I have given below the definition of the main investing, trading, market and other related financial terms used by professionals in the industry. So as to help readers understand important details and differences.
The ADX or Average Directional Index is a technical indicator that is used to measure the strength of a trend. It is a non-directional indicator and is based on the moving average of the Directional Movement Index (DMI).
Usually in the form of a stock option, an American option is an option which can be sold before the expiration of the option.
For stocks, the ASK price is the lowest price which the seller is willing to sell a stock at. For instruments which are traded on the Over-the-Counter market, the ASK price is the lowest price which a market maker is willing to sell an instrument at.
Depending on the context in which the word is used, an asset can refer to a financial instrument or economic resource which have monetary value to the person, firm or government that owns the asset.
Asset Class refers to a category of financial asset that shows the same characteristics. For example, Wheat and coffee beans are classified as belonging to the commodity asset class as they are both agricultural products. There are 5 main asset classes in the financial trading industry, bonds, currency pairs, stocks and market indices.
ATR or Average True Range is a technical indicator developed by J. Welles Wilder. It measures the volatility of prices.
The phrase At-the-money is used to describe a situation where the expiry price is the same as the price that a trader paid for an option. Normally in situations like this, the trader will receive a full rebate on his investment.
The term “Aussie” is usually used by the financial industry to describe the Australian dollar.
The Bank rate is the primary interest rate which the central bank charges the commercial banks.
An option trading strategy that capitalizes on the declining price of the underlying asset. It requires the simultaneous execution of Calls and Puts options.
Bearish is used to describe a situation where prices are generally on the decline in the market.
The BID price refers to the maximum price which a buyer or dealer is willing to pay for an asset.
Binary options are a type of derivatives where the payout is predetermined and fixed when the option expires in the money. However if the option expires out of the money, the payout will be zero.
A bond is a debt instrument issued by a company or government body for the purpose of borrowing money for a fixed tenure normally at a fixed interest rate.
Bonuses are incentives given out by brokers to persuade traders to sign up with them and to encourage them to deposit more funds. Normally, they come with conditions attached regarding their withdrawal.
Boundary options or range options are a type of binary options that allow traders to speculate on the price movements over a specific price range.
Breakeven price is the price level at which an investment will return zero profit and zero loss.
A broker is a party which acts as the intermediary between traders and the markets. In some cases, brokers also act as the market maker.
A bull spread is a trading strategy that either use Call or Put options to maximize profits when prices are rising.
Bullish is a term used to describe a situation where prices are on the uptrend.
A neutral trading strategy that utilizes both bull and bear spread. The trading strategy is considered a limited risk and limited profit strategy.
Cable is a term used by forex traders to denote the GBP/USD currency pair.
Call options are essentially a legal contract which gives the buyer the right, minus the obligation, to purchase an asset such as a commodity or stock at a certain price within a certain time frame.
A carry trade is an investment strategy where an investor borrows on a currency with a lower interest rate and utilizes the funds to invest in a currency with a higher interest rate. In forex trading, it is where a trader holds a position with an overnight positive return on interest to profit from the interest differential.
A technical oscillator, the CCI or Commodity Channel Index is used for indentifying overbought and oversold market conditions.
The acronym for Collateralized Debt Obligations, CDOs are a type of structured financial instruments which are backed by assets such as mortgages. They are sometimes also known as Asset Backed Securities (ABS) or Mortgage Backed Securities (MBS).
CFDs or contract for difference is a type of financial instrument which allow investors to speculate on the price movement of an underlying asset without having to physically purchase the asset.
Commissions are the revenue which stock brokers earn traders for facilitating the trades of traders.
Commodities refer to natural resources which come from the earth. They can be “hard” commodities such as coal or crude that needs to be mined or extracted from the ground or “soft” commodities such agricultural products.
The term correlation in the context of forex trading is often used to refer to the relationship of a currency pair.
CPI or Consumer Price Index is an index used to measure the rate of rate of inflation. It is derived from the changes in prices of a basket of goods and services that typical household consumes.
CDS or Credit Default Swap is an agreement by the seller of the CDS to agree to compensate the buyer of the CDS in the event of a loan default. While the buyer of CDS will receive the face value of the loan, the seller of the CDS will take over the defaulted loan.
A currency option works in the same way as a stock option. Basically, it gives the holder of the option the rights but not the obligation to purchase or sell a currency pair at a certain price within a specific time frame.
The act of buying and selling currency pairs.
The real time price of an asset at the moment
A demo account is often referred to as a practice account. It allow traders to experience what real trading feels like without having to risk real money.
A type of option which closes in the money of the price of an asset does not reach or touch two specified price levels (upper and lower) by the time the option expires.
EAs are software which allows users of the MetaTrader 4 trading platform to automate the trading process. The program can analyze and execute a trade based on the trading parameters specified by the programmer or trader.
The ECB is the central bank of the European Union. It is the main regulatory body that is in charge of the financial system of the European Union.
An ECN broker is a forex broker that is connected to the forex Electronic Communication Network. It allows forex traders to have direct access to the liquidity providers. ECN brokers do not trade against the trader or charge a spread. Instead, they charge a small commission for the services.
Elliott Waves is a theory of technical analysis developed by Ralph Nelson Elliott that believes the market moves in specific cycles or waves. It is often used by investors to identify the psychology of the market.
The currency of the European Union
European options are options that confer the holder of the option the rights to buy or sell an underlying asset only at exercise date. It has no flexibility with regards to the timing of the option execution.
Exotic options are options that are structured more complicatedly than the standard vanilla options. It normally has several types of triggers that determine the payoff. These options are usually traded on the OTC market.
The expiry price is the price of a binary option at the time the option expires. It is the price which determine if the option close in the money or out of the money.
The expiry time refers to the date and time at which the option expires.
The Federal Reserve is the central bank for the U.S financial system. It is responsible for implementing the monetary policy for the U.S economy and the main regulatory of the U.S financial system.
Fibonacci Retracements are naturally occurring sequences that has been identified as ratios at specific levels such as 38.2%, 50% and 61.8%. These levels are often used by traders as an indication of the possible resistance and support levels of a price movement.
A term used by forex traders to denote the EUR/USD currency pair.
Used in the context of financial trading to describe a situation where a trader has no open position.
A leverage that is dynamic and depends on the total volume of the open positions.
Acronym for the term “Foreign Exchange”, the market where currency pairs are traded.
Refer to “Currency Option” above.
A form of market analysis which is based on the concept of intrinsic value as well as on the fundamental factors of an economy.
A financial contract between two parties to agree to transact on an asset such as securities or commodities to be delivered at a future date at a specific price.
In the context of forex trading, Gap refers to the difference between a currency closing price and its next opening price. This usually occurs at the close of the Friday’s trading day to the opening of the next Monday trading day.
GDP or Gross Domestic Product is the measure of the total output of a country’s economy.
A type of market order that remains in effect until executed or cancelled by the trader.
Hedging is an investment strategy employed by traders and investors to minimize their investment risks.
High/Low is a type of binary options that require a trader to determine if the current price of the asset will be higher or lower than the strike price upon the expiry of the option.
In the Money is a term that is used to describe a situation where an asset current price is higher than a Call option strike price. It can also refer to a situation where the asset current price is lower than a Put option strike price.
An index is a statistical measure of the performance of a group of stocks, usually taken as a representative of a sector of the economy.
Another term used to describe an asset or financial security.
The interest rate is used to refer to the annual cost of borrowing.
The term intrinsic value is used to describe the true value of an asset or company after taking into consideration all aspects of the company’s business.
The amount of capital that is allocated for the purpose of earning profits.
A term used to refer to a person who earns a living from commissions by acting as an intermediary for two transacting parties. In the context of financial trading, it was a slang used to describe a market maker on the London stock exchange prior to the big bang deregulation in 1986.
Slang used to describe the New Zealand dollar
Leading indicators are indictors that show changes in the economic factors before the changes are apparent in the economy. These indicators are often used for predictive market analysis.
A limit order is a type of market order which instructs a broker to execute a trade only at a specific price or at a better price.
Liquidity refers to the extent which an asset can be bought and sold in a market without any major fluctuation in prices.
A term used to denote the purchase of an asset with the anticipation that price will rise further.
A standard lot in the context of forex trading refers to 100,000 units of base currency being traded. For stocks, it refers to the number of shares traded in one transaction.
The margin is the minimum balance that a trader must maintain in his trading account if he is trading with leverage.
A margin call is when a broker requires a trader to deposit more cash or liquidate his positions in order to bring margin account balance up to the minimum margin requirement. It occurs when a position traded on a margin account has depressed to a value that is below margin maintenance rules.
Market Order is a type of order type that instructs the broker to execute the trade at the market price. It is also one of the easiest and fastest orders for a broker to carry out.
The prevailing price for an asset in the market.
A trading strategy that requires the doubling of the investment amount each time a trader loses on a trade.
The mid market price refers to the average between the BID and ASK price. It is often used to represent the market price of an asset.
Momentum is often taken as to mean the rate at which prices are accelerating in a particular direction.
One of the most basic technical indicators that is based on the average of prices calculated over a time period.
NASDAQ or National Association of Securities Dealers Automated Quotations is the second largest stock exchange in the world that specializes in tech stocks.
A type of binary option where the payout is determined by the fact that the current price does not touch a predetermined price level before the expiry of the option
<em>See ASK price above</em>
A binary option type that requires the current price to touch a predetermined price level before the expiry of the option.
An open position refers to the state of a trader after he has entered into a trade in the market. The position will be considered open until the trader exits the market with an opposing trade.
Refers to the instructions given to a broker to buy or sell an asset.
A term used to denote a situation where the strike price of a CALL is higher than the market of an asset. For a PUT, it is when the strike price is lower than the market price.
The amount of profit earned when a trade is concluded.
PAMM is a broker side software application provided by forex brokers to permit account managers to manage several trading accounts simultaneously.
A pip is the smallest change in the price of a currency pair. Depending on the currency pair, it is usually reflect in the last digit of a 4 decimal place quote.
The pivot point is calculated based on the average of an asset’s previous trading day high, low and closing prices. Considered as a technical analysis indicator, it is often used by forex traders to determine potential support and resistance levels.
Principal Value is used to describe the original amount of money invested.
The opposite of a CALL option, the PUT allow the holder to sell an asset for a specified price within a specific time period. It is often exercised in anticipation that falling prices will allow the trader to later purchase the asset at a lower price hence letting pocket the difference between the selling price and the purchase price.
A monetary policy which entails the central bank to buy and hold financial assets hence increasing the money supply in the economy.
The ratio of profitability to the amount invested.
The actual amount of profit earned or losses incurred after the conclusion of a trade.
The level at which rising prices has difficulties in breaching
Reuters is a subsidiary of the Thomson Reuters Corporation and is a global news agency as well as a provider of financial information.
A trading incentive offered by brokers to compensate traders for their trading losses for the first few trades that they made.
A momentum oscillator that was developed by J. Welles Wilder, the RSI measures the speed as well as the rate of change in the price movements. It is used by traders to determine overbought and oversold market conditions.
The RTS index or Russia Trading System" index is a market index comprising of the largest 50 companies traded on the Moscow Exchange.
Scalping is an intraday trading strategy that focuses on making small amount of profits on each trade but over a large number of positions.
A security is a general term used in the context of the financial industry as any financial assets which are tradable. These assets can be debt instruments such as bonds, stocks and derivatives such as binary options.
Shares or stocks represent ownership in a company and entitles the stockholder to a portion of the company’s profit.
A short is the sale of an asset with the anticipation that the falling prices of the asset will later permit the seller to purchase the asset back at a lower price.
A trading strategy often used by binary traders that require the trader to simultaneously purchase CALL and PUT options with the same conditions.
Slippage is when the price at which a trade is executed is different from the price was initially requested. Slippage normally occurs when the market is fast moving or when the broker is slow in execution.
The spread is the price difference between an asset’s ASK and BID price. This is how the broker commonly monetizes their services.
<em>See Lot above</em>
A stock exchange is the market where stocks are traded.
A stock option gives the holder of the option the rights to purchase a stock at a specified within a specific time period.
A stop-limit order is a market order with 2 instructions, a stop order and limit order combined into a single market order. The stop order price is reached, the order then becomes a limit order to be executed once the limit order price is reached.
A Stop-Loss is an instruction to a broker to liquidate a market position once a certain price is reached. It is used as a risk management tool to limit the possible losses to a trader’s market position.
With Straight Through Processing, forex orders are immediately rerouted to the liquidity providers without the broker having to reprocess the orders. This process eliminates the need of a dealing desk to re-enter an order from a trader.
For binary options trading, the strike price is the price which determines if the option is in the money or out of the money upon the expiration of the option. For vanilla option, the strike price is the price at which the option is exercised at.
This is trading strategy that requires the purchase of 2 PUTs and a CALL at the same exercise price. With this trading strategy, the broker aims to capitalize on market volatility.
The support level is the price level which declining prices have difficulties in falling through. The breach of the support level would most likely indicate a significant decline in prices.
The swap is the interest incurred or earned from an overnight forex position.
The Take-Profit order is an instruction to the broker to liquidate a market position once a certain price is reached. It is used for profit realization.
Technical analysis is a type of market analysis that is based on market data and historical prices.
Trading hours refer to hours where the major financial markets around the world are opened for business. They can be divided in 3 main sessions, Asian Session, European Session and U.S session.
A trailing stop loss is similar to the normal stop loss order. The only difference is the stop price is based on a percentage of the market price rather than an absolute fixed price level.
Commonly used in derivative trading, underlying asset refers to the financial asset such currency, commodities or equities which the price of the derivative is based on.
Unrealized profit or loss refers to the profit or loss that a trader has accumulated on his open positions.
The term usable margin refers to the margin that a trader can utilize for his trading activities.
Used margin refers to the portion of margin that a trader has already utilized
The traditional type of option contract. (<em>See Call Option and PUT option above for more details)</em>
Volatility is defined as the rate at which prices increase or decrease over a given period of time.
VPS is a service that is offered by some brokers to enable their clients to run the expert advisors 24/7 without any interruption or lag. It is in essence a virtual environment that runs on a dedicated server.
Volume Spread Analysis is an alternative approach for analyzing the markets. It is a combination of both fundamental and technical analysis and looks at the relationship between volume and price in order to determine the direction of the price movements.
The term yield is used to denote the percentage return of an investment.