Every field has its own terminology, and trading is no different. Understanding these essential terms and concepts is crucial for navigating the financial markets effectively.
Key Trading Concepts
Asset / Trading Instrument
These terms refer to what you buy or sell in the market, such as stocks, currencies, commodities, bonds, or cryptocurrencies.
Trading Position
A trading position refers to the quantity of a specific asset held or owned by an individual or organization.
- Long Position: Buying an asset with the expectation that its price will rise.
- Short Position: Selling an asset with the hope that its price will fall. This involves borrowing the asset, selling it, and then repurchasing it at a lower price.
Ask Price
The price at which you can buy an asset.
Bid Price
The price at which you can sell an asset.
Spread
The difference between the ask and bid prices. A smaller spread indicates higher liquidity, meaning you can buy or sell the asset more easily.
Liquidity
The ease with which you can buy or sell an asset without significantly affecting its price. High liquidity implies that more traders are active, making it easier to enter or exit positions.
Point (Stock Market)
In stock trading, a “point” refers to a one-dollar change in the price of a stock. For example, if a stock’s price moves from $100 to $101, it has gained one point.
Pip (Forex Market)
The smallest price movement in a currency pair, equal to 0.0001. For instance, if the EUR/USD rate changes from 1.2500 to 1.2501, that’s a one-pip movement.
Pipette (Forex Market)
An even smaller price movement, equal to 0.00001. For example, if EUR/USD moves from 1.09000 to 1.08999, that’s a one-pipette movement.
Trading Volume
The amount of an asset being traded, often measured in lots.
Lot
A standard measure of trading volume in Forex:
- Standard Lot: 100,000 units of the base currency. For example, in EUR/USD, a standard lot would be €100,000. A one-pip move typically results in a profit or loss of around $10, depending on the currency pair.
- Mini-Lot: 10,000 units of the base currency. In the EUR/USD example, a mini-lot would be €10,000, where a one-pip move is generally worth about $1.
- Micro-Lot: 1,000 units of the base currency. With a micro-lot, you would trade €1,000 in EUR/USD, and a one-pip move is worth approximately $0.10.
These fundamental concepts form the foundation of trading. In the next lesson, we will delve into the basics of the currency market.
