2 per cent rule
A trading strategy where each trade is designed not to lose more than 2% of a trader’s total capital – i.e. the maximum loss is contained. This means that, as the trader’s capital increases or decreases, the size of trades are adjusted accordingly.
ADX (average directional index)
A popular type of technical analysis, used to measure the strength of a trend. On its own it does not indicate whether this is an up or down trend, but an ADX of 20-30 can represent the beginning of a trend. It is often used in conjunction with other data by trend followers.
AGM
Annual general meeting – an annual meeting called by a company at which shareholders are entitled to attend to listen to presentations from the company’s directors and to vote on any major issues that they need to decide on.
Ascending triangle
A common form of technical analysis, using straight lines across troughs and peaks to form an upward sloping triangle. Traders use this to try to predict a break out.
Aussie
Slang term for the Australian dollar (AUD).
Average true range indicator
The ATR is a means of calculating the expected volatility in a market; it can be helpful in deciding how far away from a price a stop loss needs to be set.
Backtesting
Using historic market prices to test a trading strategy.
Beta
A comparison of the behaviour of a particular share or other security against the market overall – it is a measure of volatility, with anything with a beta of above 1.0 being more volatile than the market.
Bid price
Also known as the ‘buy’ price. The price used to open a long trade or close a short trade.
Bid/offer spread
The difference between the buy and sell price, and one of the ways that brokers make their money. Also, wider spreads reflect markets where there is, or is expected to be, less liquidity.
Binary trade/option
A type of trade where you win or lose depending on whether a market price crosses a specific level. Traders usually collect 100% of their winnings, or get nothing.
Bollinger band
A technical analysis term for two lines plotted above and below the moving average. They are meant to help measure the relative volatility of the market concerned.
Break out
When a market price breaks out of a band within which it has been trading for a period of time.
Bund
A government bond issued by the German government. The 10 year bund tends to be viewed as the benchmark price for German debt and coupons.
Cable
A term frequently used to describe the GBP/USD currency market.
Carry trade
Borrowing in a lower yielding market in order to invest in a higher yielding one. A typical example is borrowing in a currency where interest rates are low, to invest in one with higher rates. Borrowing in Japanese yen to invest in markets where debt had higher yields is a good historical example, although this has become harder as interest rates around the world have reached negative levels.
CFD (contract for difference)
A popular over-the-counter (OTC) trading instrument that is now one of the most widely used retail derivatives outside the UK and Ireland. Unlike spread bets, CFDs do incur tax. They allow traders to trade a wide range of markets, including currencies.
Close out
Selling a long position or buying a short position in order to shut down a trade.
Commodity currency
The currency of a country which is particularly reliant on commodities, for example Australia or Canada. The behaviour of this currency is frequently subject to the health of commodity markets. A classic example is the Australian dollar (AUD).
Compounding
A process where interest payments are simply reinvested into the underlying capital, thereby increasing the size of the next payment. A good example is a company that pays dividends to it’s shareholders. those dividends can be reinvested to increase a shareholding
Consumer confidence index
An index that is based on a survey of consumers in a particular country. The index is based on questions about household finances, and whether consumers are planning to make any major purchases in the near future. Economist use it to help determine the likely future strength of an economy.
Core inflation
An inflation measurement that strips out the price of items that change quite a lot, for example foodstuffs that change in price depending on the season. It is used to calculate a more consistent inflation trend.
Counterparty
The party on the other side of your trade or investment. It takes two to tango with any financial transaction. This is usually a bank or broker of some description.
Coupon
The regular payments made by governments to investors that hold their bonds. The term comes from the days when bonds were printed with coupons that investors could cut off and present for payment.
CPI (Consumer Price Index)
A common means of measuring the rate of inflation in an economy, based on a basket of typically purchased goods.
Cross rate
The quoted rate for a currency pair that does not include the USD – e.g. GBP/EUR.
Custodian
A bank that looks after share contracts on behalf of clients. These days, companies do not tend to issue physical paper contracts to shareholders.
Debt to assets ratio
A way to calculate the financial health of a company by dividing its debts by its total assets. The aim is to see how reliant a company is on debt finance.
Debt to equity ratio
A way to calculate the financial health of a company by dividing its debts by the total shareholder equity. This is used to see how difficult it would be for a company to meet its interest payments, particularly if rates go up, or it starts to earn less.
Delta
A measurement of the difference between the change in price of a derivative contract, like a future, and the change in price of the underlying asset.
Demo account
A trial account offered by many trading companies which can be opened with no money deposited. Using a demo account, you will usually only be able to access a restricted list of markets, and often you will have access to the trading platform for only a limited period of time – two weeks is typical. The intention is to give you a feel for the functionality of the broker’s platform, as well as letting you trade and possibly make mistakes without risking real money.
Deposit requirement
The amount of money a broker will require you to have on deposit in order to be able to trade in a market. This will vary from broker to broker.
Direct market access (DMA)
The process of trading directly in the market, or at the very least, being able to see individual orders coming into the market, and being able to act on them.
Dividend
A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property
Earnings per share (EPS)
A ratio calculated by dividing a company’s post-tax profits by the number of shares it has issued.
ETF (exchange-traded fund)
A fund based on an index, possibly a currency index. It can be bought and sold on a stock exchange, like a share. It charges a small annual fee to the owner.
Eurodollar
The market for lending and borrowing US dollars outside the US banking system.
Ex-dividend date
The first trading day after a dividend pay out. Buyers of a share after that date are not entitled to the dividend. A share price will usually change to take account of this.
Expert adviser
A systematic trading program, usually a form of computer program that will seek buy and sell signals across dozens of markets. EAs, also called robots, can usually be bought commercially and can provide advice on the best times to open and close positions.
The Fed
Slang term for the Federal Reserve, the US central bank.
Forward
An agreement to buy or sell a currency at a fixed rate at some point in the future. Unlike a futures contract, the prices does not fluctuate. There is usually a fee attached to the transaction.
Fundamental analysis
Analysing the market using fundamental economic or corporate data – i.e. not relying on technical measures. Examples include supply and demand forecasts, government policy, central bank statements, or information issued by listed companies.
Future
A type of derivative contract that entitles the owner to buy a particular asset for a specific price at some time in the future. Today most futures are traded on exchanges. Futures contracts are the most popular way to trade commodity markets, but there is also a healthy market in index futures, which let you trade a stock index price outside trading hours.
Gapping
A sudden change in the price of a market, often caused by extraneous factors. Markets can often move too quickly for private traders to respond during this period. The price then often stabilises at a new level.
Gilts
A term used to describe government bonds, usually those issued by the UK government.
Greenback
Slang term used to describe the US dollar.
If done
A type of trading order that takes place if a previous order is executed. For example, this can be used to place a stop loss at the same time another order is opened. Some traders use ‘if done’ orders if they cannot be at their desks all the time, and need to take advantage of possible price changes when they are away.
Interbank market
The market for foreign exchange which exists between banks and other major market participants. This determines the price at which currencies are traded.
Intra-day
Something that occurs during a typical trading day: an intra-day trade is one that is opened and closed within a single trading day.
Japanese candlestick
A form of technical analysis pioneered by 16th century Japanese rice traders. It shows not only the highest and lowest points reached by a market over a given time frame, but also the opening and closing price at either end of that time frame. Traders decide how long a time period they would like the candlesticks to cover.
JGB (Japanese government bond)
Debt issued by the Japanese government. The benchmark price of Japan’s sovereign debt is the 10 year JGB.
Leverage
A term commonly used to describe the act of borrowing money with which to invest.
LIBOR
The London Interbank Offered Rate, the daily rate used by banks to borrow from each other in the London money markets. This is frequently used as a benchmark rate for financial products. Following a major scandal when banks were accused of manipulating the Libor rate, NYSE Euronext has taken over the administration of the rate calculation process.
Limit-move rules
Rules in place on some international futures exchanges that suspend trading if a maximum price movement is exceeded between one day and the next. The rules are used as a means of calming futures markets and provide brokers with enough time to call margins in fast-moving markets.
Limit order
An automatic instruction to the broker to close a trade once a specific price level is met.
Liquidity
A term used to describe how easy it is to buy and sell in a market. A less liquid market can make it harder for someone to buy or sell an asset. A house, for example, is usually considered an illiquid asset. In financial markets, lack of liquidity can cause the spreads to widen.
Listed company
A company with shares listed on a stock market.
Loonie
Slang term used by currency traders to describe the Canadian dollar.
Margin
The minimum amount of money you need to open a trade. You should ideally have more money on deposit with your broker than the minimum margin rate, in order to avoid a margin call.
Margin call
If you are close to losing your margin amount, your broker may contact you to ask you to deposit more money in that trade (or in your account). Brokers sometimes make margin calls on a discretionary basis.
Marked to market
The process of revaluing something at current market values.
Market capitalisation
The total market value of a company’s listed shares. This can be calculated by multiplying the total number of listed shares by the share price.
Moving average
A line on a chart generated by using the average price performance over a specific period of previous days. By studying the moving average, traders can see how current market behaviour compares with earlier periods. Typical moving average periods include 200 days, 50 days and 30 days.
Moving average crossover
When a shorter-term moving average (e.g. 30 days) crosses a longer one (e.g. 200 days). A cross from above to below means the market is moving from an uptrend to a downtrend. If the shorter-term average is moving from below to above, it can mean there is a move from a downtrend to an uptrend.
NTR (notional trading requirement)
A measurement used by brokers to calculate whether you have enough money in your account to fund a trade. This goes beyond the money you put down as part of your initial margin. Each market has a different bet size requirements, which your broker will apply to your account’s cash balance to see whether you can afford the trade if the market turns against you.
OCO (one cancels the other)
A type of order which will tell your trading platform to cancel one order if a priority order is opened. For example, if an automatic take profits order happens, you will also want to make sure that your stop loss is also cancelled. OCO orders are an important tool for managing risk in your account when you are away from your desk.
Offer price
Also known as the sell price, this price is used to go short of a market, or close a long bet.
Option
A derivatives contract that gives the owner the option of buying (a call option) or selling (a put option) a market at a particular price in the future. Like futures, options have a limited life; unlike futures, they can expire without the owner taking delivery of the asset.
Oscillating indicator
A warning signal that a market is being overbought or oversold. These are typically times when there is a much higher chance of a price reversal or correction.
OTC (over the counter)
A trade that is not taking place on an open exchange. Most liquid futures markets (although not all of them) are now based on open exchanges, but CFDs and spread bets are usually OTC trades.
Pairs trading
Going short one stock, while going long on another. This usually happens when a trader has detected a relationship between the prices of two shares, usually companies in the same sector. This can sometimes yield profits in a corporate takeover situation, where the price of the buying entity can often drop while the target of the acquisition goes up.
Paper trading
Simulated trading – i.e. you are trading hypothetically, perhaps not even using a demo account. Traders do this to test out strategies and market theories without risking real money.
Peg
The process by which one currency will trade roughly in line with another. The central bank responsible for managing that currency will buy and sell other currencies in order to try to maintain the peg. This is not always successful.
Physical market
A market based on real assets, such as shares, but not futures or derivatives. A CFD account is a derivatives account; a share trading account is used for physical assets. A market where you are taking actual ownership of the asset – like a share in a company – is a physical market.
Pip
A term used in foreign exchange to mean the decimal point furthest to the right of any forex quote. A currency can be described as moving a certain number of ‘pips’. If, for example, the JPY dropped from 106.67 to 106.57 against the USD, it would have dropped 10 pips.
Point
A single unit of the market if using a spread bet. The practise comes for the way indexes are quoted – e.g. “The FTSE was up 20 points at the close.” Spread bets are measured by points, and the level risk you take on is quoted at pounds per point. For example, you might decide to bet on the FTSE at £2 per point, meaning you would make or lose money according to how many points the FTSE changed its price.
Position sizing
A risk management strategy where the trader is basing the size of his trade on self-imposed rules. For example, you may decide that no new trade can exceed more than 2% of your total account value. This is intended to stop a bad trade from doing severe damage to your capital.
Price earnings ratio
A ratio calculated by dividing the market price of a share by a company’s earnings per share. It is usually quoted as ‘x’ times earnings. It is a good means of comparing the relative value of very similar companies in the same sector.
Prop trading
Trading carried out by a bank or brokerage for its own account, also called trading your own book. Big investment banks have been forced to heavily reduce their levels of prop trading since the 2008 financial crisis.
Proxy vote
A shareholder vote that is transferred to another party to allow them to vote at a shareholder meeting without attending in person. Strict regulations should govern the use of proxy votes.
Pyramiding
A strategy used by traders who add to the size of a position as the price moves in their favour. It aims to boost the value of the most profitable trades. As the new positions are added, however, they are progressively smaller than the one before, reducing the overall level of risk.
Quote currency
The second currency quoted as part of a forex pair – the number to the right of the slash. It is the changes in the price of this currency against the one on the left that you are actually trading. All the big currency pairs used a quote currency against the USD – e.g. USD/EUR would be a trade on the price of the EUR against the USD.
Range bound
When a market seems to be trading in a range between two prices, usually called the resistance and support levels.
Registrar
The official or organisation responsible for keeping track of who owns shares in a company.
Requote
A requote happens when the price of a trade is changed by the broker before it is executed. This sometimes happens because the underlying market has moved suddenly, or the trader is trying to put too many trades through at the same price. For example, big trades will move the price on their own – the broker may not be able to fill the entire trade at that price.
Retracement
A temporary change in the direction of a market that is following a trend. A market trending upward might retrace temporarily when a large sell order goes in, for example. But further buying then pushes it back up again.
Resistance level
The level at which a price rises to, before repeatedly dropping back. The market continues to sell heavily at this price, stopping it from going higher. A resistance level might last for minutes, or for weeks.
Rollover
This is when a trade is automatically renewed overnight or when it reaches its expiry date. There is usually a small charge from the broker levied on a rollover event. This is why it is a good idea not to leave a derivative trade open for too long.
RPI (Retail Price Index)
Similar to the CPI, this is a means of measuring inflation, without housing costs such as mortgage repayments.
RSI (Relative Price Index)
A technical indicator used to demonstrate whether a market is being overbought or oversold, using historical prices as a reference. Usually, an RSI of more than 70 indicates an overbought market, and one under 30 an oversold one.
Scaling in / scaling out
Gradually adding to or reducing a position as a price changes. For example, if a trader is scaling in, he/she is adding to the value of the trade with new orders at new price levels as the market goes up. This can be used to avoid any retracements that might occur, thereby adding to the profit.
Settlement date
The date in the month when a futures contract expires. This is not always the end of the month and will depend on the broker or the exchange on which the contract is listed.
Short
When you go short on a market, you are hoping to make money if the price falls. One of the advantages of derivatives trading is the ability to short falling markets.
Short sterling
A derivative contract that lets a trader bet on changes in UK interest rates. Its price is based on future interest rate expectations, and is calculated by subtracting the expected rate from 100.
Slippage
Slippage occurs when a broker is unable to execute an order at the price you specify, but as soon as possible afterwards. This can be for a variety of reasons. It is important to understand that not all markets are created equally when it comes to efficiency. A price might change overnight, for example, when the market is closed.
Soft commodities
Sometimes just referred to as ‘softs’ these are agricultural commodities, like coffee, cocoa or sugar.
Spot price
The price for settlement of a futures contract, if it were settled today. Sometimes this is calculated using sophisticated mathematical formulae. A spot price is used by traders to help them calculate the value of futures contracts. It is not always possible to trade at the spot price, but more brokers are now quoting spot markets for retail traders.
Spread betting
A type of trading only available to residents of the UK and Republic of Ireland. Profits are treated as tax free by the local revenue authorities.
Stop loss
An automatic order for your broker to close a trade if it reaches a specific price. This is used to protect traders from big losses. It is very risky to trade without a stop loss.
Support level
A point at which a market price bounces back repeatedly. This is because big buyers are continually coming into the market at that price. This is the opposite to a resistance level.
Swing trading
The practice of repeatedly trading the same market, both short and long, while it is trading between two levels. The swing trader is coming in and out all the time, taking small profits from rises and falls in the price.
Swissie
Slang term for the Swiss franc (CHF).
Systematic trading
The use of a heavily rules-based approach to trading, sometimes with the assistance of a computer program.
Technical analysis
Using charts and various price indicators to try to predict how a market is likely to behave in the future.
Tick
The minimum price by which a market can change. In spread betting it will be quoted as ‘points’, and in currency markets as ‘pips’.
Trading the news
A forex trading strategy that focuses on fundamental factors such as inflation, trade figures, national debt and interest rates. The trader is studying the economic picture and relying less on technical indicators.
Trailing stop loss
A stop loss that stays the same distance behind a trade as it goes up in price, but stops if it comes down. The idea is that it allows the trade the freedom to gain in value, but will close it if it falls too far back. Not all brokers offer trailing stop losses, but they are becoming increasingly popular with traders.
Treasuries
Debt securities issued by governments. The term if often used to refer to US government debt specifically.
Trend following
A strategy that involves looking for long term market trends and staying with them for as long as possible.
Value investor
An investor who deliberately seeks out very cheap stocks, which look like they could grow quickly or become the target of an acquisition.
Volatility
The degree to which a price moves during a specific time. If a price goes up or down a lot during this period, it is considered to be volatile.
