Trading Terminology
Tuesday, 2 November 2010
Traders have their own language. They use words that might confuse a “newbie” or a non trader. Trading lingo is almost a type of secret handshake that lets other traders know that you’re a member of the club.
There is a method to the madness of trading terminology. Many of these terms allow a trader to express a concise thought in one or two quick syllables. In any discussion involving trading, you’ll often hear the terms long, short, and flat. In fact, every trader is always long, short, or flat. What do these terms mean?
Going Long - Going Short - Flat
Going Long - When a trader says he is “going long,” he is placing a trade that will become profitable if the exchange rate rises.
Going Short - When a trader says he is “going short” or “selling short,” he is placing a trade that will become profitable if the exchange rate falls.
Flat - When a trader says he is “flat,” he is neither long nor short. This trader has no open positions in the market.
Why do traders use these terms? Why not just use the word buy instead of long, and use the word sell instead of short? The answer is simple when you consider that traders can make money whether the exchange rate moves up or down. For example, suppose you walk into my office and ask me what sort of trade I will be making today. I tell you that I’m going to sell today.
Isn’t it true that the word sell could have two different meanings? Perhaps I’m going to sell a currency pair that I bought last week, in order to take a profit. Or it could mean that I’m opening a short trade; in other words, I’m selling a currency pair today in order to profit from an expected drop in the exchange rate.
However, if you ask that same question of me and I answer, “I’m going short,” there can be no confusion as to my meaning. If I’m selling short, I am definitely going to make money if the exchange rate falls, and I’m definitely going to lose money if the exchange rate rises. There can be no doubt about it.
Suppose you ask me what I am planning to do today, and I tell you that I plan to buy. Again, this word has two potential meanings. Perhaps I’m going to buy because I think the exchange rate is going to rise. Or it could be that I sold short last week, and the exchange rate has fallen. In order to take a profit and “close” the trade, I have to buy back the currency pair that I sold short last week. This is called “covering a short.”
If I do cover my short position, and I have no other open trades, I will be “flat.” I will have no open positions in the market.
If I were to tell you, “I’m going long today,” this can have only one meaning. It means that if the exchange rate rises, I’ll make a profit, and if it falls, I’ll lose money. The use of these terms removes ambiguity because they describe trading activity in precise terms.
What is a Pip?
A pip is the smallest increment of price in the forex market. It is an acronym for the phrase “percentage in point.” You might recall that in an earlier example, the exchange rate for the U.S. Dollar/Canadian Dollar currency pair was 1.10, and we expanded that to 1.1000 for the sake of precise measurement.
The reason why this is a more precise representation is that it allows us to show the smallest possible increment of change in the exchange rate. For example, suppose the exchange rate rises from 1.1000 to 1.1001. We could say that the exchange rate rose by one pip—the smallest increment of change possible.
The Major Currencies
Here is a list of some of the most actively traded currencies and their currency codes. Please note that this is a partial list, as there are many currencies traded in the world today:
Many of these currencies possess colorful nicknames. Traders love to use slang, so you need to know these nicknames in order to understand what they are saying. Here are some examples:
Long ago, the Great Britain pound was considered the world’s dominant currency, and British pounds were frequently wired back and forth between North America and Europe via the transatlantic cable. Many years later, the nickname “cable” persists. The pound was originally equal in value to one pound in weight of sterling silver, hence the term “pound sterling” or simply “sterling.”
“Loonie” is the unofficial but commonly used name for Canada’s gold colored, bronze-plated, one-dollar coin. The nickname is derived from the picture of a loon, a distinctive bird, on one side of the coin.
The first member of every currency pair is called the “base” currency, and the second member of each pair is known as the “quote” or “counter” currency. For example, in the case of the euro/U.S. Dollar currency pair (EUR/USD), the euro is the base member of the pair, and the U.S. Dollar is the counter member of the pair.
In order to prevent confusion, the currencies in the EUR/USD pair should always be presented in their correct order. You won’t see this pair represented as USD/EUR, unless you are trading currency futures.
Who decides which currency is the base currency, and which is the counter or quote currency? That task falls to the International Organization for Standardization, or ISO. The ISO determines the currency codes and the order of the currencies within each pair.
Whenever a currency pair is rising on a chart, this means that the base currency is strengthening versus the counter currency. This is true for every currency pair.
The opposite is also true — if the base currency is growing weaker versus the counter currency, the chart will show the exchange rate of that currency pair falling.
Lots
In the stock market, traders buy and sell shares. In the futures market, traders buy and sell contracts. In the forex market, traders buy and sell “lots.” The smallest position that a trader can take in the forex market is “one lot.”
Each lot consists of 100,000 units of currency. So if you are long one lot of the EUR/USD currency pair, in reality you are long 100,000 units of the base currency and short 100,000 units of the counter or quote currency.
Therefore, a trader who is long one lot of the EUR/USD currency pair is actually long 100,000 euros, and simultaneously short an equivalent amount of U.S. Dollars
Entry
The entry or entry point is the point at which a long or short position is opened. This is where the trade begins.
Stop or Protective Stop
A stop order is an order that is placed to exit a trade if the exchange rate makes an unfavorable move. This is done to keep losses minimal and under control.
Target
A target is placed to exit a position if the exchange rate makes a favorable move. It is also referred to as a “take-profit” order.
All About Forex Spot or Cash Market
The spot price is the value of an object or item right now, or “on the spot.”
This differs from a futures contract, which places a value on an object or item in the future. For example, suppose you want to buy a bottle of water. You are thirsty, so you want the water right now. The person behind the counter charges you $1 for a bottle of water. Therefore, $1 is the “spot” price of water at that store — the price you will pay right now, or “on the spot.”
On the other hand, suppose you want to lock in a price for water that you’ll need in the future. You negotiate with the store owner, taking inflation, supply and demand, and future uncertainty into consideration. You agree on a price of $1.05. You have now entered into a futures contract for water.
When you see a reference to the “spot” or “cash” forex market, this is done to differentiate between the current (spot) market and the future (futures) market.
Liquid
A liquid or “thick” market is a market in which selling and buying can be accomplished with ease. This is because there are more buyers and sellers in a liquid market like forex. A market with few buyers and sellers is referred to as “illiquid.”
Leverage
Leverage is the ability to control a large amount of capital with a comparatively small amount of capital.
For example, one lot of a currency pair has a value of 100,000 units of currency — 100,000 euros or 100,000 U.S. Dollars, and so on. Do we actually need to possess 100,000 euros or 100,000 U.S. Dollars in order to trade one lot of the EUR/USD currency pair?
No, we can control one lot with as little as 1/100th of that amount. We could say that a person who controls one lot in this fashion is using 100-to-1 leverage. The amount of leverage used by traders varies based on their individual needs and their “comfort zone.”
Support
Support is a point on the chart where the exchange rate has shown a tendency to stop falling. Support is not an exact price point, but an area.
Resistance
Resistance is a point on the chart where the exchange rate has shown a tendency to stop rising. Like support, resistance is an area, not an exact price level. Think of resistance as the ceiling above you.
Breakout
A breakout occurs when the exchange rate breaks beneath support or above resistance.
Trend
A trend occurs when the exchange rate moves consistently in one direction, either higher or lower.
Range
A range occurs when the exchange rate has no clear direction and is contained within visible support and resistance levels.
There is a method to the madness of trading terminology. Many of these terms allow a trader to express a concise thought in one or two quick syllables. In any discussion involving trading, you’ll often hear the terms long, short, and flat. In fact, every trader is always long, short, or flat. What do these terms mean?
Going Long - Going Short - Flat
Going Long - When a trader says he is “going long,” he is placing a trade that will become profitable if the exchange rate rises.
Going Short - When a trader says he is “going short” or “selling short,” he is placing a trade that will become profitable if the exchange rate falls.
Flat - When a trader says he is “flat,” he is neither long nor short. This trader has no open positions in the market.
Why do traders use these terms? Why not just use the word buy instead of long, and use the word sell instead of short? The answer is simple when you consider that traders can make money whether the exchange rate moves up or down. For example, suppose you walk into my office and ask me what sort of trade I will be making today. I tell you that I’m going to sell today.
Isn’t it true that the word sell could have two different meanings? Perhaps I’m going to sell a currency pair that I bought last week, in order to take a profit. Or it could mean that I’m opening a short trade; in other words, I’m selling a currency pair today in order to profit from an expected drop in the exchange rate.
However, if you ask that same question of me and I answer, “I’m going short,” there can be no confusion as to my meaning. If I’m selling short, I am definitely going to make money if the exchange rate falls, and I’m definitely going to lose money if the exchange rate rises. There can be no doubt about it.
Suppose you ask me what I am planning to do today, and I tell you that I plan to buy. Again, this word has two potential meanings. Perhaps I’m going to buy because I think the exchange rate is going to rise. Or it could be that I sold short last week, and the exchange rate has fallen. In order to take a profit and “close” the trade, I have to buy back the currency pair that I sold short last week. This is called “covering a short.”
If I do cover my short position, and I have no other open trades, I will be “flat.” I will have no open positions in the market.
If I were to tell you, “I’m going long today,” this can have only one meaning. It means that if the exchange rate rises, I’ll make a profit, and if it falls, I’ll lose money. The use of these terms removes ambiguity because they describe trading activity in precise terms.
What is a Pip?
A pip is the smallest increment of price in the forex market. It is an acronym for the phrase “percentage in point.” You might recall that in an earlier example, the exchange rate for the U.S. Dollar/Canadian Dollar currency pair was 1.10, and we expanded that to 1.1000 for the sake of precise measurement.
The reason why this is a more precise representation is that it allows us to show the smallest possible increment of change in the exchange rate. For example, suppose the exchange rate rises from 1.1000 to 1.1001. We could say that the exchange rate rose by one pip—the smallest increment of change possible.
The Major Currencies
Here is a list of some of the most actively traded currencies and their currency codes. Please note that this is a partial list, as there are many currencies traded in the world today:
EUR = EuroNicknames
GBP = Great Britain Pound
USD = U.S. Dollar
JPY = Japanese Yen
CHF = Swiss Franc
CAD = Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar
Many of these currencies possess colorful nicknames. Traders love to use slang, so you need to know these nicknames in order to understand what they are saying. Here are some examples:
U.S. Dollar “greenback” or “buck”The origins of these nicknames are an interesting topic of discussion. For example, the euro is called the single currency because it is one currency that is used by many countries. A “kiwi” is a flightless, nocturnal bird, and is also a national symbol of New Zealand.
British Pound “cable” or “sterling”
Euro “single currency”
Swiss Franc “swissy”
Canadian Dollar “loonie”
Australian Dollar “aussie”
New Zealand Dollar “kiwi”
Long ago, the Great Britain pound was considered the world’s dominant currency, and British pounds were frequently wired back and forth between North America and Europe via the transatlantic cable. Many years later, the nickname “cable” persists. The pound was originally equal in value to one pound in weight of sterling silver, hence the term “pound sterling” or simply “sterling.”
“Loonie” is the unofficial but commonly used name for Canada’s gold colored, bronze-plated, one-dollar coin. The nickname is derived from the picture of a loon, a distinctive bird, on one side of the coin.
The first member of every currency pair is called the “base” currency, and the second member of each pair is known as the “quote” or “counter” currency. For example, in the case of the euro/U.S. Dollar currency pair (EUR/USD), the euro is the base member of the pair, and the U.S. Dollar is the counter member of the pair.
In order to prevent confusion, the currencies in the EUR/USD pair should always be presented in their correct order. You won’t see this pair represented as USD/EUR, unless you are trading currency futures.
Who decides which currency is the base currency, and which is the counter or quote currency? That task falls to the International Organization for Standardization, or ISO. The ISO determines the currency codes and the order of the currencies within each pair.
Whenever a currency pair is rising on a chart, this means that the base currency is strengthening versus the counter currency. This is true for every currency pair.
The opposite is also true — if the base currency is growing weaker versus the counter currency, the chart will show the exchange rate of that currency pair falling.
Lots
In the stock market, traders buy and sell shares. In the futures market, traders buy and sell contracts. In the forex market, traders buy and sell “lots.” The smallest position that a trader can take in the forex market is “one lot.”
Each lot consists of 100,000 units of currency. So if you are long one lot of the EUR/USD currency pair, in reality you are long 100,000 units of the base currency and short 100,000 units of the counter or quote currency.
Therefore, a trader who is long one lot of the EUR/USD currency pair is actually long 100,000 euros, and simultaneously short an equivalent amount of U.S. Dollars
Entry
The entry or entry point is the point at which a long or short position is opened. This is where the trade begins.
Stop or Protective Stop
A stop order is an order that is placed to exit a trade if the exchange rate makes an unfavorable move. This is done to keep losses minimal and under control.
Target
A target is placed to exit a position if the exchange rate makes a favorable move. It is also referred to as a “take-profit” order.
All About Forex Spot or Cash Market
The spot price is the value of an object or item right now, or “on the spot.”
This differs from a futures contract, which places a value on an object or item in the future. For example, suppose you want to buy a bottle of water. You are thirsty, so you want the water right now. The person behind the counter charges you $1 for a bottle of water. Therefore, $1 is the “spot” price of water at that store — the price you will pay right now, or “on the spot.”
On the other hand, suppose you want to lock in a price for water that you’ll need in the future. You negotiate with the store owner, taking inflation, supply and demand, and future uncertainty into consideration. You agree on a price of $1.05. You have now entered into a futures contract for water.
When you see a reference to the “spot” or “cash” forex market, this is done to differentiate between the current (spot) market and the future (futures) market.
Liquid
A liquid or “thick” market is a market in which selling and buying can be accomplished with ease. This is because there are more buyers and sellers in a liquid market like forex. A market with few buyers and sellers is referred to as “illiquid.”
Leverage
Leverage is the ability to control a large amount of capital with a comparatively small amount of capital.
For example, one lot of a currency pair has a value of 100,000 units of currency — 100,000 euros or 100,000 U.S. Dollars, and so on. Do we actually need to possess 100,000 euros or 100,000 U.S. Dollars in order to trade one lot of the EUR/USD currency pair?
No, we can control one lot with as little as 1/100th of that amount. We could say that a person who controls one lot in this fashion is using 100-to-1 leverage. The amount of leverage used by traders varies based on their individual needs and their “comfort zone.”
Support
Support is a point on the chart where the exchange rate has shown a tendency to stop falling. Support is not an exact price point, but an area.
Resistance
Resistance is a point on the chart where the exchange rate has shown a tendency to stop rising. Like support, resistance is an area, not an exact price level. Think of resistance as the ceiling above you.
Breakout
A breakout occurs when the exchange rate breaks beneath support or above resistance.
Trend
A trend occurs when the exchange rate moves consistently in one direction, either higher or lower.
Range
A range occurs when the exchange rate has no clear direction and is contained within visible support and resistance levels.
Labels:
About Forex And Beginning
Bullion Exchanges is a trusted Precious Metals Shop established in the heart of New York City's Diamond District.
They have a massive inventory of items including, metals that range from the gold and silver to platinum & palladium.
Bullion Exchanges are offering a massive range of products appealing to first time investors and the established collectors.