I decided to divide this Glossary section into two parts. The first is a set of definitions that are crucial to understand before you read my daily market analysis blog posts. It’s really important to understand these words and phrases as they crop up all of the time in the world of FTSE Day Trading!
The second set of definitions titled ‘Useful definitions for trading’ that appear further down this page are specific to active trading, and again it’s imperative that you understand each word or phrase before you place your first trade.
If you’re new to trading then I always recommend running a demo trading account for as long as it takes before you feel comfortable with the ins and outs of trading the FTSE 100 index. All of these keywords will crop up in a demo account, and that’s the best place for beginner’s to start before trading live!
There are of course hundreds of words and phrases that relate to trading but the ones below are those that I feel are most important to understand from day one.
Glossary – Understanding the terminology/analysis
Associated with increased investor confidence, a bull market is a financial market of a group of securities in which prices are rising or are expected to rise
Associated with reduced investor confidence, a bear market is a financial market where the prices of securities are falling or are expected to fall
A price level above which it is deemed difficult for the market to rise
A price level below which it is deemed difficult for a security or market to fall. This tends to be where there is more demand than supply at a given point
A technical indicator derived by calculating the numerical average of a particular stock’s high, low and closing prices
A statistical indicator that represents the total value of the stocks that constitute it e.g. the FTSE and Dow Jones are both indices
A price channel
A channel that typically shows the trailing 20-day high and 20-day low. It works very simply; you buy when the weekly closing price moves up to a new 20-period high, and sell when the weekly closing price moves down to a new 20-period low. I.e. when the price moves out of its channel, trade in the direction of the new trend
A technical analysis technique in which lines are plotted to standard deviations above and below a moving average, and at the moving average itself. Because standard deviation measures volatility, these bands will be wider during increased volatility and narrower during decreased volatility. Some consider a market which approaches the upper band to be overbought, and a market which approaches the lower band to be oversold
Leverage is the ratio between the initial outlay and the equivalent position in the underlying market. Leverage is the realisation that a large return can be obtained from a relatively small outlay with risks attached
Hedge or hedging
Reducing the risk of an outright position in one market by the buying or selling of contracts in a similar or derivative market
A calendar used by traders for tracking the occurrence of market-moving events and results. Investors research the date and time of a specific event and pay close attention to the announcement because of the high probability that it will affect the direction of the market. http://www.dailyfx.com/calendar/
Useful definitions for trading
Long / buy
A bet or trade taken in anticipation of a rising market, an ‘up bet’. To go Long means to Buy
Short / sell
A bet or trade taken because you believe the market will fall. To go Short means to Sell
The difference between the Sell and Buy price
The bet size per unit of movement. This is not the total amount you could lose
A pre-determined level at which you can close a trade to limit your loss if the price moves against you
Stops are orders to sell below, or buy above the current price. They can be used to initiate a new position if the price breaks through a perceived support / resistance level
A more complex stop-loss order in which the stop loss price is set at a fixed percentage or number of points below the market price. If the market price rises, the stop loss price rises proportionately, but if the stock price falls, the stop loss price doesn’t change. This technique allows you to set a limit on the maximum possible loss without setting a limit on the maximum possible gain
This is a controlled risk bet where you are guaranteed to exit your position at your chosen level irrespective of volatility. You may incur a small initial charge
For a small fee you can protect an order against the risk of any market gaps
A long or short position whose values will change with a change in position
Open Trade Equity (OTE)
Unrealised profit or loss on an open position
Support and resistance levels plotted on the daily chart, using linear regression formulas over 10, 20 and 50 days. Available from www.biancatrends.com
Similar to the Bianca channels, but devised by Gilbert Raff to calculate support and resistance levels. I use these on a daily chart as well, also over 10 and 20 days. The Raff channel is a more scientific approach to defining a trend. It uses the mathematical technique of least-squares regression to determine the central trend and a channel on either side of it.
I use a mixture of simple, exponential and Hull moving averages on my charts. They give slightly different values depending on which one you use, but generally show you the average price of an instrument over a specific time period. For example, a 10 period moving average is the close value of 10 candles added together and divided by 10 to give an average price across those 10 candles.
A rising or falling channel, with the price typically constrained within the boundaries of that channel. Imagine railway lines – thats the channel, short when the prices hits the top of a channel, go long when the price hits the bottom of a channel
High of the day – the highest price achieved during that days session
Low of the day – the lowest price achieved during thats days session