or options, this compilation of trading terms is essential to study.
These trading terms are broken down in alphabetical order, and the navigation menu makes it easy to find the specific terms you are looking for.
Alpha is a trading term that refers to the difference in performance relative to a benchmark return. For example, if your stock portfolio returns 18% for the year and the S&P 500 (the benchmark you are comparing your return to) made 10%, your alpha is 8%.
Arbitrage refers to a riskless profit, or almost no-risk profit. For example, if you could buy Bitcoin on one exchange for slightly cheaper than you could sell it for another, there is an opportunity there for profit. Arbitrage is often about profiting from inefficiencies, not necessarily profiting from the direction the asset price is moving.
A bear market is when an asset is falling in price. If the gold price is falling, it is a bear market in gold. If major stock indices are falling, it is a bear market in stocks. Some traders assign percentages to a bear market, such as stating that only drops over 20% from a prior high are considered a bear market.
The bid price is the highest price someone is currently willing to pay for an asset. If you wanted to sell, you could sell at the bid price to sell instantly. If you want to buy something, you can place a bid at any price you want and wait for someone to sell to you at that price (though there is no assurance someone will do so).
A bull market is when an asset is rising in price. If the price of silver is rising, it is a bull market in silver. If stock indices are moving up, it is a bull market in stocks. Certain percentages are sometimes used to identify a bull market, such as stating that prices rising at least 20% are a bull market.
Contracts for difference are a type of trading instrument where the trader enters into an agreement with their broker to exchange profits and losses on a trade. The trader never owns the underlying asset they are buying or shorting. Margin requirements on CFD trades are typically lower than with traditional markets.
Day trading is a style of trading where you don’t hold trades overnight. Trades may be held for seconds, minutes, or hours. Day trading is popular because of its fast pace and high return potential, yet it’s worth noting that the day trading success rate is very low.
Digital options are a trading instrument where you predict whether the price will be above or below a certain level at some point in the future. If you are correct, you receive a fixed payout. If you are wrong, you lose the amount you put into your trade.
Dividends are a cash or stock payout to shareholders of a company. The most common type of dividend is a cash dividend. The company pays out part of its profits to shareholders. Dividends received are taxed at a different rate than capital gains in most countries.
A drawdown is a loss in capital from a peak point, usually expressed as a percentage. If your account or portfolio had a peak point of $10,000, and the value is currently $8,000, that is a 20% drawdown.
Fundamental analysis is the study of how companies or economies perform, and the factors that drive that performance. Common tools of the fundamental analyst include reviewing corporate financial statements and examining trends in economic data.
A futures contract is an agreement between a buyer and seller to exchange an underlying asset at a specific price at a future date. Futures trade on a futures exchange. Futures are one of the common markets used for trading, the others being forex, stocks, bonds, and options.
A hedge is when a trade is taken to offset potential losses in another position. A portfolio manager may buy put options (increases in value if stock prices drop) to hedge a portfolio of stocks instead of selling the stock.
In the money is an options term referring to when the strike price of a call option is below the current price of the underlying asset. For a put option, in the money is when the strike price is above the current price of the underlying asset.
Leverage is when you can use more capital to trade than you have in your account. For example, if your broker provides you with 4:1 (4x) leverage and you have $1,000 in your account, you can take up to $4,000 in positions. Leverage can increase wins, but can result in significant losses as well.
A limit order is an order that is filled at a specified price or better. For example, if you want to buy an asset using a limit order, you would specify the maximum price you are willing to pay. The order will fill at that price or lower. For a sell limit, specify the lowest price you are willing to sell it. The order will only give you that price or higher.
A long position means you own something — you bought it. If you buy a stock, you are long that stock. Buy and long are often used interchangeably, “I wouldn’t mind being long (or buying) that stock.”
A lot refers to a specific quantity. In the stock market, a lot refers to 100 shares. In the forex market, a standard lot is 100,000 units of currency, a mini lot is 10,000 units, a micro lot is 1,000 units, and a nano lot is 100 units.
Margin is how much capital you need to maintain a position. Margin is applicable to margin or leveraged accounts only. The margin is specified on the broker’s website. For example, if you buy a $10,000 stock position with a 25% margin requirement, that means you need to maintain at least $2,500 in the account to maintain that position. If you do not maintain that amount in your account, the broker may close it or issue a margin call (a request for more money in order to maintain your position).
A market order can be to buy or sell. The order executes at the nearest available price. If buying with a market order, you’ll get the nearest price someone is willing to sell to you at. If you’re selling, you’ll get the closest price at which someone is willing to buy from you.
The offer is the best price someone is willing to sell an asset for. If you want to buy something, you can pay the offer price and receive it immediately. If you want to sell something, you can place your own offer at the price you are willing to sell it. If someone pays that price, your order is completed.
Options are broken down into calls and puts. A call gives the buyer the right to buy an asset at a set price within a set period. A put gives the buyer the right to sell an asset at a set price within a defined time limit. The buyer of the option is receiving it from a call writer. The call writer receives the premium (cost) of the option as payment, and then is obligated to fulfill the rights of the option buyer if needed.
Out of the money is an options term for when the strike price of a call option is above the current price of the underlying asset. For a put option, out of the money is when the underlying asset’s price is above the strike price.
A pullback (also called a retracement) is a price move against the dominant trend. If the price is moving higher overall, and the price drops temporarily before rising again, that is a pullback. Pullbacks don’t change the overall direction of the trend. If this happens, it is not a pullback; it is a reversal.
A range is an area within which an asset’s price has been moving. A range can be any distance or measurement, such as how far the price moves in a day (daily range). Or, it often refers to a rectangle-like shape where the price continues to move up and down within this range (rectangle), unable to break high or lower.
A reversal is when the trend direction of an asset changes. If it was trending higher, and then starts trending lower, that is a reversal. If it was trending lower and is now trending higher, that is a reversal. A reversal is different than a pullback. Pullbacks are minor retracements against the prevailing trend. A reversal is bigger, changing the trend direction.
Risk management is a broad trading and investing term that refers to protocols used to limit the losses (risk) from losing trades. Some risk management tools include stop losses, position sizing, and daily (weekly, monthly) loss limits.
A share is also called a stock. It is a portion of a company traded on a stock exchange. When you buy a share, you own part of that company. You are then eligible to receive dividends if the company pays them, you can vote on company decisions, and if the company does well, you can participate in profits via a rising share price.
In trading, short refers to a position which will profit if the price drops. Shorting is not necessarily the same as selling. You can own something and sell it; in that case, there was no chance of profiting if the price dropped. Shorting is opening a position that benefits if the price drops. If you sell a stock before owning it, you have opened a short position. If the stock price drops, you can buy the shares. Your profit is the difference in price between where you sold and bought.
Slippage is the difference between the price you get and the price you expected on a trade. If you put out a market order when the stock shows an offer price of 25.85 and your order fills at 25.89, you have 0.04 of slippage. Slippage can result from rapidly moving prices or lack of liquidity (other buyers and sellers) at the price you wanted to buy or sell.
A spread is the difference between the bid and ask (offer) prices. A bid is the highest current buy order and the offer is the highest current sell (or short) order. If the bid is 25.68 and the offer is 25.70, there is a 0.02 spread.
Strike price is an options term that determines whether an option is in the money or out of the money. If the underlying asset’s price is above the strike price, a call option is in the money (a put option is out of the money). If the underlying asset’s price is below the strike price, a put option is in the money (a call option is out of the money).
Support is a technical analysis term used to describe a price level that the price has tended to bounce off of. It could be a price level the price has bounced off before, or it could be a rising trendline or moving average where the price has tended to rise after reaching it.
Technical analysis is the study of how prices move and how historical movements, patterns, and statistics may help forecast or trade in the current market environment. The main tool of the technical analyst is price charts.
Volume is how many shares, contracts, or lots change hands. For example, in the stock market, volume is expressed in shares. If 1 million shares change hands in a day, that is the daily volume. In the futures and options market, volume is tracked based on contracts traded. In the forex market, volume is typically tracked in standard lots (100,000 unit increments).
