– LESSON 9 –
TRADING TERMS & TRADING STYLES
Here you have a dictionary with the most used trading terms. If you don’t understand a trading term when learning, then you can visit this lesson and search for the meanings.
TECHNICAL ANALYSIS (TA) is a trading discipline used to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. TA is one of the methods that traders use to help them identify potential trading opportunities.
Being long (buying) is a BULLISH action for a trader to take. Being a bull or having a bullish attitude stems from a belief that an asset will rise in value. Those who buy (opening long positions) are bulls.
Being short (selling) is a BEARISH action for a trader to take. Being a bear or having a bearish attitude stems from a belief that an asset will lose its value. Those who sell (opening short positions) are bears.
When buying an asset is called that you are opening a ‘LONG POSITION’ or simply ‘LONG’. Investors are buying a stock, commodity, or currency with the expectation that it will rise in value.
When selling an asset, with the intention of repurchasing it or covering it later at a lower price, it is called a ‘SHORT POSITION’ or simply ‘SHORT’. Investors are selling a stock, commodity, or currency with the expectation that will decrease in value.
The ENTRY level or entry point refers to the price at which an investor buys or sells a stock, commodity, or currency.
STOP-LOSS refers to a particular price level. If the market goes to that level the position is automatically closed in a loss. Traders pre-define the loss before entering a trade. That’s the most important tool that a trader can use to control the risk.
TAKE PROFIT (TARGET)
TAKE-PROFIT refers to a particular price level. A trader predefine the TP level before entering a position. When the market reaches that level the position is automatically closed in profit.
In Technical Analysis, a SUPPORT LEVEL is a level at which the price will tend to stop and reverse upward. Basically, the price will decrease till it reaches the support and then it bounces up again. Supports are always below the price level.
In Technical Analysis, a RESISTANCE LEVEL is a level at which the price will tend to stop and reverse downward. Basically, the price will increase till it reaches the resistance and then it goes back down. Resistances are always above the price level.
When the price is moving in one overall direction, such as upward or downward, that is called a TREND. A market can also trend sideways, forming a range between support & resistance.
In Technical Analysis, a TRENDLINE is a line connecting more than two lows or two highs which shows the trend of the market. Trendlines are a visual representation of support and resistance in any time frame. They show the direction of the price.
A RANGE occurs when the price is going between support and resistance. The lows will define the bottom of the range and the highs will define the top. When in range, the price will remain in rectangular shape.
BREAKOUTS appear when the price is moving outside of a defined support or resistance. Price can break out from trendlines, ranges, triangles, rectangles, and any other chart patterns. Usually, the price will continue its moves in the direction of the breakout.
A FALSE BREAKOUT is when the price temporarily moves thru resistance/support but then it retraces back to where it starts. Obviously, it is the opposite of a breakout.
The BULL TRAP is referring to a false signal also known as FALSE BREAK OUT. It usually appears when the price is breaking above the resistance but then it is rejected back below. This move is stopping all the buyers who have bought after the break out.
The BEAR TRAP is the opposite of a bull trap. Meaning that the price was breaking through support and many traders opened short positions. Then the price is rejected and it came back above the support level. In this situation, all the traders who had opened shorts were stopped out.
The term ‘SWING LOW’ is used in Technical Analysis to describe the lower point of the price before starts rising. A swing low is created when a low is lower than any other surrounding prices in a given period of time.
The term ‘SWING HIGH’ is used in TA and it refers to a peak reached by the price before declining and starts dropping. It is the highest price of the move. Higher swing highs are associated with uptrends. (uptrends are recognized by seeing the price making higher highs and higher lows).
An IMPULSE wave describes a strong move of the price. It can refer to upward movements in uptrends or downward movements in downtrends. The impulse wave is the movement in the direction of the main trend and it is followed by a corrective wave which is a short counter-trend move.
CORRECTIVE WAVE (RETRACEMENT)
The CORRECTIVE wave is also known as ‘RETRACEMENT/CORRECTION’. It appears after an impulse wave. Its move is counter the trend. The best way to measure the corrective wave is by using the Fibonacci Retracement Tool.
FOREX CURRENCY PRICES
One currency is traded in relation to another in the forex market. It means one unit of some currency may be exchanged for a particular number of units of another currency.
BID is the lower price at which a trader sells the first currency in a pair (JPY/CHF means selling JPY).
ASK is the higher price at which a trader buys the first currency in a quote (EUR USD means buying EUR).
The difference between “Bids” and “Asks” is called the SPREAD. Spread is a payment for trading on Forex and a so-called commission of brokerage companies.
SWAP is a simultaneous purchase and sale of identical amounts of one basic currency with two different value dates. Swaps can be both negative and positive. It depends on the difference between interest rates set by the central banks, which issue the traded currencies. As an example, when traders purchase USD/JPY in fact, they get the currency (USD) with the highest interest rate (0.50%) and sell the currency (JPY) with the low interest rate (-0.10%). Every day the broker must add percentage on funds involved in trades until the position is closed. Conversely, if the trader opens a short position (SELL) then the trader will have to pay.
CONSOLIDATION appears after a big move (up or down) and price tends to stop and ‘rest’ in a small range before it continues to rise or to fall. The consolidation phase develops in a small range and typically offers few trading opportunities.
ACCUMULATION phase starts when institutional investors are usually entering their position. The price moves slowly in this phase. The accumulation phase often falls into the end of a downtrend. In this phase price moves under a range.
The DISTRIBUTION phase is opposite to the accumulation phase. At this stage, the market tends to be overbought. The distribution phase can be the initial start of a bear market.
PRICE ACTION is defined as the price movement over a specific amount of time. The price action trading is a method that allows a trader to read the market based on the recent and actual price movements.
CONFLUENCE is when you have two or more levels come together at a certain point on your chart. It can be a support level meeting a Fibonacci level (0.5 or 0.618 as an example), or it can be the trendline meeting a support line, etc.
CONSISTENCY refers to applying the same set of rules over and over again. Read this article for better understanding what consistency means in trading.
Next, let’s see all kinds of trading styles so you can familiarize yourself with them.
Let’s see all types of trading:
- MOMENTUM TRADING
- DAY TRADING
- SWING TRADING
- POSITION TRADING
SCALPING is a short-term trading style. Traders who like scalping usually take action on smaller time frames. They define the trend using the 1h timeframe and trigger their buying/selling orders on 15m and 5m.
2. MOMENTUM TRADING
MOMENTUM TRADING refers to traders that go where the action is. They are trying to capture profits on assets that are making significant price moves, up or down.
3. DAY TRADING
DAY TRADING is also a short-term trading style. Usually, the day traders define the trend using the 4h/1h timeframe and trigger their buying/selling orders on the 15m/5m timeframe.
4. SWING TRADING
SWING TRADING is a medium-term trading style. They are using the Daily timeframe to define the direction of the trend but they trigger their buying/selling orders on a 4h timeframe.
5. POSITION TRADING
POSITIONS TRADING is a long-term trading style. Traders who like this type of trading usually define the trend on a Monthly/Weekly timeframe and take action using the Daily timeframe.
Congratulations, now you are more familiar with the most used trading terms.
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