Trading terms explained simply
The most important trading terms, each explained in two sentences. Search for a term or jump straight to the right place using the letters. Where there is more on the topic on my site, you will find a link.
73 terms
A
- Ask
- The price at which you can buy. It is always slightly above the bid; the difference is the spread.
- ATR (Average True Range)
- An indicator that measures the average range of a market over a certain number of candles. Many traders use the ATR to adjust their stop distance to the current volatility.
B
- Backtest
- You test a strategy on historical price data before you put real money at stake. A backtest shows whether an idea would have worked in the past, but does not guarantee future profits.
- Bear market
- A longer phase of falling prices. As a rule of thumb, the term is used when a market has lost more than 20 % from its high.
- Bid
- The price at which you can sell. It is always slightly below the ask.
- Break of Structure (BOS)
- The price breaks a previous high in an uptrend or a previous low in a downtrend. This confirms that the existing trend is continuing. More on this
- Break-even
- The point at which a trade brings neither profit nor loss. “Moving the stop to break-even” means setting the stop-loss to the entry price.
- Breakout
- The price leaves a range or overcomes an important high or low. A genuine breakout is usually accompanied by increasing momentum.
- Bull market
- A longer phase of rising prices. The opposite is the bear market.
C
- Candlestick chart
- A chart type in which each candle shows the open, high, low and close of a period. The body and wicks reveal at a glance who was in control during that time.
- CFD (contract for difference)
- A contract with which you bet on rising or falling prices without owning the underlying asset. You trade with leverage and only deposit part of the position value as margin. More on this
- Change of Character (CHoCH)
- The first break in market structure against the previous trend, for example a broken low in an uptrend. It is seen as an early warning signal of a possible trend reversal. More on this
- Consolidation
- A phase in which the price moves sideways in a narrow range after a move. The market is gathering strength for the next impulse.
- Contract
- The trading unit for futures and CFDs. A contract defines how much money one point of price movement is worth. More on this
D
- Day trading
- You open and close your positions within one trading day. Nothing stays open overnight, so there are no financing costs.
- Demo account
- A practice account with play money and real prices. You can use it to test the platform and your strategy without financial risk.
- Drawdown
- The decline of your account from its last peak to the following low, usually given in per cent. The larger the drawdown, the more profit you need to recover it. More on this
E
- Economic calendar
- An overview of upcoming economic data and central bank events with time and expected importance. Around important events, prices can move very quickly and sharply. More on this
- Equity
- Your current account value including all open profits and losses. Equity changes with every price movement of your open positions.
- Expected value
- The average profit or loss per trade over many trades. It results from the hit rate and RRR and decides whether a strategy is profitable in the long run. More on this
F
- Fair Value Gap (FVG)
- A price gap across three candles that forms when the market moves very quickly in one direction. The price often returns to this area, which is why it is seen as a possible entry zone. More on this
- Fakeout (false breakout)
- The price briefly breaks above a high or below a low and then immediately turns back. Traders who bet on the breakout are stopped out.
- Financing costs (swap)
- Charges or credits for CFD positions you hold overnight. They depend on interest rates, the market and the direction of your position. More on this
- FOMO (fear of missing out)
- The fear of missing a price move. It tempts you to enter a trade too late and without a plan.
- Future
- An exchange-traded forward contract with a fixed contract size and a fixed expiry date. Futures are traded on futures exchanges such as Eurex or the CME.
G
- Gap
- A price jump between the close of one candle and the open of the next, with no trading in between. Gaps often form overnight or over the weekend.
H
- Hedging
- You protect an existing position with an opposite position. This limits losses if the market moves against you.
- Higher high / lower low
- A higher high and a higher low mark an uptrend. Lower lows and lower highs mark a downtrend. More on this
- Hit rate
- The share of your winning trades in all trades, in per cent. On its own it says little; what matters is the combination with the RRR. More on this
K
- Key level
- A price level at which the market has reacted clearly in the past, for example a previous day’s high or a prominent low. You expect reactions at such levels again. More on this
L
- Leverage
- Leverage indicates how large your position is in relation to the margin you have deposited. With leverage of 20, €1,000 moves a position of €20,000, and gains and losses have a correspondingly stronger effect. More on this
- Limit order
- An order that is only executed at your specified price or better. You use it to buy below the current price or sell above it. More on this
- Liquidity
- It describes how easily a market can be traded without moving the price much. In price action, liquidity also means the stop orders sitting above highs and below lows.
- Liquidity sweep
- The price briefly runs above a high or below a low, takes out the stop orders there and then turns in the opposite direction. Many price action traders wait for exactly this move for their entry. More on this
- Long
- You buy and bet on rising prices. You make money when the price rises above your entry.
- Lot
- The standardised trading size, especially for currencies and commodities. In forex, a standard lot corresponds to 100,000 units of the base currency.
M
- Margin
- The deposit you have to put up for a leveraged position. It is not a cost but is tied up in your account for the duration of the trade. More on this
- Margin call
- A warning from your broker that your account value is no longer enough to cover the margin of your open positions. If you do not react, positions are closed automatically. More on this
- Market order
- An order that is executed immediately at the next available price. You are sure of execution, but not necessarily of the price you saw. More on this
- Market structure
- The sequence of highs and lows from which you can tell whether a market is rising, falling or moving sideways. It is the basis of every price action analysis. More on this
N
- Negative balance protection
- The obligation to cover losses that exceed your balance does not apply to retail clients trading CFDs in the EU, so your account cannot go into the red. More on this
O
- Order block
- The last opposite candle before a strong price move that breaks the market structure. If the price returns to this zone, many traders expect a reaction there.
- Overtrading
- You make too many trades, often out of boredom, greed or frustration. This increases costs and usually lowers the quality of your entries.
P
- Pip
- The smallest common price unit in forex, the fourth decimal place for most currency pairs. For EUR/USD, one pip is a move of 0.0001.
- Point
- The price unit for indices such as the DAX or Nasdaq. If the DAX rises from 24,000 to 24,001, that is a move of one point.
- Position size
- The number of contracts or lots you trade. You calculate it from your risk per trade and your stop distance. More on this
- Pre-market
- Trading before the official opening of the exchange. Pre-market prices show where the market is likely to open. More on this
- Price action
- The analysis of the pure price path without classic indicators. You read highs, lows, candles and market structure to make decisions. More on this
- Pullback
- A short countermove within a trend. Many traders use pullbacks to enter in the direction of the trend at a better price.
R
- R (unit of risk)
- 1 R is the amount you risk on a trade. A profit of 2 R means you have earned twice your risk. More on this
- Range
- A sideways phase in which the price swings between an upper and a lower boundary. A breakout from the range often starts the next trend move.
- Resistance
- A price zone where sellers have entered the market in the past and stopped a rise. If it is broken, resistance often turns into support.
- Revenge trading
- You try to win back a loss immediately with the next trade. These trades come from frustration and often end in even bigger losses.
- Risk management
- All the rules you use to limit your losses: risk per trade, stop-loss, position size and daily limit. In the long run it decides your success more than the perfect entry. More on this
- Role reversal
- Broken support becomes resistance, or broken resistance becomes support. A role reversal consists of three steps:
1. Breakout
2. Pullback to the broken level
3. Move in the direction of the breakout
More on this in the blog post Old but Gold. See also: Change of Character (CHoCH) - RRR (risk-reward ratio)
- The ratio between the possible profit and the risked loss of a trade. With an RRR of 2 : 1, your target is twice as far away as your stop. More on this
S
- Scalping
- A very short-term trading style with many trades, often lasting only seconds to a few minutes. The aim is small price moves with a tight stop.
- Session
- A trading segment of the day, for example the Asian, European or US session. At the start of a session, volume and volatility usually rise significantly. More on this
- Short (short selling)
- You sell first and bet on falling prices. You make money when the price falls below your entry.
- Slippage
- The difference between the price you expected and the price at which your order was actually executed. It occurs mainly in fast markets and around important news. More on this
- Spread
- The difference between the buying price (ask) and the selling price (bid). The spread is part of your trading costs and is incurred on every trade. More on this
- Stop order
- An order that only becomes active when the price reaches a certain level and is then executed at the next available price. With a buy stop order you buy above the current price, with a sell stop order you sell below it. More on this
- Stop-loss
- An order that closes your position automatically when the price reaches a defined level against you. With it you limit your loss before you open the trade. More on this · In-depth article
- Stop-out (forced liquidation)
- Your broker closes positions automatically when your account value falls below a certain proportion of the required margin. For retail clients in the EU this threshold is 50 %. More on this
- Support
- A price zone where buyers have entered the market in the past and stopped a decline. If it is broken, support often turns into resistance.
- Swing trading
- You hold positions for several days to weeks and aim for larger price moves. This requires wider stops and less time in front of the screen than day trading.
T
- Take-profit
- An order that automatically closes your position at a profit as soon as your price target is reached. This way you take profits even when you are not sitting in front of the chart.
- Tick
- The smallest possible price movement of an instrument. In the Nasdaq future, one tick is 0.25 points.
- Timeframe
- The period that a single candle on the chart represents, for example 5 minutes, 1 hour or 1 day. Higher timeframes show the overall trend, lower ones the exact entry.
- Trailing stop
- A stop-loss that automatically follows the price in the direction of profit. It locks in accumulated profits while still letting the trade run.
- Trend
- The overall direction of a market. An uptrend consists of rising highs and lows, a downtrend of falling ones. More on this
V
- Volatility
- The measure of a market’s range of fluctuation. High volatility means large price moves in a short time, and therefore more opportunity but also more risk.
- Volume
- The number of contracts or shares traded in a given period. High volume shows that many market participants are involved in a move.
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The explanations are deliberately short and do not replace investment advice. CFDs are complex instruments and come with a high risk due to leverage.