Glossary
Trading terms, in plain words.
44 terms every beginner meets, each explained in a sentence or two, with a link to go deeper.
Market basics
- PipThe standard step of a currency pair's price: 0.0001 on most pairs, 0.01 on yen pairs.
- LotThe unit of position size: 1 standard lot = 100,000 units of the base currency, 0.1 a mini lot, 0.01 a micro lot.
- SpreadThe difference between the buy (ask) and sell (bid) price: the cost you pay on every trade.
- LeverageBorrowed buying power from the broker: at 1:100, each dollar in the account controls $100 in the market.
- MarginThe part of your balance the broker sets aside to keep a leveraged position open.
- Margin callThe broker's warning when losses are about to eat your margin, followed by the automatic closing of trades (stop out).
- Swap (overnight fee)The interest charged or paid for keeping a leveraged position open overnight.
- Currency pairTwo currencies quoted against each other, like EUR/USD: the price is how many of the second you pay for one of the first.
- BrokerThe company that gives you access to the market and executes your trades.
- CFD (contract for difference)A contract that pays the price difference of an asset without owning it: how most traders trade gold, indices and oil.
- VolatilityHow much and how fast a price moves: gold and indices are more volatile than most currency pairs.
- Trading sessionThe hours when a financial centre (Sydney, Tokyo, London, New York) is open; the overlaps are the busiest.
- Economic calendarThe schedule of economic data and central-bank decisions that move markets.
Orders and execution
- Bid and askBid is the price you can sell at, ask the price you can buy at; the gap between them is the spread.
- Market orderAn order to buy or sell right now at the best available price.
- Limit orderAn order to buy below or sell above the current price, filled only if price comes to your level.
- Stop lossAn order that closes your trade at a set price to cap the loss.
- Take profitAn order that closes your trade at a set price once the target is reached.
- SlippageThe difference between the price you asked for and the price you got.
Chart reading
- CandlestickA bar showing the open, high, low and close of a period; its body and wicks tell who won.
- Support and resistancePrice zones where falls (support) or rises (resistance) stopped before.
- TrendThe general direction of price: higher highs and higher lows in an uptrend, lower ones in a downtrend.
- Market structureThe sequence of swing highs and lows that shows whether the market is trending up, down or ranging.
- Break of structure (BOS)When price breaks the last swing high in an uptrend (or low in a downtrend), confirming the trend continues.
- Change of character (CHoCH)The first break of structure against the current trend: an early sign it may be turning.
- LiquidityThe orders waiting in the market, especially stops clustered above highs and below lows.
- Fair value gap (FVG)A three-candle imbalance left by a fast move, which price often comes back to fill.
- Order blockThe last opposite candle before a strong move, seen as a zone where large orders were placed.
Indicators
- Moving average (EMA/SMA)The average price over a number of candles, drawn as a line that smooths out the noise.
- RSI (Relative Strength Index)A 0 to 100 oscillator of momentum; above 70 is called overbought, below 30 oversold.
- VWAPThe average price of the day weighted by volume, the benchmark institutions trade against.
- Bollinger BandsBands two standard deviations around a 20-period average that widen and narrow with volatility.
- ATR (Average True Range)The average size of a candle over a period: a simple measure of how much the market moves.
Risk and performance
- Risk per tradeThe money you lose if the stop is hit, usually set as 0.5% to 1% of the account.
- Risk-reward ratio (R:R)What a trade can make compared to what it can lose: risking 1 to make 2 is 1:2.
- DrawdownThe fall of the account from its highest value, in money or percent.
- ExpectancyThe average result per trade over many trades, in R: what a strategy is worth.
- BacktestTesting a strategy's rules on past charts to see how it would have performed.
Trading styles and accounts
- ScalpingVery short trades, from seconds to minutes, aiming for small moves many times a day.
- Day tradingOpening and closing trades within the same day, with no positions held overnight.
- Swing tradingHolding trades for days to weeks to catch a larger move, using the 4-hour and daily charts.
- Demo accountA practice account with virtual money and real prices.
- Prop firmA company that funds traders who pass its challenge, in exchange for a share of the profits.
- Islamic (swap-free) accountAn account with no overnight interest (swap), offered by some brokers.