Your Quick Guide to Mastering Financial Trading Terminology

Financial trading terminology is essential for traders and investors at all levels of expertise. For beginners, it builds a strong foundation and allows them to understand the main slang and terminology to learn trading and investing skills easily. Mastering financial trading terminology for beginners is absolutely essential to ensure clear communication, better market analysis, and improved overall trading performance. Let’s quickly overview the main financial trading terminology that you will find when undertaking a trader’s career path.

Why Understanding Trading Terminology Matters

Trading jargon represents the absolute basics of FX trading where traders learn core concepts such as technical and fundamental analysis, risk management, and so on. Traders should analyze markets and make trading decisions and without understanding basic terms it is difficult to learn and conduct market research. Misunderstanding terms is the easiest path to trading errors and financial losses, so learning them is critical to grasping all the basic trading concepts and understanding and learning advanced concepts later. Developing a strong foundation means knowing what the main trading terminology encompasses and how to use it in your trading.

Essential Trading Terms for Beginners

Here are the most essential slang and terminology in financial trading:

●     Bid and ask prices – These prices are simple buy and sell prices shown in your trading platforms.

●     Spread – The difference between the bid and ask prices is called spreads and they are the most essential trading costs involved in trading.

●     Leverage – Leverage is borrowed capital. It simply means to amplify your buying or selling power several times. (1:50 leverage means you can open positions 50 times your account balance).

●     Margin – The deposit required to trade with leverage. Required margin is how much capital you need to open a trading position (buy or sell an asset) at a certain trading size.

●     Pip – The smallest price change in Forex typically 0.0001 (4th decimal point in price after coma).

●     Stop-loss order –  An order type that automatically closes a trade at a set loss limit. Stop-loss and take-profit orders are core parts of risk management.

●     Take-profit order – An opposite of stop-loss order, it closes trade when you are in a certain predetermined profit.

●     Slippage – The difference between the expected and actual execution price. It can become important when you trade on lower timeframes of 5 minutes and lower.

Financial Markets and Asset Class Terms

There are other terminology that are crucial in trading:

●     Equities, Forex, commodities, indices – Market available for trading. FX are currencies, commodities include metals, energies, and agricultural products, and indexes show the performance of certain economic sectors.

●     CFDs – Contracts for Difference are derivatives that allow traders to speculate on price changes without owning the underlying assets.

●     Volatility – The speed at which price fluctuates. Extreme volatility is very dangerous for even experienced traders. Volatility increases during major economic news releases.

●     Liquidity – How easily you can open and close a trading position, or buy or sell an asset. Highly liquid markets like FX currencies, allow traders to instantly open trading positions.

Key Risk Management Terms

Here are trading terminology that are important for risk management:

●     Risk-reward ratio – How much you risk per dollar of potential profit. 1:2 risk-reward means, you risk 1 dollar per potential profit of 2 dollars.

●     Drawdown – The lowest point of the portfolio during trading. A higher drawdown indicates your strategy might be too risky.

●     Hedging – A strategy to minimize potential losses by simultaneously buying and selling the same asset. Advanced hedging methods include entering into opposite directions for correlated assets.

●     Position sizing – Determining the optimal lot size to open a trading position, or to buy or sell the asset.

●     Trading lot – Standard lot size equals 100,000 units of a trading instrument or pair.

Trading Terms that are often Misunderstood

There are some trading slang that are popular among traders and are often misunderstood by beginners:

●     Bulls vs. Bears – Bull markets mean prices move in an uptrend, while bear markets mean prices are falling. Bullish means to buy or long the asset and bearish means the opposite.

●     Margin vs. leverage – Margin is a deposit you paid, and leverage is a borrowed amount.

●     Order execution vs. order placement – Placement is to submit an order and execution means when it is filled by your broker.

Overall, traders need to learn and understand these and other core terminology to effectively learn trading and avoid misunderstandings and errors.