Trading Terminology For Beginners

 

  Trading Terminology For Beginners

Compiled by Jason Sen, Randall Liss & Jill De Quincey www.DayTradeIdeas.com

  • Ask (Asked or Offered Price) – The lowest price at which a trader can buy from the market, broker or market maker.
  • Bar Chart – A price chart where each bar represents the range of price movement over a given time period and shows the high, low and close of that time period.
  • Bear Market or down trend – A market in which prices are generally declining.
  • Bid – The highest price anyone has declared the market or a broker will pay at a given time.
  • Bounce – A sudden rebound in the market (or a stock) typified by a strong upward move directly after a strong down move.
  • Break Point – The area at which the price breaks below or above a trend line
  • Bull Market or up trend – A market in which prices are generally rising.
  • Bullish – Term used to describe rising prices.
  • Buying Power – In a margin account, the maximum monetary amount a client can purchase or sell short without having to deposit additional funds.
  • Candlestick Chart A price chart where each bar represents the range of price movement over a given time period and shows the high, low and close of that time period. The colour of the bar shows the direction of the market for that time period
  • Day Chart – A chart on which each bar represents the time period of one day
  • Day Order – An order that, if not executed on the day it is entered, expires at the close of that day’s trading.
  • Day Trade – The buying and selling of the same security within the same day.
  • Fibonacci Ratio – A set of numbers used in the measurement of movements in prices that allow the identification of support and resistance levels and targets
  • Good-Til-Canceled (open) Order (GTC) – An order that does not expire at the end of the day it is entered. Instead, it remains in force until it is either executed or canceled by the trader.
  • Hit the Bid – This is the term used for when traders sell to the current posted bid price.
  • Limit Order – Sets the highest price the customer is willing to pay for a buy order, or the lowest price the customer is willing to accept for a sell order. Buy orders may be executed at or below the limit price, but never higher. Sell orders may be executed at or above the limit price, but never lower.
  • Long Position – A trader has bought securities or contracts that are either fully paid for (a cash account) or partially paid for (a margin account).
  • Margin – Trading products such as futures, options & spread bets do not require full payment when a position is opened. A broker will require a Margin as security to allow the position to be opened.
  • Margin Call – If an open position moves in a loss a broker may request an increase in margin to allow the position to remain open and provide cover against future increased losses.
  • Market Order – An order that is executed as quickly as possible at the best price available. During market hours, this means orders for widely traded securities will usually execute at or close to the current quotation. Buy orders should execute at or close to the “ask” price and Sell orders should execute at or close to the “bid” price.
  • Market Maker – A broker-dealer firm that accepts the risk of buying or selling in order to facilitate trading in a security & therefore provides liquidity. Each market maker competes for customer order flow by quoting buy and sell prices in the open market.
  • Minute Chart – A chart on which each bar represents the time period of one minute
  • Moving Average – A moving average uses price data over a specified time period to smooth out short-term fluctuations and highlight longer-term trends or cycles.
  • Rally (recovery) – An upward movement of prices. Opposite of a sell-off.
  • Range – The high and low prices for the period.
  • Resistance Level – A price at which prices may tend to stop upward momentum and hold below this level. Traders may use a resistance level to enter a short position or exit a long position.
  • Short Position – A position in a customer’s account in which the customer has sold to open a position. A trader can sell something ‘short’ that he does not already own in order to buy it back at a later time, hopefully at a cheaper price.
  • Short Sale – The sale of securities that are not owned or that are not intended for delivery. The short seller “borrows” the stock to make delivery with the intent to buy it back at a later date at a lower price.
  • Spread – The difference between the bid and offer sides of a quote.
  • Stop (Order) – An order that is automatically executed when the price is reached or passed. Buy stops are entered above the current market price; sell stops are entered below it. Stop orders can be used to enter a position once the price has moved beyond a certain level in the hope that the trend continues or they can be used to exit a position a position once the price has moved beyond a certain level to limit losses.
  • Stop Loss – An order that is automatically executed when the price is reached or passed in order to limit a loss on a trade. A Buy Stop Loss order will exit a short sale. A Sell Stop order will exit a long position.
  • Stop Trigger – The price at which your stop order is executed. Once the price trigger is hit the order will be executed at the best price. This may not be at the exact price the stop order was entered if the market is moving quickly.
  • Support Level – A price at which the price may tend to stop its momentum when moving downward. Traders may use a support level to enter a long position or exit a short position.
  • Trend – The general direction over a specified period, of the movement in prices. There are three trends. Prices can trend upwards, downwards or sideways with in a range.
  • Trend Line – A line joining two or more points on a chart to demonstrate the direction of the trend. The Trend line will also provide support and resistance levels
  • Volatility – The degree of price fluctuation usually expressed as a variance or standard deviation.

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ECONOMIC NUMBERS

BUILDING PERMITS: The number of new residential construction projects that have begun during any particular month. The New Residential Construction Report, commonly referred to as “housing starts,” is considered to be a critical indicator of economic strength. Housing start statistics are released on or around the 17th of each month by the U.S. Commerce Department. The report includes building permits, housing starts and housing completions data. Surveys of homebuilders nationwide are used to compile the data.

CAPACITY UTILIZATION: A metric used to measure the rate at which potential output levels are being met or used. Displayed as a percentage, capacity utilization levels give insight into the overall slack that is in the economy or a firm at a given point in time. If a company is running at a 70% capacity utilization rate, it has room to increase production up to a 100% utilization rate without incurring the expensive costs of building a new plant or facility.

CONSUMER PRICE INDEX: A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance.

FOMC: The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (the Fed), is charged under United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasury securities). It is this Federal Reserve committee which makes key decisions about interest rates and the growth of the United States money supply.

GDP (Gross Domestic Product): The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

HOUSING STARTS: The number of new residential construction projects that have begun during any particular month. The New Residential Construction Report, commonly referred to as “housing starts,” is considered to be a critical indicator of economic strength. Housing start statistics are released on or around the 17th of each month by the U.S. Commerce Department. The report includes building permits, housing starts and housing completions data. Surveys of homebuilders nationwide are used to compile the data.

INDUSTRIAL PRODUCTION: A measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of GDP (Gross Domestic Product), they are highly sensitive to interest rates and consumer demand. This makes Industrial Production an important tool for forecasting future GDP and economic performance. Industrial Production figures are also used by central banks to measure inflation, as high levels of industrial production can lead to uncontrolled levels of consumption and rapid inflation.

JOBLESS CLAIMS (Initial/Continuing): Refers to those individuals filing for unemployment benefits for the first time. Continuing jobless claims refer to those who have already filed for two or more consecutive weeks. Changes in the number of jobless claims from week-to-week tend to reflect changes in the overall unemployment rate. For example, an increase in the unemployment rate directly reflects an increase in the number of jobless claims.

LEADING INDICATORS: An index published monthly by the Conference Board used to predict the direction of the economy’s movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. These 10 components include: 1. the average weekly hours worked by manufacturing workers 2. the average number of initial applications for unemployment insurance 3. the amount of manufacturers’ new orders for consumer goods and materials 4. the speed of delivery of new merchandise to vendors from suppliers 5. the amount of new orders for capital goods unrelated to defense 6. the amount of new building permits for residential buildings 7. the S&P 500 stock index 8. the inflation-adjusted monetary supply (M2) 9. the spread between long and short interest rates 10. consumer sentiment

NAT GAS STORAGE CHANGE (EIA): The U.S. Energy Information Administration (EIA) weekly estimate of working natural gas volumes held in underground storage facilities at the national and regional levels. Changes in these gas inventories on a weekly basis primarily reflect net withdrawals or injections. The report is generally reported every Thursday at 10:30am EST. Unexpected changes such as above-average withdrawals or injections can have an immediate impact on natural gas prices.

NEW YORK EMPIRE MANUFACTURING INDEX: Economic indicator that uses survey results acquired from New York City manufacturing companies to determine how manufacturing activity is performing during a given time period. The primary reason for the survey is to receive a current reading on sentiment among the manufacturers polled. Since the index only focuses on NY, the results are not the most accurate depiction of the entire United States, but the index is monitored by investors nonetheless.

PRODUCER PRICE INDEX (PPI): The official measure of producer prices in the US. It measures average changes in prices received by domestic producers for their output. The PPI was known as the Wholesale Price Index, or WPI, up to 1978. All of the physical goods-producing industries that make up the U.S. economy are included, but imports are not.

PHILADELPHIA FED REPORT: Formally known as the Business Outlook Survey and sometimes abbreviated as BOS, is a monthly survey produced by the Federal Reserve Bank of Philadelphia (informally known as the Philadelphia Fed) which questions manufacturers on general business conditions. The index covers the Third Federal Reserve District (the jurisdiction of the Philadelphia Fed), namely covers eastern and central Pennsylvania, the nine southern counties of New Jersey, and Delaware. The report is sometimes also called the Philadelphia Fed Index because it includes reporting of some index values.
REDBOOK CHAIN STORE SALES: Redbook monitors, analyzes and explains trends in retail sales and the consumer economy. The Index provides advance warning of changes in consumer spending that in turn affect the business cycle, sector rotation, inflation and interest rates.

RETAIL PRICE INDEX: One of the two main measures of consumer inflation produced by the United Kingdom’s Office for National Statistics. The Retails Price Index (RPI) was introduced in the U.K. in 1947, and was made official in 1956. Like the better-known Consumer Prices Index (CPI), the RPI tracks changes in the cost of a fixed basket of goods over time, and is produced by combining about 180,000 price quotes for over 650 representative items. However, since the introduction of the CPI in 1996, 12-month inflation in the U.K. has generally been about 0.9 percentage points higher when measured by the RPI, as compared to the CPI.

RETAIL SALES INDEX (RSI): Measures the value and volume of retail sales in Great Britain on a monthly basis. The RSI is a key economic indicator and one of the earliest short-term measures of economic activity. It is used to estimate consumer spending on retail goods and the output of the retail sector, both of which are used in the compilation of the National Accounts.

TIC FLOWS (Treasury International Capital): Select groups of capital which are monitored with regards to their international movement. Treasury international capital is used as an economic indicator that tracks the flow of Treasury and agency securities, as well as corporate bonds and equities, into and out of the United States. TIC data is important to investors, especially with the increasing amount of foreign participation in the U.S. financial markets.

TRADE BALANCE: The difference between a country’s imports and its exports. Balance of trade is the largest component of a country’s balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad.

ZEW ECONOMIC SENTIMENT: A monthly economic survey. The ZEW Economic Sentiment is an almalgamation of the sentiments of approximately 350 economists and analysts regarding the economic future of Germany for the next six months. The survey shows the balance between those analysts who are optimistic about Germany’s economic future and those who are not. 

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OPTION GLOSSARY (let’s define our terms) from RANDALL LISS – THE LISS REPORT

    •    Call option: The right and not the obligation to buy an underlying asset at a fixed price at or within a fixed period of time

    •    Put option: The right and not the obligation to sell an underlying asset at a fixed price at or within a fixed period of time

    ▪    Strike Price: The price at which the underlying asset will be bought or sold if the option is exercised

    •    Exercise: Using the option right to buy or sell the underlying value at the strike price
    
•    Assignment: When the seller of the option is required to buy or sell the underlying value at the strike price
    
•    Physical delivery: The delivery of the actual asset upon assignment
    
•    Cash settlement: Settling in cash the difference between the strike price and the settlement price upon expiration

•    American style: The option may be exercised at any time during its lifetime (usually accompanied by physical delivery)          
•    European style: The option may only be exercised at expiration (usually accompanied by cash settlement)

•    Intrinsic value: The amount the call option strike is lower than the underlying value price or the put option strike is higher than the underlying value price (also known as In the Money)       

•    Out of the Money: There is no intrinsic value. The option price is based solely on time and volatility

THOSE PESKY ECB & FED TERMS

EFSF (European Financial Stability Facility): A limited liability company established by the euro area Member States, on an intergovernmental basis, for the purpose of providing loans to euro area countries in financial difficulties. Such financial assistance is subject to strong conditionality in the context of joint EU-IMF programmes. EFSF loans are financed through the issuance of debt securities, guaranteed up to a total of €440 billion by euro area countries on a pro rata basis.

FANNIE MAE (Federal National Mortgage Association): A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate- and middle-income Americans.

FREDDIE MAC (Federal Home Loan Mortgage Corp): A stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.

FED FUNDS: Excess reserves that commercial banks deposit at regional Federal Reserve banks. Federal funds can then be lent to other commercial banks with insufficient reserves. These loans are made at a relatively low interest rate, called the federal funds rate or overnight rate, and they typically have an extremely short duration: overnight. Federal funds help commercial banks meet their daily reserve requirements. Banks are required to maintain a certain level of reserves based on the amount of customer deposits they are responsible for.

TAF (Term Auction Facility): A monetary policy program used by the Federal Reserve to help increase liquidity in the U.S. credit markets. TAF allows the Federal Reserve to auction set amounts of collateral-backed short-term loans to depository institutions that are judged to be in sound financial condition by their local reserve banks. Participants bid through the reserve banks, with a minimum bid set at an overnight indexed swap rate relating to the maturity of the loans. These auctions allow financial institutions to borrow funds at a rate that is below the discount rate.

TALF (Term Asset Backed Securities Loan Facility): A program created by the U.S. Federal Reserve in November, 2008 to boost consumer spending to help jumpstart the economy. This is accomplished through the issuance of asset-backed securities. The collateral for these securities is made up of student, personal auto and credit card loans. Backing for these loans comes from the (up to) $1 trillion provided by the New York Federal Reserve Bank.

TARP (Troubled Asset Relief Program): A group of programs created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth and prevent foreclosures in the wake of the 2008 financial crisis through purchasing troubled companies’ assets and equity. The Troubled Asset Relief Program initially gave the Treasury purchasing power of $700 billion to buy illiquid mortgage-backed securities and other assets from key institutions in an attempt to restore liquidity to the money markets. The fund was created on October 3, 2008 with the passage of the Emergency Economic Stabilization Act. The Dodd-Frank Act later reduced the $700 billion authorization to $475 billion.

TLTRO: Targeted Longer-Term Refinancing Operations. Designed to enhance the functioning of the monetary policy transmission mechanism by supporting bank lending to the real economy. Under the scheme, banks will initially be able to borrow an amount equivalent to up to 7% of a specific part of their loans in two operations in September and December 2014. After this, additional amounts can be borrowed in further TLTROs, depending on the evolution of the banks’ eligible lending activities in excess of bank-specific benchmarks. 

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