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10 Common Trading Terms That Even Non-Traders Should Understand

Do you understand these trading terms?

 

The financial trading world is one that is filled with complex terms. With many things to know, strategies to follow and patterns to recognise, it’s no surprise that most retail investors attempt to draw a line between what they need to know for simple investing, compared to what full-time traders have to know.

Below is a list of 10 common trading terms that you should know, even if you not into trading.

# 1 Candlesticks

If you ever invested in stocks, bonds or indices, you would have come across what is called a candlestick chart.

There are two main types of candlesticks. White (or green) candlesticks and black (or red) candlesticks.

When looking at a daily chart, a white candlestick indicates that the asset closed at a higher price today compared to yesterday. A black candlestick indicates that the asset close at a lower price today compared to yesterday.

The body of the candlestick indicates the opening and closing price of the stock while the shadows (i.e. the vertical lines above and below the candlestick) indicate the respective high and low of the stock for that particular day.

candlestick

Traders have all sorts of candlestick patterns to base their trading strategies on. You may hear terms like Evening Star, Three Black Crows and Three-Line Strike being discussed by traders.

You do not need to base your investment strategy on these candlesticks patterns, but it is definitely useful to at least know how candlestick charts work.

# 2 Moving Average (MA)

Moving Average (MA) looks at the average price of an asset over a specified time period and it can be used to examine the trend of price movements while lessening the impact of random price spikes.

A simple technique that both investors and traders alike sometimes practise is to look at short-term MA and long-term MA. Short term MA refers to the average price over a shorter period of time (typically 5, 10 or 20 days). Long term MA refers to the average price over a longer period of time (typically, 50, 100 or 200 days).

When the short-term MA crosses the long-term MA, some investors/traders see this as a signal for a change in trend. If you are interested to learn more about this, we suggest that you read up more about technical analysis.

# 3 Spread

A spread refers to the difference between the buying and selling price of an asset. Most brokers will charge a spread when you buy or sell from them.

For example, if you are trading foreign exchange (Forex) on the EUR/USD currency pair, you would see a table similar to this from the Forex platform that you are using. Here is an example from IG for the EUR/USD.

forex-spread-ig

Source: IG

If you sell EUR for USD, you will get USD 1.12268 for every 1 Euro that you sell. If you buy EUR with USD, you will pay USD 1.12274 for every 1 Euro.
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Obviously, you pay slightly more when you buy Euro get slightly less when you sell Euro. This difference is known as the spread.

Due to the large volume of foreign currency being exchanged, spread from online Forex brokers are a lot smaller compared to what you would be used to from your traditional moneychanger.

# 4 Over The Counter (OTC) Markets

Over The Counter (OTC) markets are where financial assets are traded directly between two parties. This trading takes place outside of formal exchange and are usually done electronically through a dealer network.

For example, instead of buying a stock through a centralised exchange such as SGX, investors or traders may choose to take up a position through the OTC market. They may purchase a Contract For Difference (CFD), which allows them to open a position without owning any assets directly on the exchange.

Some asset classes such as Forex and options are mainly traded via OTC markets.

Since they do not directly own any underlying asset, the counterparty (i.e. party on the other side of the transaction) is important. Similar to how we would want to keep our money with a reputable bank, we should consider using reputable brokers who we know well to minimise counterparty risk. Such brokers will include big international companies like IG.

Read Also: 7 Factors To Consider Before Opening A Trading Account

# 5 Contracts For Difference (CFDs)

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As the name suggests, CFDs allow you to open a position for the difference in price of an asset from the time the CFD is bought, to when the buyer closes the position.

CFDs can be used as a tool for investors to hedge their position. For example, if you currently own some Singtel shares, but are worried about the short-term volatility of the Singtel shares, you can buy a short position on Singtel using CFDs, instead of selling the shares outright.

This way, the losses you make if the counter falls will be offset by the profits you make through the CFDs you bought.

# 6 Currency Pairs

Primarily a Forex term, currency pairs refer to the exchange of one currency for another. Popular currency pairs include the EUR/USD, USD/JPY and GBP/USD.

You can check out what are some of the most popular currency pairs and the current exchange rate for these currencies.Advertisement

# 7 Options

Options are probably the most misunderstood financial instruments among the retail investing community. They get a bad rep, simply because most people don’t understand them at all.

In simple terms, options are nothing more than contracts between parties that bet on 2 different outcomes. For example, if you buy a “call” option, you are betting that the price of a stock will be above the strike price by the specified time period of the option. The opposite applies for “put” options. It’s advisable for you to read more on options trading before getting started.

Read Also: Guide To Options (Part One)

# 8 Basis Point

You may have heard about basis point whenever you read about US interest rates, or engage in discussion with your knowledgeable friends who are involved in bond or Forex trading.

Basis point is simply a unit of measurement for interest rate. One basis point refers to 1/100 of 1% (or 0.01%). 100 basis points equate to 1 percentage point (1%).

Basis Point Percentage (%)
1 0.01%
10 0.1%
100 1%

 

Yes, it’s that simple.

Even if you are a long-term investor who doesn’t deal with bond trading or Forex, it’s still good to understand what basis points refer to, since interest rates do affect all types of asset classes.

# 9 Futures

A futures contract is a contract between two parties where both parties agree to buy or sell a particular asset at a predetermined price, at a specific date in future in an exchange..

While investors may not bother to trade future contracts, it’s worth noting that futures contracts are a way for companies to hedge, particular for companies that deal in commodities.

For example, an oil and gas company may buy future contracts on oil in order to hedge their business against the risk of oil price fluctuating.

# 10 Day Traders

Day traders are individuals who buy and sell financial assets within the same trading day. They avoid holding overnight positions and commonly trade in instruments such as currencies, futures and options.

Due to the short period that they hold assets for, most day traders rely on technical analysis (i.e. studying of trends based on past price movement) more than fundamental analysis (i.e. studying of companies based on financial results). They also sometimes employ leverage so that they are able to increase their positions. Day traders monitor their position very closely and have systematic ways of cutting their losses when a trade moves against them.

Day traders can be seen as the direct opposite of long-term investors.

Read Also: What Is Leveraged Trading And How Does It Work In Singapore?

Unlike investing, trading is not necessarily for everyone. Understanding the basics is the must even before you consider whether or not it is for you. Educating yourself is a must. Thankfully, there is a wealth of information available on the internet. You can educate yourself first through some of the programmes offered by IG before you think of getting started.Advertisement

This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2015). All views expressed in the article are the independent opinion of DollarsAndSense.sgAdvertisement

From now till 30 June 2017, you can receive up to $288 when you open a trading account with IG and start trading indices. Find out more about how you can qualify for this indices trading promotion here.

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