Trading Terminology
ADRs (American Depository Receipts):
ADRs represent shares of foreign companies that trade in the U.S.
They allow U.S. investors to invest in foreign companies without directly buying shares on foreign exchanges.
ADRs are denominated in U.S. dollars and often represent a specific number of shares of the foreign company.
Ask Price:
The ask price is the price at which sellers are willing to sell their shares.
When you want to buy a stock, you’ll pay the ask price.
Authorized Shares:
The total number of shares that a company is legally allowed to issue.
This number is typically larger than the public float, which represents the shares available for trading in the market.
Averaging Down:
When investors buy more of a stock as its price decreases.
This results in a decrease in the average price at which they purchased the stock.
Averaging down can be risky if the stock continues to decline.
Bear Market:
A market condition where investors expect stock prices to fall.
Short sellers tend to benefit during bear markets.
Bearish:
Refers to the bias that the market is trending down.
Bearish investors anticipate price declines.
Beta:
A measurement of the relationship between the price of a stock and the movement of the overall market (usually represented by an index like the S&P 500).
A beta greater than 1 indicates the stock is more volatile than the market, while a beta less than 1 suggests lower volatility.
Bias:
A prejudice in favor of or against something.
In trading, having a bias that doesn’t align with the trend can be risky.
Bid Price:
The price a buyer is willing to pay for a stock.
When you want to sell a stock, you’ll receive the bid price.
Bid-Ask Spread:
The difference between the buying price (bid) and the selling price (ask) of a stock.
Resolving this spread is necessary for a transaction to take place.
Blue Chip Stocks:
Large, well-established companies with a history of stable earnings and dividends.
Examples include companies like Apple, Microsoft, and Coca-Cola.
Broker:
A person or firm that facilitates buying or selling investments for a fee.
Brokers execute orders on behalf of clients.
Bull Market:
A market condition where stock prices are expected to rise.
Bullish investors anticipate upward trends.
Capitalization (Market Cap):
Market capitalization refers to what the market believes a company’s value is.
It is calculated by multiplying the stock price by the total number of outstanding shares.
Chop:
Range-bound price action where stock prices move sideways.
Trend traders may struggle during choppy markets.
Confluence:
A situation where two or more factors align, such as multiple buy or sell signals occurring simultaneously.
Confluence can strengthen the validity of a trading decision.
Curve-Fitting:
Fitting a trading strategy too closely to historical data.
Overfit strategies may not perform well in real-world conditions.
Day Order:
An order that is valid only for the day it is placed.
If not executed, it expires at the end of the trading day.
Day Trading:
The practice of buying and selling within the same trading day.
Day traders aim to profit from short-term price movements.
Requires close monitoring of the market and quick decision-making.
Dividend:
A portion of a company’s earnings paid to shareholders.
Typically distributed on a quarterly or annual basis.
Dividends provide income to investors.
Dogs of the Dow:
Refers to Dow Jones stocks that pay dividends.
Investors often consider these stocks as a traditional choice for long-term investment.
The strategy involves selecting the highest-yielding Dow stocks.
Drawdown:
The amount by which a portfolio, fund, or position declines from its peak value to a subsequent low point.
Drawdowns are common during market downturns.
Equity Curve:
A graphical representation of an account balance over time.
Shows the performance of an investment or trading strategy.
Helps assess risk and track progress.
ETF (Exchange-Traded Fund):
An investment fund that trades on stock exchanges.
ETFs track an index, commodity, or basket of assets.
Provides diversification and liquidity.
Exchange:
A marketplace where different financial instruments (stocks, bonds, commodities) are bought and sold.
Examples include the New York Stock Exchange (NYSE) and NASDAQ.
Execution:
When an order to buy or sell is completed.
Execution can occur at the market price or a specified limit price.
Forex (Foreign Exchange):
Trading different currencies in the global foreign exchange market.
Forex traders speculate on currency exchange rate movements.
Fundamentals:
Refers to a company’s financial health, earnings, product launches, and impact of regulations.
Fundamental analysis helps evaluate investment opportunities.
Going Long:
Betting that a company’s stock price will increase.
Long positions involve buying shares with the expectation of future gains.
Good Till Canceled Order (GTC):
An order that remains active until canceled by the investor.
It will be executed whenever the stock reaches the desired price.
Hedge Funds / Mutual Funds:
Two different types of investment accounts that pool money from multiple investors.
Hedge funds often use complex strategies, while mutual funds are more straightforward.
Indices:
Statistical measures of the stock market or a specific segment of it.
Examples include the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite.
IPO (Initial Public Offering):
Occurs when a private company becomes publicly traded by issuing shares to the public.
Investors can participate in IPOs to buy shares at the offering price.
Limit Order:
An instruction to execute a trade only at or under a specified purchase price (buy limit) or at or above a sale price (sell limit).
Helps control entry and exit points.
Line of Best Fit:
A trendline fitted to price action data.
Used in technical analysis to identify trends and potential reversals.
Liquidity:
Refers to how easily you can buy or sell an asset without significantly affecting its price.
High liquidity means ample trading volume.
Margin:
A margin account allows borrowing money from a broker to purchase investments.
The difference between the loan amount and the securities’ price is the margin.
Market Order:
An instruction to execute a transaction at the present market price.
Be cautious with market orders, as they may not always fill at the expected price.
Mean Reversion:
The belief that an asset’s price will return to its average over time.
Despite short-term volatility, mean reversion suggests a tendency toward equilibrium.
Momentum:
The rate at which a stock’s price accelerates compared to a previous period.
Momentum traders seek stocks with strong upward or downward trends.
Moving Average:
A stock’s average price per share over a specific time period.
Moving averages help identify trends and potential reversals.
Order Types:
Order Block: A specific price level where a large number of buy or sell orders are clustered.
Pennant: A technical chart pattern that indicates a brief consolidation before a continuation of the previous trend.
Portfolio:
A collection of investments owned by an investor.
Diversifying a portfolio helps manage risk.
Position Sizing:
Determining the amount of trading capital allocated to a single trade.
Proper position sizing is crucial for risk management.
Primary & Secondary Market:
Primary Market: Where securities (stocks, bonds) are created and issued (e.g., initial public offerings).
Secondary Market: Where existing securities are traded among investors (e.g., stock exchanges).
Probability:
The likelihood that a specific event or outcome will occur.
Traders use probabilities to assess risk and make informed decisions.
Public Float:
The number of shares available for trading once shares held by insiders are excluded.
Public float affects liquidity and stock price movements.
Rally:
A rapid increase in the general price level of the market or an individual stock.
Bullish rallies can lead to significant gains.
Range:
A price area on a chart where price action consolidates between a swing high and swing low.
Range-bound markets lack clear trends.
Resistance:
A level or price range where a stock has seen reactions before and is likely to face selling pressure.
Resistance levels can act as barriers to further price increases.
Risk Management:
The process of limiting losses to protect capital.
Techniques include setting stop-loss orders and proper position sizing.
Risk-to-Reward Ratio (R:R):
Compares the potential loss to the possible gain from a single trade.
Traders aim for favorable R:R ratios (e.g., 2:1 or higher).
Rule-Based System:
A repeatable set of criteria that, if followed, leads to predictable results.
Rule-based trading helps reduce emotional decision-making.
Sector:
A group of stocks in the same industry or business.
Examples include technology, healthcare, and energy sectors.
Secondary Offering:
When a company issues additional shares to raise more capital.
Existing shareholders may sell their shares in secondary offerings.
Shorting:
Borrowing shares to sell, with the intention of buying them back at a lower price.
Short sellers profit from falling stock prices.
Stock Splits:
When a company increases its outstanding shares by issuing more shares to current shareholders.
Stock splits adjust share prices while maintaining ownership proportions.
Stock Symbol:
A one to four-character alphabetic root symbol representing a publicly traded company on a stock exchange.
Examples: AAPL (Apple), MSFT (Microsoft).
Stop Loss:
An order that sells an entire position at the best available price.
Used to limit losses when a stock’s price moves against the trader.
Support:
A level or price range where price has previously seen reactions (bounces) and is likely to react again.
Support acts as a floor, preventing prices from falling further.
Support / Resistance Flip (S/R Flip):
Occurs when previous support levels become resistance, or vice versa.
A level that was once a floor (support) now acts as a ceiling (resistance), or vice versa.
Swing High:
A peak reached before a notable decline in price.
Swing highs often indicate potential trend reversals.
Swing Low:
A low reached before a notable increase in price.
Swing lows signal potential trend changes.
Swing Trading:
A trading style focused on obtaining gains over multiple days, weeks, or months.
Swing traders aim to capture short- to medium-term price movements.
Systematic:
Acting according to a fixed plan or trading system.
Systematic traders follow predefined rules and strategies.
Technicals:
Studying price action and using technical analysis (TA) to make trading decisions.
Technicals involve analyzing charts, patterns, and indicators.
Theta:
The rate at which the price of an option changes over time.
Theta measures the impact of time decay on option prices.
Trade Setup:
A pre-planned trading plan with entry, exit, and stop-loss levels.
Trade setups help traders make informed decisions.
Trading Capital:
The amount of money available for trading.
Properly managing trading capital is crucial for risk management.
Trading Edge:
Having an advantage over other market participants.
Traders seek edges through analysis, strategies, or information.
Trading Volume:
The number of shares traded in a given period (usually a day).
High volume often indicates significant market interest.
Trend:
The direction of an asset’s price over a specific time period.
Trends can be upward (bullish), downward (bearish), or sideways.
Trend Line:
A visual representation of a trend by connecting specific price points on a chart with a line.
An upper trendline connects significant highs, while a lower trendline connects significant lows.
Trend Trading:
A strategy of going long in an uptrend, short in a downtrend, and remaining flat when there is no clear trend.
Trend traders follow the prevailing market direction.
Volatility:
The measure of how much price is moving.
Volatile stocks experience rapid price changes.
Win Rate:
The ratio of winning trades to losing trades.
Traders aim for a high win rate, but it must be balanced with risk-to-reward ratios.
Quote:
Information about a stock’s latest trading price.
Quotes may be delayed by 20 minutes unless accessed through a real-time broker platform.
Yield:
A measure of the return on an investment received from dividends or interest payments.
Yield reflects income generated by an investment.
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