60 most used terms in trading terminology
The world of financial markets can be quite busy and packed with action. If you switch on a news channel these days or just head over the business section of a newspaper, you will come across various financial terms that might not make any sense.
Whether you are a trader, or want to learn more about the financial markets, understanding the trading terminology is important. After all, even if you do not trade, the financial markets can impact your life in one way or another.
While earlier trading was mostly done on the trading pits, these days, with electronic trading platforms, just about anyone can trade from the comfort of their homes. So if you are new trader, then chances are that you don’t want to be left out of the conversation.
While trading has changed over the years, the trading terminology hasn’t.
Whether you have some friends in the trading circles or simply hanging out at a forum, you will often come across these top sixty trading terminologies that are most commonly used.
- The Ask price is the price at which a seller is willing to sell the security. The sell price is the best price a seller has to offer and is the highest referenced price. Therefore, when you want to buy or go long in the market, you buy the ask price.
- The Bid price is the price at which a buyer is willing to buy the security. The bid price you see is usually the highest referenced price. Thus, when you want to sell your position, you sell at the bid price.
- The spread is a technical trading term which refers to the difference between the bid and the ask price. Usually, securities that are more liquid and high volumes tend to have lower spreads compared to securities that experience less volumes or lower liquidity.
- The high and low is a technical trading term that describes the highest and lowest price of the day in a security.
- The 52-week high is a trading slang that is used to describe the stock that has reached a new yearly high or a 52-week high.
- A 52-week high is a stock market trading terminology used to describe a stock or stocks that have reached a fresh 52-week low or a yearly low. Very often, you can hear in news channels and in financial journals about stocks hitting a 52-week low.
- Going long is a term commonly used to describe when a trader has taken on a long position in the market. A long position is nothing but buying. Thus, when you hear the term, going long it simply means to buy.
- The opposite of going long is going short. When a trader is going short, they are selling or taking a short position in the market. Going short means that you are selling.
- When you buy, you are taking a position where you can expect returns when the price of the security is rising.
- When you sell, you are essentially offloading or selling your long positions.
- Sell short is when you want to take advantage when the markets are falling. Sell short is also known as short selling. When you are short selling, you are essentially borrowing the securities from your broker and selling them.
When you close your short selling position, you are essentially buying back the security and returning to your broker. Short selling is a trading slang that is used in the equity markets.
However, with futures or currencies, it is easy to short sell.
- Cover is the term used to describe when you are buying back the securities you borrowed to short sell. Thus, when you are closing your short sell position, you are essentially covering your position. The word cover is a stock market slang.
- Risk averse or risk aversion is described as when the markets are trying to avoid taking on more risk. Risk aversion can occur when there are major economic or political events that could dampen the market’s bullish sentiment.
When risk aversion rises, you can expect the safe haven assets to outperform. Conversely, when risk aversion falls, you can expect the risky assets to outperform.
- Risk sentiment is a term used to describe the overall sentiment of the market. The sentiment can be bullish or bearish. Typically, when the risk sentiment is bullish, you would see the risky assets appreciating, while the safe haven assets depreciating.
Conversely, when the risk sentiment is bearish, you can expect the risk assets to fall while the safe haven assets appreciate.
Hit the bid:
- Hit the bid is a term that is used to describe when traders agree to sell at the bid price that is quoted to them. When a trader hits the bid, they are basically selling their security or position.
When a trader hits the bid, they are instantly selling their position at the market price. Thus, if you see that you are liquidating your long position by selling it at market, you are essentially hit the bid.
- Safe haven is a term used to describe a security or a group of securities or assets that tend to perform well when the markets are bearish or when the risk sentiment is bearish.
Safe haven assets are securities such as U.S. Treasuries and also includes precious metals such as gold and some currencies such as the Japanese yen and the Swiss franc.
- Liquidity is a technical term in the financial markets that describes how easy it is to convert your assets into cash. In trading terms, when the stock is more liquid, you are able to easily convert your position in the market and go into cash.
When liquidity is low, it can be difficult to sell your position at a price that you would like.
Candlesticks (or candlestick charts):
- Candlestick is a type of price chart that visually represents the activity in the price of the security. A candlestick chart is therefore a chart that uses the candlesticks to represent price.
A candlestick is made up of a body with thin lines emerging at the top and bottom of the body. These are referred to as wicks. The wicks represent the high and low prices of the day while the body represents the opening and closing price.
When price closes below the opening price, the candlestick is said to be bearish and when prices close above the opening price, the candlestick is said to be bullish.
- A death cross is a stock market slang that is used to describe when the short term moving average falls below the long term moving average. When a death cross occurs, it signals a bearish market. The death cross is commonly referred to when the 50-day (short term) moving average falls below the 200-dau (long term) moving average.
- The golden cross is the opposite to the death cross. A golden cross is a term used to describe a security’s short term moving average rising above its long term moving average.
When a golden cross occurs, it indicates a bullish market. A golden cross is typically used to describe when a security’s 50-day moving average crosses above the 200-day moving average.
- A support is a technical term used in day trading. A support level is used to describe an area or a price point where there is heavy buying activity. When price reaches a support level, it instantly bounces off the support level and the price rises. The support level is also known a demand area.
- Resistance is a technical term that goes hand in hand with support. A resistance area, as the name describes is a price level where there is heavy selling. When price reaches resistance, it tends to instantly fall off from the resistance level.
The resistance level is also known as supply area.
Fundamentals (or fundamental analysis):
- Fundamentals or fundamental analysis is the study of analyzing the reasons behind the price movement in a security. The fundamental analysis can vary from one financial market to another.
In the stock markets, fundamental analysis deals with valuation of the company by utilizing various financial ratios and then determining if the current stock price is overvalued or undervalued.
In the forex markets, fundamental analysis is the study of the macro-economic developments that result in expected changes to the monetary policy or interest rates.
Technicals (or Technical analysis):
- Technical analysis is the study of analyzing past price history to predict future price movements. With technical analysis, traders make use of indicators that are derived from price and volume.
Within technical analysis there are also various other methods of analysis.
- In forex trading terminology, majors is a term used to describe a bunch of currency pairs that are most commonly traded. These currencies tend to exhibit similar properties such as belonging to developed economies, are free floating and are commonly used in global trade. Major currencies also have a common attribute where the USD is one of the currencies in the currency pair.
Examples of majors or major currency pairs are EURUSD, USDJPY, GBPUSD.
- Minors is a forex trading slang that describes the less commonly traded currency pairs. Minors or minor currency pairs are cross currency pairs where the USD is not quoted. Example of a minor currency pairs include EURGBP, GBPJPY, EURAUD.
- Exotics or exotic currency pairs are those that do not have as high volumes as that of forex majors or minors. These are currency pairs where at least one currency belongs to an emerging market.
One of the criteria for a currency to be dubbed an exotic currency pair is that it should be free floating. Examples of exotic currency pairs are USDZAR, USDBRL, USDINR.
- A gap is a technical trading term that describes when the opening price of the security is at a different price than the price at which it is closed. Gaps can occur when there is heavy market activity and price simply moves past that level.
Gaps are commonly occurring in the stock markets.
- A doji is a day trading term used to describe one of the candlestick patterns. A doji is visually represented by the opening and closing prices staying the same while there are visible high and lows presented on the day.
A doji candlestick pattern suggests indecision in the market as both buyers and sellers match each other, leading to the opening and closing prices staying the same.
- Market maker is a financial term that describes a brokerage or an institution that makes the markets. A market maker is tasked with the responsibility of buying and selling from market participants.
A market maker makes profit by the spread that they charge on each transaction.
- STP is the short form of Straight through processing. STP is a term that describes when orders that are executed by traders are sent out straight through into the markets without any interventions.
- Execution venue is the name that describes where your trades were execution. Some common execution venues include a stock exchange, multilateral trading facility, Alternate trading facility or over-the-counter.
- Stock exchange the name that describes the place where stocks are transacted and executed. A stock exchange is the place where buyers and sellers meet to negotiate and trade the securities.
Some examples of a stock exchange include the New York Stock Exchange (NYSE).
- A commodities exchange is another type of exchange where commodity markets are negotiated and traded. It is mostly futures contracts that are executed at a commodities exchange.
Examples of a commodities exchange is the Chicago Board of Options Exchange (CBOE) or the Chicago Mercantile Exchange (CME).
- MTF is short for multilateral trading facility. An MTF is a type of an exchange that facilitates exchange of financial instruments between multiple parties An MTF operates in the same way as a stock exchange. The only difference is that MTF’s are smaller venues.
An example of a multilateral trading facility is the Bloomberg terminal.
- Greenback is a forex trading slang that is referred to the U.S. dollar. The name comes to the green color of the one U.S. dollar bill. Other terms to describe the U.S. dollar are the buck.
- The loonie is a forex trading slang to describe the Candian dollar. In forex trading slang, the loonie means the USD/CAD currency pair. The name comes from the solitary loon that is printed on one of the sides of a Canadian dollar coin.
- The kiwi is a forex trading slang that refers to the New Zealand dollar. The name comes from the picture of a Kiwi that is printed on the New Zealand dollar coin. The kiwi refers to the NZD/USD currency pair.
- The Aussie refers to the Australian dollar and represents the AUD/USD.
- ZIRP is short for Zero interest rate policy. The name gained prominence in the aftermath of the 2008 global financial crisis. Central banks across major developed economies cut interest rates bringing them to historic lows and some to zero levels.
This led rise to the term ZIRP which is also referred to lose monetary policy.
- Beta is the name given to measure the risk or volatility of a security or an asset compared to the wider market. Beta is used in relation to a benchmark such as the stock market index.
Beta is mostly used in capital asset pricing model which is used to balance the risk of an instrument and its expected return. Beta is commonly used in the stock markets. When the beta of a security is above one represents high volatility stocks. Whereas stocks below beta below one represent low volatility stocks.
- Alpha is a term used in the stock markets and used to describe a strategy’s ability to beat the stock market. Beta is simply the difference between the returns of a strategy and the returns from a stock market index.
Alpha is commonly used in hedge funds and states the amount of returns a hedge fund can give compared to the main stock market index.
- Risk reversal is a technical term which is a position that simulates the profit and loss behaviors when owning an underlying stock. A risk reversal is also known as a synthetic long.
Risk reversals are used in options trading and amounts to buying and selling out of the money options. Both these options have the same maturity.
- Call is a term used in options trading. It describes when an investor is bullish on a security and expects price of the security to rise. In this case, a CALL option is purchased. A call option is similar to being long in the market.
- Put is the opposite of call in options trading terminology. When an investor buys a PUT option, they expect that the price of the security will fall by the time the option matures. A put option is similar to being short in the market.
- An option is a derivatives contract. An option contract gives the buyer the option but not an obligation to exercise the option contract at maturity. In other words, using an option contract the buyer can walk away from the contract without any obligations.
An options contract is used in stocks and forex and used to hedge the exposure to the underlying securities.
- An option premium is the fee that an option buyer pays to the seller of the option or the underwriter. An option seller will have to deliver the underlying security if the option buyer chooses to exercise the contract.
In the Money:
- In the money is an options trading term that describes when the strike price is below the market price of the underlying asset in a CALL option. Conversely, an in the money option is one where the strike price is above the market price of the underlying asset in a PUT option.
When an option is in the money, the option buyer is most likely to exercise the option contract.
Out of the money:
- An out of the money option is where the strike price is above the market price of the underlying asset in a CALL option. Similarly, when the strike price is below the market of the underlying security in a PUT option.
- An option chain describes the matrix for the single underlying security’s options which lists all the CALLs and the PUTs for a given maturity period.
- VIX is the short for volatility index. The volatility index was developed by the Chicago Board of Options Exchange and is also known as the CBOE VIX. The VIX is based on the total outstanding PUT and CALL options for the S&P500 index.
When the VIX indicator rises, it can signal that investors are cautious of the stock market. The VIX is also known as the fear index.
- FANG is the acronym for the four high performing technology stocks. It was coined in 2017 and FANG represents, Facebook, Amazon, Netflix and Google.
- ESG is the acronym for Environmental, social and governance. The ESG is the term that describes stocks where the above three elements are central to investors when evaluating a stock.
ESG investing is also known as sustainable investing or responsible investing.
- An order book is a stock market term which describes a book or a ledger that keeps note of all the transactions taken place on any given day. A stock market order book is electronic, and it lists the number of shares that are bid or offered at each price point. An order book is also known as market depth.
Depth of Market:
- Depth of Market or DOM is nothing but the order book. The DOM shows the number of open buying and selling orders for a security or an asset. DOM is used when the security is traded at an exchange.
For example, you can find the depth of market for Stocks and Futures.
- Green bonds refer to bonds that are issued by a company earmarked for climate or environmental projects. Green bonds are asset linked and are also known as climate bonds. Green bonds concept was started in 2007 by the European Investment Bank and the World Bank.
- Death bond is the name given to bonds that are securitized based on life insurance policies purchased by the elderly or those who are terminally ill. Death bonds are mostly sold in Europe. Death bonds are asset backed securities.
Bps (or beeps):
- BPS is a technical trading term in the fixed income or bond markets. Bps stands for basis points and is known as beeps. One basis point is equal to 0.01%. Therefore, when you hear the term quarter basis point, it means a 0.25%.
- OIS is the acronym for overnight index swap. An overnight index swap is an interest rate agreement where a fixed interest rate is swapped for a pre-determined rate from a daily overnight published index.
Examples of overnight reference rates include the EONIA, SONIA, TONIA.
- Libor is the short for London Interbank Overnight Rate. It is a benchmark rate used by leading banks for short term loans. The LIBOR rate is calculated for five currencies and covers different periods of lending which ranges from one-day to one year.