5 Terms Every Trader Should Know
Trading the markets and navigating financial concepts can seem daunting at first, yet it can be an exciting journey. Like every industry, trading has its own nuances but once you wrap your head around these concepts, you will be ready to get going in your trading journey.
To help you start off on the right foot, we have put together 5 of the most common trading terms we believe every new trader should know:
1. Going Long and Going Short
When trading in the financial markets, traders buy and sell assets such as currencies, commodities, and stocks by “going long” or “going short” on them. Going long is a popular industry term used to express the act of buying. On the other hand, going short is a term investors and traders use to describe the act of selling.
Traders will go long when they expect that the price of the asset will rise. Alternatively, they go short when they expect that the price will fall. This is because CFD trading allows traders to work with price movements in either direction, and so, they potentially benefit from both rising and falling markets.
2. Bid and Ask Price
The terms bid and ask (also known as bid and offer) refer to a two-way price quotation that indicates the best potential price at which a security can be sold and bought at a given point in time.
When trading financial markets, you are provided with two prices: the ask (buy) price and the bid (sell) price. The difference between the two prices is called the Spread.
If you are going Long or “buying” a particular instrument, your position will be opened on the Ask price and closed on the Bid price. Then again, when you go Short or 'sell', your position will be opened on the Bid price and closed on the Ask price.
For instance, if the market window on your trading platform quotes EURGBP at 0.89123 / 0.89133, then this would mean that the bid price is 0.89123 and the ask price is 0.89133.
3. The Spread
The spread on financial markets is the difference between the buy (ask) price of an instrument and the sell (bid) price of an instrument.
If a trader is selling a CFD, they are going to get the bid price. If they are buying, they are going to get the ask price. The difference (or “spread”) goes to the broker that handles and regulates the transaction. The Spread can either be ‘Fixed’ when the broker sets a fixed value for the spread of the instrument, or ‘Floating’ when the spread is determined by the market’s supply and demand.
For example, let’s say our EURGBP market is quoted with a buy price of 0.89133 and a sell price of 0.89123, so the spread is calculated by subtracting 0.89123 from 0.89133- giving a total spread of 0.0001 or 1 pip.
4. Margin and Leverage
CFDs are leveraged products, which means when trading CFDs, traders use “leverage” to be able to make large trades with a limited amount of money. CFD traders do not need to deposit the full value of a security to open a position. Instead, they can deposit a portion of the total amount and trade with it. This deposit is called “margin”. Leveraged investments amplify both gains and losses of price changes in the underlying security for investors.
The margin is expressed as either an amount or a percentage. Whereas the leverage is expressed as a ratio.
For example, if the value of a security is $100,000 and the required margin is $2000. This means that to trade this security, you must make a margin deposit of $2000. The leverage, in this case, is 1:50 i.e. the traders can trade 50 times leverage.
You can find more about leverage here.
5. Technical Vs Fundamental Analysis
There are mainly two approaches that traders use in the financial markets for forecasting the direction of prices. These are known as fundamental analysis and technical analysis.
The difference between Technical and Fundamental analysis is that technical analysis is used to understand price movement based on charts and identifiable trends. While fundamentals predict price movement by analyzing economic, social, and political factors that may impact the supply and demand of an asset.
Fundamental and technical analysis can be combined to provide a holistic trading strategy. Traders often compare the differences between fundamental and technical analysis, however, blending the two can be incredibly powerful.