By Your Trading Mentor,
Trading Angel
Understanding the proper terminology is an essential first step before learning to day trade. Here are a few reasons why:
1. Effective communication: Day trading involves a lot of communication with other traders, brokers, and market participants. Understanding the proper terminology ensures that you can communicate effectively and avoid misunderstandings.
2. Understanding market data: Day traders need to be able to interpret market data such as price charts, order books, and news releases. Understanding the proper terminology allows you to understand the data more effectively and make informed trading decisions.
3. Trading strategies: Different trading strategies rely on different technical indicators and chart patterns, each with their own terminology. Understanding the terminology allows you to understand the trading strategies more effectively and implement them successfully.
4. Risk management: Day trading involves a high degree of risk, and effective risk management is essential. Understanding the terminology allows you to understand the risks associated with different trades and implement effective risk management strategies.
5. Avoiding mistakes: Day trading is a complex activity that requires a lot of attention to detail. Understanding the proper terminology can help you avoid costly mistakes such as misunderstanding order types, misreading charts, or misinterpreting news releases.
Overall, understanding the proper terminology is essential for effective communication, understanding market data, implementing trading strategies, managing risk, and avoiding costly mistakes. It is an important first step for anyone interested in learning to day trade.
Here are the trading terms you need to know before you start trading the financial markets
BULLS AND BEARS
In trading, bulls and bears are used to describe two opposing market sentiments or trends. Here are the differences between the two:
1. Bull market: A bull market is characterised by rising prices and a general sense of optimism among investors. A bullish investor expects prices to continue to rise, and may enter long positions in anticipation of further gains. In a bull market, buyers outnumber sellers, and there is typically a high level of trading volume.
2. Bear market: A bear market is characterised by falling prices and a general sense of pessimism among investors. A bearish investor expects prices to continue to fall, and may enter short positions in anticipation of further losses. In a bear market, sellers outnumber buyers, and there is typically a low level of trading volume.
3. Market psychology: Bulls and bears reflect the market psychology of investors. Bulls are optimistic and believe that the market will continue to rise, while bears are pessimistic and believe that the market will continue to fall. This psychology can influence trading decisions and market trends.
4. Economic indicators: Bulls and bears are also influenced by economic indicators such as GDP growth, interest rates, and inflation. A strong economy with low inflation and low interest rates generally favours a bull market, while a weak economy with high inflation and high interest rates generally favours a bear market.
5. Trading strategies: Bulls and bears also influence trading strategies. In a bull market, traders may focus on long positions and buy-and-hold strategies, while in a bear market, traders may focus on short positions and more active trading strategies.
Overall, bulls and bears represent two opposing market sentiments or trends, with bulls being optimistic and expecting prices to rise, and bears being pessimistic and expecting prices to fall. Understanding these concepts is important for traders to make informed decisions based on market trends and economic indicators.
BID AND ASK
In trading, the bid price and ask price are the prices at which buyers and sellers are willing to buy and sell an asset, such as a stock, currency, or commodity.
The bid price is the highest price a buyer is willing to pay for an asset at a given time. It represents the demand for the asset and is typically lower than the ask price.
The ask price, on the other hand, is the lowest price a seller is willing to accept for the asset. It represents the supply of the asset and is typically higher than the bid price.
The difference between the bid and ask prices is known as the bid-ask spread. This spread represents the transaction cost for trading the asset and is typically narrower for highly liquid assets such as major currency pairs and broader for less liquid assets such as small-cap stocks.
PIP VALUE
In trading, a pip (short for “percentage in point”) is a unit of measurement used to express the change in value between two currencies. The pip value represents the smallest price change that a currency pair can make, and is typically used to calculate the profit or loss of a trade.
The pip value is dependent on the currency pair being traded, as well as the size of the position. For currency pairs where the quote currency (the second currency listed) is the US dollar, the pip value is typically $10 for a standard lot (100,000 units of the base currency), $1 for a mini lot (10,000 units of the base currency), and $0.10 for a micro lot (1,000 units of the base currency).
For currency pairs where the quote currency is not the US dollar, the pip value is determined by converting the pip value in the quote currency to the account currency using the current exchange rate.
For example, if a trader buys 1 lot of EUR/USD at a price of 1.2000 and sells it at a price of 1.2020, the trade has made a profit of 20 pips. If the trader’s account is denominated in USD and they traded a standard lot, the profit would be $200 (20 pips x $10 per pip). If the trader’s account is denominated in a different currency, they would need to convert the pip value to their account currency using the current exchange rate.
STOP LOSSES AND TAKE PROFITS
Stop loss and take profit are two types of orders that traders can place in advance to manage their risk and secure their profits in a trade.
A stop loss order is an instruction to close a trade automatically at a specific price level in order to limit potential losses. When a trader places a stop loss order, they are essentially setting a maximum loss they are willing to accept on a trade. If the market moves against their position and reaches the stop loss level, the trade will be automatically closed at that level, preventing further losses.
A take profit order is an instruction to close a trade automatically at a specific price level in order to secure a profit. When a trader places a take profit order, they are essentially setting a target profit they want to achieve on a trade. If the market moves in their favour and reaches the take profit level, the trade will be automatically closed at that level, securing the profit.
Both stop loss and take profit orders can be set at the same time when a trader enters a trade. This allows them to manage their risk and potential reward on a trade in advance, without having to constantly monitor the market. It is important to note that stop loss and take profit levels should be based on a trader’s individual risk tolerance and trading strategy, and should be carefully calculated to avoid being triggered too early or too late.
MARKET STRUCTURE
In price action technical analysis, market structure refers to the framework of the price movements of an asset over time. It includes the identification of key levels of support and resistance, as well as the formation of trends and patterns.
Market structure in price action analysis is typically analysed using charts, such as candlestick charts or bar charts, which display the price movements of an asset over a specific time frame. By analysing the price movements, traders can identify patterns and levels that can provide clues as to the future direction of the asset’s price.
For example, an uptrend can be identified by a series of higher highs and higher lows, while a downtrend can be identified by a series of lower highs and lower lows. These trends can provide traders with potential entry and exit points for their trades.
Support and resistance levels are also important aspects of market structure in price action analysis. Support refers to a level at which buying pressure is strong enough to prevent the price of an asset from falling further. Resistance, on the other hand, refers to a level at which selling pressure is strong enough to prevent the price of an asset from rising further. By identifying these levels, traders can determine potential entry and exit points for their trades and manage their risk accordingly.
Overall, market structure is an important aspect of price action technical analysis as it provides traders with a framework for analysing the price movements of an asset and making informed trading decisions.
PRICE ACTION
In forex trading, price action refers to the analysis of the historical price movements of a currency pair to identify patterns, trends, and other trading opportunities. Price action traders believe that studying the movement of price alone, without relying on indicators, can provide valuable insights into the market and help predict future price movements.
Price action traders typically use candlestick charts or bar charts to visualise the price movements of a currency pair over a specific time frame. They look for patterns such as support and resistance levels, trend lines, and chart patterns such as head and shoulders or double tops and bottoms. By analysing these patterns, they can identify potential entry and exit points for their trades.
Price action trading is based on the idea that the market is always changing and that price movements reflect the collective beliefs and actions of all market participants. Therefore, by analysing the price movements themselves, traders can gain a better understanding of market sentiment and make more informed trading decisions.
Price action trading can be used in conjunction with other forms of technical analysis or fundamental analysis to develop a comprehensive trading strategy.
TECHNICAL INDICATORS
Sure! Technical indicators are mathematical calculations based on the price and/or volume of a financial instrument, such as a currency pair in forex trading. They are used to analyze the market and to help traders make informed decisions about when to enter or exit a trade.
There are many different technical indicators that forex traders use, but some of the most common ones include:
1. Moving averages: These indicators calculate the average price of a currency pair over a certain period of time, such as 50 or 200 days. Traders use moving averages to identify trends and to determine potential support and resistance levels.
2. Relative strength index (RSI): This indicator measures the strength of a currency pair’s recent price movements, and is used to identify overbought or oversold conditions. Traders use RSI to help determine when to enter or exit a trade.
3. Bollinger Bands: These indicators use a moving average and standard deviation to create a band around the price of a currency pair. Traders use Bollinger Bands to identify potential breakout or reversal points.
4. Fibonacci retracements: These indicators use the Fibonacci sequence to identify potential support and resistance levels. Traders use Fibonacci retracements to help identify potential entry and exit points.
5. MACD: The Moving Average Convergence Divergence (MACD) indicator uses moving averages to identify potential trend changes in a currency pair. Traders use the MACD to help confirm potential entry and exit points.
It’s worth noting that while technical indicators can be helpful in analysing the market, they should not be relied upon exclusively. Fundamental analysis, which involves analysing economic and geopolitical factors that can affect currency prices, is also an important part of forex trading.
Overall, understanding the proper terminology is essential for effective communication, understanding market data, implementing trading strategies, managing risk, and avoiding costly mistakes. It is an important first step for anyone interested in learning to day trade.
Until next time,
Happy Trading!
Love from, Your Trading Mentor,
Trading Angel x