Comprehensive Trading Terminology Guide | Quant Tekel

Trading Terminology: A Comprehensive Guide by Quant Tekel

Understanding trading terminology is crucial for navigating the financial markets effectively. Quant Tekel’s guide covers key terms you need to know.

Forex

Forex, or FOReign EXchange, is the global marketplace for trading major and minor currencies. Known as currency trading or FX, it operates internationally, setting official world exchange rates.

Lot

In forex trading, a lot represents a standard unit of currency. One lot equals 100,000 units. Traders can also use mini (10,000 units), micro (1,000 units), or nano (100 units) lots to manage position sizes and risks effectively.

Leverage

Leverage allows traders to amplify their trading positions using borrowed capital. It can significantly increase potential profits but also magnifies losses. For example, with a $1,000 account and 1:500 leverage, a trader can control up to $500,000.

Margin

Margin is the required collateral to open and maintain trading positions. It represents the difference between the total investment value and the amount provided by the trader.

Hedging

Hedging involves creating a market position to offset potential losses from another position. Common hedging tools include futures, options, and various derivatives.

Pip

A pip (Price Interest Point) is the smallest price movement in forex, typically 0.0001 for most currency pairs. For pairs involving the Japanese yen, a pip is 0.01.

Bid and Ask

• Bid: The price at which a trader can sell an asset.
• Ask: The price at which a trader can buy an asset.

Spread

The spread is the difference between the bid and ask prices, representing the cost of trading.

Trading Strategy

A trading strategy is a plan that outlines financial goals, risk tolerance, and methods for entering and exiting trades. It provides a trader with an edge in the market.

Volatility

Volatility measures the degree of price fluctuations over time, indicating the risk associated with an asset. High volatility means greater potential for profit and loss.

Trading Approach

Different trading approaches include scalping, day trading, swing trading, and position trading, each with unique strategies and timeframes.

• Scalpers: Engage in rapid trades, lasting seconds to minutes, focusing on small price movements.
• Day Traders: Hold positions for hours, capturing intraday market moves.
• Swing Traders: Hold positions for days to weeks, targeting longer-term trends.
• Position Traders: Invest for weeks to years, relying on fundamental analysis.

Broker

A broker facilitates access to financial markets, executing trades on behalf of clients. Forex brokers provide platforms, market insights, and charge spreads or commissions.

Limit and Market Orders

• Market Orders: Execute immediately at the best available price.
• Limit Orders: Execute at a specified price, offering control over entry points.

Stop Loss and Take Profit

• Stop Loss: Automatically closes a trade to limit losses.
• Take Profit: Closes a trade to lock in gains at a predetermined level.

Reward to Risk Ratio (RRR)

The RRR compares potential returns to the risk taken. A higher RRR means needing a lower success rate to be profitable.

Trading Sessions

Forex trading is divided into three main sessions: Asian, European, and North American, each offering unique opportunities based on market activity and volume.