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A-Z Trading Terms

February 20
20:50 2011

Arbitrage

The simultaneous purchase and sale of an identical or similar asset for the purpose of profiting from the difference in price as a result of the inefficiency in the market. These assets can be in different forms and / or on different markets. 

Averaging Down

An investment strategy that is used for lowering the average entry price of a trade by adding contracts or shares that are at lower prices and thereby lowering the average entry price. This technique is typically used when a trader has experienced a losing trade.

Binary Betting

The process of betting on a proposition that has two possible outcomes and is quoted in the form of a spread bet. Contrary to traditional betting, binary bets are quoted as a two way price, both a buy and a sell.

Options – Call

A type of option contract giving the holder the right, but not the obligation, to purchase a specific quantity of stock shares, a bond, commodities, or other instruments of an underlying security at a specific price within a specified time period.

Options – Put

A type of option contract that gives the owner the right, but not the obligation, to sell a specific quantity of an underlying security to the seller, or writer, of the option, at a specific price up through a particular date.

Day Trading Restrictions on U.S. Stocks

Restrictions used for preventing day trading of U.S. stocks, unless the day trader has a minimum of $25,000 on deposit in their trading account. These restrictions essentially prevent the U.S. stock markets from being day traded, but they do not apply to the futures or currency markets. Also known as pattern day trading restrictions.

Day Trading Style

A type of short term style used by both individuals and commercial traders where an investor holds their trades from just a few seconds to several hours, but are always exited within the same trading day. Also called short term trading.

Divergence

A scenario where two or more indicators such as an average or an index are moving in opposite directions and are not showing confirming trends, such as when stock prices decline while at the same time, bond prices go up.

Futures Contracts

An agreement to purchase or sell a particular commodity or financial instrument at a pre-set price at a time in the future. These contracts specify the quality and the quantity of the underlying asset to be purchased or sold, and some may even call for physical delivery of the asset.

Options – In the Money

Either a call option contract where the price of the underlying stock or other security is more than the contract price stated in the option’s strike price, or a put option where the price of the underlying stock or other security is less than the price stated in the option’s strike price.

Options – Out of the Money

Either a call option contract where the price of the underlying stock or security is less than the contract price stated in the option’s strike price, or a put option where the price of the underlying stock or other security is more than the price stated in the option’s strike price.

The Herd

A group of investment traders that tend to trade as a single group using news from mass media reports and the public’s economic sentiment, and who initiate their trades after all other traders. This group makes their trades based completely on emotion, primarily greed or fear that they will miss out on large gains.

Japanese Candlestick Patterns

Trading signals that consist of roughly 40 reversal and continuation patterns and have credible probabilities of indicating the correct future direction of a price movement. There are 12 major patterns that provide information on a majority of trading situations for most investors.

LEAPS

Acronym meaning Long Term Equity Anticipation Securities. Long term stock or index options that are similar to standard options but have expiration dates as long as three years out. Thought to be somewhat safer than traditional options as it is easier to predict the movement of a stock over longer time periods.

Futures – Long and Short

Entering a trade by purchasing a contract or group of equity shares in anticipation of the price going up puts a day trader in a long trade. Conversely, entering a trade by selling a contract or group of equity shares in anticipation that the price will go down puts a day trader in a short trade.

Live Trading Room

Chat rooms on the internet that allow professional day traders to make live trades while other day traders watch, learn, and even make trades along with the trader. Some are teaching-only trading rooms while others are more actual trade oriented.

Margin

Borrowed funds that are used to buy securities, making trades more risky due to amplified gains and losses, and also subjecting the investor to interest payments on the use of the borrowed funds. Also known as the amount of equity a customer contributes as a percentage of the current market value of the securities that are held in their margin account.

Margin Call

The demand of a brokerage firm that an investor deposit additional funds into their margin account because the securities in that account that were purchased on margin have fallen below a certain amount, thus making the account no longer able to meet the required maintenance margin.

Open Interest

A calculation used to determine the number of active trades for a specific market. It is determined by calculating options and futures contracts and is typically used as an indicator of the strength behind that market, which is not the same as the market’s volume.

Opening Gap

The opening price of a security that is either significantly higher or lower than the closing price on the previous trading day. Often this is based on positive or negative news or rumors about the underlying security overnight or over a weekend or market holiday.

Order Execution

A variety of ways in which a financial trade or order may be filled. How and where order execution occurs can affect the cost of the investor’s transaction, as well as the price they pay for the investment. Orders are not always executed immediately.

Points, Ticks, and Pips

Unit measurements of price changes based on completed futures transactions at various intervals depending on the volume of trading. For example, when trading volume is low, price changes might occur in points, equal to a penny, and as volume increases, the price changes may occur as ticks which is the smallest possible interval of change. In currency trading, pips equate to ticks.

Position Trading

The most common form of trading in which investors buy and hold a stock position for a long time frame (days or weeks) without regard to intermittent market changes or short term tick trends. Position trading relies more heavily on the fundamental analysis of a company’s financial prospects.

Range Charts

A bar chart that depicts price movements irrespective of time so as to focus exclusively on volatility in a range of prices. Bars are only formed when a price movement reaches a certain number of ticks within a range, and a new bar is formed when the price breaks out of the previous range. Each bar depicts the low and high of that particular price range.

Ranging and Trending

Two different types of market price movements that, when understood, can provide indications of future price movements. Ranging prices tend to move sideways within established resistance and support levels while trending prices move in an extended up and down direction constituting a trend.

Realized Profit

The recorded profit of a completed trade, net of transaction expenses, that is reflected in the trading account. A realized profit is the true measure of a day’s trading activity whereas an unrealized profit is subject to change because it exists in an active trade.

Risk to Reward Ratio

A parameter established by a trader to calculate the potential risk versus the expected reward of a trade. In most trading, the ratio is not based on absolute numbers, rather, it is based on the trading points on both the loss and profit side the trader expects to hit.

Scaling In

A method of trading in which a predetermined amount of capital or units of investment are segmented into multiple entry trades over a period of time in order to reduce the risk on the total investment. It also creates greater upside potential if the entry trades occurred in a down movement of prices.

Scaling Out

A method of trading in which a total investment is segmented into multiple exit trades over a period of time in order to reduce the risk on the total investment. Exit trades made in a down movement can have the affect of averaging down possible losses so that the most profitable exit trades can cover the losses on negative exit trades.

Spread Betting

A gamble on the price movements of a security or an index in which the bettor wagers a specific stake on the bid and ask spread, either short or long, and realizes a gain for each point of favorable movement. Since there are no fixed odds, the risk to the bettor is extensible as long as the bet is active. Spread-betting is illegal in the U.S.

Spread – Bid and Ask Spread

The difference in pricing between the buying side and the selling side of a day trading market. Small spreads result from a higher level of trading activity and enables traders to enter and exit the market more quickly at desired prices.

Spread Trading

An trading strategy in which a trader acquires positions on both sides of an options market with varying strike prices and/or expiration dates in order to profit from the disparity in prices. Most types of spread trades are structured so that both the profit and loss potential are limited.

Statistical Trading

A trading method that relies on the statistical probabilities of price movements. For example, if a statistical model indicates that an index has a 70% probability of moving in a certain direction at a certain time of the trading day, trades would be placed at that same time each day.

Stop And Reverse

A trading technique in which an order is placed to close a position and a simultaneous order is placed to open a position in the same security in the reverse direction. While a stop order can be used to close out the first position, a trader would have to initiate the reverse position manually.

Stop Loss

An automated order placed on a position that will trigger its sale if the price moves past a certain point in the opposite direction of the trade in order to limit a loss.

Options – Strike Price, Option Exercise, and Expiration Date

The specifications of an options contract that dictate its price and duration. Strike price is the price at which the underlying security will be sold at exercise; Option exercise is the right of the owner to purchase or sell the security; Expiration date is the date the option is required to be exercised if it is in the money.

Swing Trading

A speculative trading technique that employs a system or set of rules to determine the timing of trades at either end of a market swing when the short term direction of prices change.  Trading decisions are made frequently within a short term period (1 to 3 days), and are usually based on various criteria such as trade activity, volume, spread, and the duration of the swing.

Tick Charts

A chart that graphs real time trades as ticks, the smallest increments of price changes, used by traders to assess movement duration and predict price breakouts. Traders are able to view the number of trades at different price levels as they occur.

Futures – Tick Size and Tick Value

In the futures market, the tick size is the smallest increment of price change of a contract which varies depending on the market. Tick value is the intrinsic value of a tick that is an indicator of the amount of unrealized profit or loss as each tick is recorded.

Time Charts

A chart that depicts price changes over intervals of time as bars displaying the high and low price for that interval. Volume figures for each interval are also displayed. Time charts can be set to intervals of different lengths such as one minute, five minutes or one hour.

Time and Sales or Tape

A digital scroll that posts real time price and trade information as transactions occur.  The tape provides traders with detailed information that enables them to assess buying strength and price trends as well as support and resistance levels.

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