THE KEY TERMS OF THE TRADING INDUSTRY

35 trading terms every trader should know

The trading society contains terms, which may seem a bit difficult to grasp the first time. That is why AxiomTrade has selected the most useful terms every trader should know!
image
image

Bearish – It means expecting that a market will experience a downward trend, and acting accordingly.

Bear call spread – A trading strategy constructed by combining a short call option and a long call option with a higher strike.  You would use this to use the advantage of downward market movement by limiting profit and loss.

Bid-Ask Spread –The difference in price between the best buy (bid) and best sell (offer) price for an asset.

Broker – An independent person or company who organizes and executes a financial transaction on behalf of another party.

Bullish – It means expecting a market to have an upward trend, and acting accordingly. The exact opposite of being bearish.

Bull call spread – A trading strategy constructed by combining a long call and a short call with a higher strike. It takes advantage of upward market movements while limiting profit and loss. It can be traded at 0 costs initially, making it attractive.

Blue-chip – This is a term often used to describe stocks and shares that are reputable, stable, and long-established. The companies considered to hold this status can change over time, though it tends to be companies at the top of the sector.

Calendar Spread – A calendar spread is a difference in the price of the same asset from one futures contract to another. For example, if the price for white sugar was $5/MT higher against the March futures contract than the May futures contract, this would be the value of the March-May calendar spread.

Call Option – A contract giving the buyer the right, but not the obligation, to BUY a specific amount of an underlying contract (e.g No. 11 Futures) at a specific price (strike price) at a specific time (Options expiration date).

Cash Price – Not to be confused with Prompt or Spot price, the cash price refers to the current price being traded for a commodity for immediate delivery off the exchange. The cash price and spot futures price should converge the closer you get to the spot futures contract expiry.

Day order – This is an instruction to buy or sell an asset at a specific limit. The order will remain valid for the day and will either fill at the target or expire unfilled if the market does not reach the target. A day order will not continue working after the market close.

Exchange – The exchange is an open, organized marketplace for financial instruments including stocks, shares, commodities, and derivatives. Sometimes, this term is used interchangeably with ‘the market.’

Forex – Often knows as foreign exchange, it is the rate at which you can convert one currency into another. The rate may vary depending on the value date at which the forex transaction is booked for.

Forward contract – This is a contract with a defined date of expiry. It can be customized to include stipulations of a specific amount of the asset being traded.

Futures contract – A futures contract is an agreement to buy or sell a particular asset at a predetermined price at a specified time in the future.

GTC order – This stands for `good `till canceled` and is an instruction to buy or sell an asset at a specific limit. The order will remain valid and working in the market until it is either filled or canceled.

Hedge – Not the green garden kind, this is a term to describe an investment or trade that is made to reduce your existing exposure to risk.

Historical simulation method – This is an approach to measuring VAR that uses analytics to predict the price.

Leverage – This is where a market participant amplifies their exposure to the market. An example of this would be an option position, where more risk can be taken on, compared to an outright futures position. This can amplify profits, however also increases the risk of large losses.

Limit orders – These are the most common type of order, and are instructions to buy or sell at a specific price or better. The priority is therefore price and not immediate execution. Limit orders carry the risk of not filling if the market trades further away from the limit. Limit orders are either `day` or `GTC` orders.

Long – This refers to a position that makes a profit if the asset’s market price increases – for example buying the underlying asset. Often referred to as ‘going long’ or ‘taking a long position’.

Long and short straddle – When going long on a call and long on a put with identical strikes, the trader will make a profit if the market moves either way. The loss is therefore whatever was paid as a premium to gain the position. Here, the trader is expressing a view on volatility – executing a long straddle if they believe the market will trade higher or lower, and a short straddle if they believe it will remain rangebound.

Lot – A group of assets that are traded instead of a single asset. For example, lots of sugar come in standardized sizes, according to the market. 1 lot of white sugar amounts to 50 metric tonnes.

Margin call – These can be broken down into initial and variation margin calls: margin calls are charged by the exchange to limit exposure to the participants executing futures, mitigating the risk of counterparty default. An initial margin is charged as a percentage of the national commodity value, and protects the exchange from one day of market movement risk.

The variation margin is charged at the day to day change in the value of the position, and must be settled the next working day by the participant. If you have bought futures and the price on the market rises, you will receive a cash call. If the market falls, you will pay a cash call. This ensures counterparty performance on the exchange.

Market order – This is the most basic order. It instructs the broker to buy or sell a security at the best price currently available. The priority here is on execution, not price. This type of order is typically used for smaller orders in more liquid markets, where the participant wishes to execute their position without delay.

OTC trade – An Over Countertrade is not executed through an exchange, however as a bilateral agreement between two counterparties. This brings the advantage of flexibility over executing orders on the market, as contractual terms can be negotiated.

Option – A type of derivative, and therefore are also specifically linked to an underlying asset. However, the buyer of an option has the choice of whether or not to receive futures relating to an asset at a predetermined price, volume, and expiry date in the future.

Put Option – A contract giving the right, but not the obligation, to SELL a specific amount of an underlying contract (e.g No. 11 Futures) at a specific price (strike price) at a specific time (Options expiration date).

Short – This refers to a position that makes a profit if the asset’s market price falls in price. An example of this is selling an asset that you do not own, with the requirement to buy it back at a subsequent point in time.

Spot Price – The price quoted on the exchange for the earliest possible delivery.

Strike Price – The agreed price for an underlying asset, this then forms the basis of an options contract.

Stop Loss Order – A limit order which triggers at a predetermined price. This can be useful for closing out a position in a volatile market when the market suddenly trades against you. Typically, a stop-loss order will be part of an OCO order.

Trailing stop – A type of stop-loss that automatically follows positive movements in the market for the asset you are trading. The level that the order will `stop` at constantly revises, taking into account the movement in the market. As an example, the trailing stop can be set at $5 lower than the high of the day, if the market is pushing new daily highs.

Value at Risk (VAR) – Risk measures and quantifies the level of financial risk within a firm or investment portfolio over a specific time frame. It is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their international portfolios.

Contact us

Office Address

Reach us!