Glossary Of Trading Terms.
This glossary of trading terms covers all the financial markets. Like everything on the web its an ongoing resource. You will find links to further explanations on some of the definitions.Â
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A.
In trading terms, an account balance refers to the total amount of money in a trading account. This includes any deposits, withdrawals, profits, and losses that have occurred during the course of trading. The account balance is used to determine the margin available for trading and the amount of money that can be used to open new positions.
In trading, “alpha” refers to the excess return on an investment relative to a benchmark index. It is a measure of the performance of an investment compared to a market index. A positive alpha indicates that the investment has performed better than the benchmark, while a negative alpha indicates underperformance. Alpha is often used as a measure of the skill of a portfolio manager, with higher alpha indicating better skill.
Alpha is also used to measure risk-adjusted returns. It is the excess return of a portfolio relative to the return of a benchmark index, adjusted for the level of volatility. A high alpha means that the portfolio is generating a high return for the level of risk taken.
Amortization refers to the gradual reduction of the value of an asset over time through regular payments. It is often used in the context of debt securities, such as bonds, where the issuer makes regular interest payments to bondholders and also repays a portion of the principal (the original amount borrowed) with each payment. The process of repaying the principal over time is known as amortization.
For example, a bond issued with a face value of $100 and a coupon rate of 5% would pay $5 in interest each year. If the bond has a 10-year maturity, the issuer would pay $5 in interest annually for 10 years, and also pay a portion of the $100 principal with each interest payment until the full $100 is repaid at maturity. This gradual repayment of the principal is known as amortization.
It’s also possible to amortize a loan, or a mortgage, where the borrower will make regular payments, part of it will pay for the interest, and the other part will be used to gradually pay the principal.
Arbitrage refers to the practice of buying and selling financial instruments, such as stocks, bonds, currencies, or commodities, simultaneously in different markets in order to take advantage of price differences. Arbitrage is a way to profit from the difference in price of the same asset or security in two or more markets.
For example, an investor might buy a stock for $50 in one market and then sell it for $55 in another market. This process can be done manually by an investor or can be done with the help of advanced computer programs and algorithms.
Arbitrage can also take place between different markets, such as stock and options markets, or between different countries where the exchange rate fluctuates.
Arbitrage is considered a low-risk strategy because it takes advantage of the temporary price differences and can be done quickly. However, it does require a significant amount of capital, and the markets have to be efficient for the arbitrage to work.
It’s also important to note that arbitrage opportunities are rare and tend to disappear quickly when they appear, as the market forces adjust the prices.
ASIC stands for the Australian Securities and Investments Commission. It is an independent Australian government body that acts as Australia’s corporate regulator. Its role is to regulate and enforce compliance with the laws that govern the financial services industry, including the securities and derivatives markets, in order to protect consumers, investors, and creditors.
The ASIC is responsible for enforcing compliance with laws and regulations, issuing licenses, and supervising the conduct of companies and individuals that operate in the securities and derivatives markets. It also has the power to investigate and prosecute companies and individuals for breaches of the law.
Some of the tasks of ASIC include:
- supervising the conduct of financial service providers, including banks, credit unions, and insurance companies
- enforcing laws that protect consumers’ rights and interests
- issuing and canceling licenses for companies and individuals that provide financial services
- investigating and prosecuting companies and individuals for breaches of the law
- providing education and guidance to consumers and industry participants on financial products and services.
ASIC’s main goal is to maintain and enhance the integrity of the Australian financial system by promoting the confident and informed participation of investors and consumers in the securities and derivatives markets.
The ask price, also known as the “offer” price, is the price at which a trader is willing to sell a particular financial instrument, such as a stock, bond, currency, or commodity. It is the lowest price that a seller is willing to accept for the instrument. The ask price is typically higher than the bid price, which is the highest price a buyer is willing to pay for the instrument.
“At limit” refers to a situation where an order to buy or sell a financial instrument, such as a stock, bond, currency, or commodity, has been placed at the current best available price. For example, an order to buy a stock at limit would be an order to buy the stock at the current lowest available asking price. Similarly, an order to sell a stock at limit would be an order to sell the stock at the current highest available bid price.
When an order is placed “at limit”, it means that the trader is willing to pay the current best available price for the instrument, or receive the current best available price for the instrument when selling. It’s also possible that the order doesn’t get filled because the best available price changes before the order is executed.
In trading, an asset class refers to a group of financial instruments that have similar characteristics and are traded in similar markets. The main asset classes are:
Stocks or equities: These are shares of ownership in a publicly traded company.
Bonds: These are debt securities issued by companies or governments to raise capital.
Commodities: These are raw materials such as gold, oil, or agricultural products.
Real estate: This refers to the ownership or use of land and buildings.
Currencies: These are the different forms of money that are used in different countries.
Each asset class has its own unique characteristics, such as risk, return, volatility, and liquidity. Investors typically diversify their portfolios by allocating their assets among different asset classes, in order to spread risk and achieve better returns.
It’s important to note that different asset classes can be correlated or uncorrelated. Correlation is a measure of how two or more asset classes move in relation to each other. If two asset classes are positively correlated, they tend to move in the same direction, if they are negatively correlated, they tend to move in opposite directions. Diversifying across uncorrelated assets can help to reduce overall portfolio risk.
Averaging down is when a market participant buys more of a stock they already own after the price has declined. In doing so, they will reduce the average price at which they purchased the stock and could stand to realize a greater profit if the market value recovers above the new average price.
B.
All the international commercial and financial transactions of the residents of one country.
A type of chart that consists of four significant points: the high and the low prices, which form the vertical bar; the opening price, which is marked with a little horizontal line to the left of the bar; and the closing price, which is marked with a little horizontal line
The value of exports less imports. Invisibles are normally excluded, which is why balance of trade is also referred to as mercantile or physical trade.
The currency in which an investor or issuer maintains its book of accounts; the currency that other currencies are quoted against. In the Forex market, the US dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair.
One hundredth of a percent.
An investor who believes that prices/the market will decline.
A market distinguished by a prolonged period of declining prices accompanied with widespread pessimism.
The price that a buyer is prepared to buy CFDs.
The difference between the bid and offer prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.
A quantitative method that combines a moving average with the instrument’s volatility. The bands were designed to gauge whether the prices are high or low on a relative basis. They are plotted two standard deviations above and below a simple moving average. The bands look like an expanding and contracting envelope model. When the band contracts drastically, the signal is that volatility will expand sharply in the near future. An additional signal is a succession of two top formations, one outside the band followed by one inside. If it occurs above the band, it is a selling signal. When it occurs below the band, it is a buying signal.
An individual, or firm, that acts as an intermediary, putting together buyers and sellers usually for a fee or commission. In contrast, a ‘dealer’ commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.
An investor who believes that prices/the market will rise.
A market distinguished by a prolonged period of rising prices. (Opposite of bear market)
An economic indicator that consists of the items produced and held for future sale.
C.
A call option is a contract that gives the buyer the right but not the obligation to buy a specific asset at a specific price, on a specific date of expiry. The value of a call option appreciates if the asset’s market price increases.
A chartist is a trader who relies predominantly on charts to help them understand a financial instrument’s historical price movements, in order to better predict and to speculate on its future performance. They are also commonly known as technical analysts, or technical traders.
Contracts for difference, or CFDs, are a type of financial derivative used in CFD trading. They can be used to trade a variety of financial markets like shares, forex, commodities, indices or bonds.
Cost of carry is the amount of additional money you might have to spend in order to maintain a position. This can come in the form of overnight funding charges, interest payments on margin accounts and forex transactions, or the costs of storing any commodities on the delivery of a futures contract.
CPI stands for consumer price index, an average of several consumer goods and services that are used to give an indication of inflation.
A currency future is a contract that details the price at which a currency could be bought or sold, and sets a specific date for the exchange.
A currency option is a type of options contract that gives the holder the right, but not the obligation, to buy or sell a currency pair at a given price before a set time of expiry. To get this right, the holder of the option pays a premium to the seller (known as the option’s writer).
D.
Day trading is a strategy of short-term investment that involves closing out all trades before the market closes.
Derivatives are financial products that derive their value from the price of an underlying asset. Derivatives are often used by traders as a device to speculate on the future price movements of an asset, whether that be up or down, without having to buy the asset itself.
A dividend is the portion of profit that a company chooses to return to its shareholders, usually expressed as a percentage.
E.
Earnings per share (EPS) is an important metric in a company’s earnings figures. It is calculated by dividing the total amount of profit generated in a period, by the number of shares that the company has listed on the stock market.
EBITDA is a way of evaluating a company’s performance without factoring in financial decisions or the tax environment. The literal meaning of EBITDA is ‘earnings before interest, taxes, depreciation and amortization’.
EBITDAR is the abbreviation of ‘earnings before interest, taxes, depreciation, amortization and restructuring or rent costs’. It is used to analyze a company’s financial performance and profit potential where the company is undergoing a restructure or if its rent expenses are higher than average.
ECB stands for the European Central Bank, which is the organization responsible for the monetary policy in the eurozone.
In trading, equity can mean several different things. However it usually comes down to the ownership of an asset without any debt involved.
F.
G.
H.
I.
The Ichimoku Cloud, also known as the Ichimoku Kinko Hyo, is a technical indicator that was developed by Goichi Hosoda, a Japanese journalist, in the late 1930s. The Ichimoku Cloud is designed to provide a comprehensive view of the market trend and momentum, as well as support and resistance levels.
The Ichimoku Cloud is composed of five lines:
The Tenkan-sen line, which is a short-term moving average and represents the conversion line.
The Kijun-sen line, which is a long-term moving average and represents the base line.
The Senkou Span A line, which is the average of the Tenkan-sen and Kijun-sen lines and is plotted 26 periods ahead of the current price.
The Senkou Span B line, which is the highest high and lowest low of the last 52 periods and is plotted 26 periods ahead of the current price.
The Chikou Span line, which is the current price plotted 26 periods behind the current price.
The area between the Senkou Span A and Senkou Span B lines is shaded and is referred to as the “cloud.” The cloud represents the area where the current price is likely to experience support or resistance, and its color (green or red) can indicate bullish or bearish market trends.
Traders use Ichimoku Cloud to identify the overall trend, potential changes in trend, and potential levels of support and resistance. Additionally, many traders will use the Ichimoku Cloud in combination with other indicators and analysis to make their trading decisions.