Trading on the stock exchange is a complex subject. Beginners in online trading in particular, repeatedly come across terms they need help assigning. However, since not only the understanding of the trading instruments but also of all functions is an essential requirement for success in trading, every trader should know the following basic terms:
Lot
A lot is a standardized number of units of a trading instrument. Usually, this value corresponds to the smallest number that can be purchased. For example, when trading forex, a standard lot is worth 100,000 units. So traders buy using a lot, a defined number of units of a trading instrument.
Pips
These are measures of a price change that determine your profit and loss.
- For a currency pair with five decimal places, one pip is 0.00010.
- For a currency pair with three decimal places, one pip is 0.010.
- For a currency pair with two decimal places, one pip is 0.10.
A pip is always the penultimate digit. A dot is always the last digit. If you want to buy (go long) 0.1 lot of EUR/USD at 1.13500 and it moves to 1.13510, then raising USD 0.00010 is a gain of one pip, i.e., ten points.
Position
Simply put, the position is a trader’s trade. If he buys commodities such as gold, for example, he opens a position. If he sells his gold again, the position is closed.
Positions are, therefore, crucial for success in online trading. It depends on when a position is opened and when it is closed again. The course of the course and the intuition of the trader are essential for the decision. Without the necessary expertise, there is a very high risk of losses when opening and closing positions.
Short and Long
The term short is often used in connection with positions. This is a trade that bets on falling prices for a profit.
With a long position, traders aim to benefit from rising prices. This is the opposite of a short trade.
Bid
Bid means the bid price of a financial instrument. This is the highest price that market participants are willing to pay to buy the instrument. This course is subject to change.
Swap
When traders open or close a trade, they pay spreads representing the cost or effective commission. Another essential aspect to consider when holding a position is the daily interest rate adjustment in the account at the rollover point at 5:00 PM EST (New York time) or 12:00 AM server time. This is a critical fee considering that many traders close their positions before this point.
Because currencies trade in pairs, traders speculate that one currency will appreciate or lose value against the other, so their primary focus is on capital gains or losses. It is also important to note the interest rate adjustment, which is determined by the two corresponding interest rates.
If the interest rate on the currency a trader bought is higher than the corresponding interest rate on the currency a trader sold, the trader earns interest. This is known as a positive roll or carry.
When the interest rate on the currency a trader bought is lower than the corresponding interest rate on the currency a trader sold, the trader pays rollover interest, known as an opposing roll.
Swap interest rate differentials are a function of the length of time a position is held and the size of the position and can add cost or benefit to each trade over time.
Ask
Ask denotes the asking price of a financial instrument. This is the opposite of the bid price: the asking price is the lowest price that market participants are willing to pay to buy the trading instrument. This course is also constantly changing.
Spread
The spread describes the cost or fee of trading and represents the difference between the buy (bid) and sell (ask) price at first moment but to increase the capital in the account. Your goal should be for the bid price to rise higher than the level at which you bought (opened) a position.
If you open a short position, the asking price should fall below the level at which you initially sold (opened). This concept is known as the beating spread.
Margin
Margin, also known as your deposit, is the amount of money in your account that needs to be placed to open a position. Margin is a function of desired notional exposure to a given market and leverage ratio.
If your equity, which is the remaining funds in your account adjusted for profit or loss, falls below a certain level, you will receive a margin call.
If you receive a margin call, you must deposit funds into your account to continue supporting your current open positions.
If no additional funds are deposited into the account before a certain period, your open positions may be closed automatically.
Your secure client area offers you a unique overview of your trading account. There you will be able to manage your account, including depositing funds when you want to open a position, transferring funds from one account to another, or withdrawing your funds when you are ready.
Margin is a type of security. A distinction is made between entry and holding margins:
- Entry margin: This is the value a trader needs to be able to open a position.
- Holding margin: As soon as the entry value is no longer sufficient to hold the position due to the price development, the trader must subsequently pay in money. This additional amount is called the holding margin.
Stop-loss
A stop loss is intended to limit the loss on a trade. The trader tells his broker that he should close the position at a specific rate, i.e., sell it.
Take profit
Take profit is the opposite of stop loss. To make the desired profit, the trader tells his broker to close the position once a profit is reached. These two essential disciplines are at the heart of our trading plans and methods to establish our trading edge and develop positive expectancy.
Many watch one of the two alone, but there is incredible potential in combining the two disciplines.
Technical and fundamental analysis
Technical analysis involves using charts to understand market behavior better and estimate the probability and the risk/reward ratio. Besides price development analysis, it is also a helpful tool for understanding the likelihood of future price movement and provides valuable insight for risk management.
Fundamental analysis involves interpreting news and knowing how new information can affect market price movements. Think of it like a journey. Fundamental traders don’t care about getting from point A to point B because they want to understand why this move is happening and under what circumstances one moves to point C. Learn more about “fundamental” analysis.
Understanding what really drives a currency is imperative when trading Forex. This allows us to understand how this independent variable reacts and how that might affect the currency.
For example, we know that over a third of Australia’s exports go to China, so the AUD (Australian Dollar) is often highly sensitive to Chinese data or changes in Chinese monetary or fiscal policies. For this reason, a trader may buy AUD if he believes that the People’s Bank of China will cut prices to stimulate domestic consumption.
