Trader’s Dictionary
In order to navigate the world of trading, you should learn some important concepts and terms that you are bound to encounter sooner or later. In this part of the lesson, we will introduce you to the most basic terms – you can find a full list of them in our glossary, which we are preparing on our website.
Forex
Short for FOReign EXchange, it is a decentralised global market where all the world’s currencies are traded. It operates as an over-the-counter market, meaning there is no centralised location. As the largest and most liquid market globally, it boasts a daily trading volume exceeding $7.5 trillion (as of 2022).
Currency Pair
A currency pair consists of two different currencies, with one quoted against the other. The first currency of the pair is known as the base currency, while the second is the quoted currency, acting as the benchmark. For instance, in the EUR/USD pair, the euro (EUR) is the base currency, and the US dollar (USD) is the quoted currency. The exchange rate of a currency pair indicates how many units of the quoted currency are required to purchase one unit of the base currency. When you open a long position on the EUR/USD currency pair, you are speculating on an increase in the value of the euro and/or a decrease in the value of the US dollar. Conversely, when you open a short position on this currency pair, you are speculating on a decrease in the value of the euro and/or an increase in the value of the US dollar.
Leverage
Financial leverage involves using borrowed capital to amplify the size of a trader’s trading account and positions. It allows traders to execute trades with significantly more capital than they have in their account, potentially increasing both profits and losses.
Margin
Margin, in simple terms, is a deposit or advance held by a broker or company where a trader has an account. It enables traders to open positions on currency pairs (or other offered instruments) and serves as assurance that they have enough funds to cover potential losses.
Lot
A lot is a standardised measure of the quantity of a financial instrument available for trading. The size of a lot varies depending on the specific market and the asset being traded, but typically represents a specific number of units of an asset. In forex trading, the standard lot size is 100,000 units of a particular currency.
Pip
Pip (Price Interest Point, or Points in Percentage) is the fundamental unit of currency movement in Forex, representing 1/10,000th of the currency rate. For instance, if the EUR/USD price shifts from 1.1000 to 1.1001, this reflects a movement of 1 pip.
Bid
The price at which a trader is willing to buy a particular asset.
Ask
The price at which a trader is willing to sell an asset.
Spread
The difference between the buy (bid) and sell (ask) prices.
Long
Long position means buying an asset with the expectation that its price will rise (speculating on the price rise). Thus, the trader buys with the intention of selling later at a higher price and thus making a profit.
Short
Short position means selling an asset with the expectation that its price will fall, thus speculating on a fall in price. The trader is therefore selling now with the intention of buying back later at a lower price and making a profit.
Buy
An order to buy a financial asset to speculate on the appreciation/increase of the exchange rate/price.
Sell
An order to sell a financial asset, to speculate on the depreciation/decline of the exchange rate/price.
Market Order
A Market order means the trader will execute the trade at the best available price at the time of placing the order.
Limit Order
A trader places a Limit order to execute a trade at a more favourable price than the current market price of the selected instrument. When seeking to open a long position, the trader enters a Limit order below the current price; thus, the price must first drop to or below the specified level for the buy order to be executed. Conversely, for a short position, the trader enters a Limit order above the current price. However, the order may not execute even if the price briefly touches the specified level, especially if there are multiple orders at that price.
Stop Order
A trader uses a stop order when anticipating the continuation of current price movements. For a long position, the trader places a Stop order above the current price, and for a short position, below it. Once the price reaches this predetermined level, a buy (for a long position) or sell (for a short position) order is triggered. Essentially, a stop order acts as a market order, executed at the best available price. Therefore, traders must consider potential slippage, especially in low liquidity or volatile markets.
Stop Limit Order
A Stop Limit order is a combination of Stop and Limit orders, and is basically an improved version of a Stop order. As we have already mentioned, the Stop order is subject to negative slippage in low liquidity and volatile markets. A Stop Limit order solves this problem by triggering the Limit price when the Stop level is reached, which is the “worst” price a trader is willing to accept. Again, the trader has to take into account that the order may not be executed even if the price reaches the Stop level but no longer reaches the Limit level.
Stop Loss
A Stop Loss order is a type of Stop order used to close a position when the price does not move as anticipated by the trader. It represents the maximum loss the trader is willing to accept on a trade. For a long position, the Stop Loss is typically placed below the entry price. As the trade progresses in the trader’s favour, the Stop Loss can be adjusted to lock in profits by setting it at a price higher than the current market level. The process is reversed for a short position.
Take Profit
A Take Profit order is a limit order designed to close an open position that is moving in the direction of the trader’s trade entry. It specifies the price at which the trader aims to secure profits or exit the market, even if at a loss. For a long position, this order is typically placed above the entry price, while for a short position, it is placed below. Similar to a Stop Loss, the Take Profit level can be adjusted as the trade progresses.
Trailing Stop
A specific type of Stop Loss order is the Trailing Stop, used by traders to protect their profits. Unlike the conventional Stop Loss, it is a dynamic order that adjusts according to the asset’s price movement in the trader’s favour. It activates only when a predetermined profit level is reached. For instance, if a trader sets a Trailing Stop at 25 points, once this profit threshold is achieved, the Stop Loss will adjust to the Break Even level. Subsequently, it continues to move with each further favourable movement in the asset’s price direction. If a Take Profit is not set, the trade remains open until the price moves 25 points in the opposite direction to the trader’s position.
Candlestick Chart
Candlesticks provide a visual depiction of price fluctuations. On a candlestick chart, traders can observe the trading range within a specified timeframe, displaying the open, close, low, and high prices. The colour of the candlestick indicates whether the price has increased or decreased during that period, with the difference between the open and close prices represented by the chosen colour.
Volatility
Volatility represents the degree of volatility of a given price or asset price. It also reflects the degree of uncertainty and risk associated with an investment. The greater the volatility, the greater the price range over which the exchange rate/price fluctuates.
An example of a market with high volatility:
An example of a market with low volatility:
Broker
A company that arranges trades in the financial markets for traders in return for a commission.
Modern Prop Trading
Modern prop trading firms are companies whose goal is to seek out novice traders and provide them with the tools, education, and environment to experiment with their trading skills. To this end, modern prop trading firms have each developed their own way to objectively identify and educate potential prospective traders from among prospective traders, without risk of financial loss on the part of their clients.
