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Beginners’ Guide to Trading Vocabulary

As a beginner to trading and investment, the financial markets can seem a bit daunting, both for traders and for those designing software for the booming Fintech market.  As well as research into the various markets out there to invest in, and focusing on the data that indicates the trend in price movements, it is also worth knowing the language used in this part of the trading industry. Familiarising yourself with the basic terms as a novice can help you develop into a more experienced trader and can also help developers better understand the market.

Here’s a list of some trading terms and vocabulary you need to know when first approaching financial investment:

Arbitrage
This term refers to the buying and selling of the same or similar financial instruments in different markets, to profit from the discrepancies in price.

Bid
A bid is the amount that an investor is willing to pay to buy an asset, and an indication to buy that asset in the future at a given price.

Bear Market
This refers to when the prices of a market are declining and continuing on a downward trajectory for a sustained period of time. Sometimes if the price of a financial instrument plummets dramatically, it is known as being bearish, likewise the person who speculates the prices to decline can be known as a bear (or bearish).

Bull Market
A bull market is the opposite of a bear market, where the market sees an increase in prices as an upward trend for a prolonged period of time. A person who expects the prices to rise on this upward trajectory can be known as a bull, and a singular asset or sector can be seen as bullish.

CFD Trading
CFD stands for Contract for Difference. CFD trading offers the opportunity for investors to speculate on the price movement of assets, opening and closing their position accordingly, without owning the asset itself. Instead, the investment is based on CFD contracts called units, which they can buy when the prices are expected to rise, or sell if they’re expected to fall.

Day Trading
This is the practice of a short-term investment strategy, when the buying and selling, and closing of all trades takes places within the same day, before the financial markets close. The traders that partake in day trading are often known as ‘active traders’ or ‘day traders’ and will use simple trendlines and volume indicators for their technical analysis to make trading decisions.

Exchange
An exchange is a central place where the different investments and trades in the markets take place, with established rules and regulations for the meeting of buyers and sellers. The most well-known of which is arguably the New York Stock Exchange (NYSE) in the United States.

Forex Trading
Forex is a shortened term for foreign exchange, also known as FX. Forex trading involves the trade of currencies and the conversion of currency from one to another.

Liquidity
This refers to how easily an asset can be bought or sold, without a substantial effect on its price, and can be influenced by the high demand for an asset. Some technical indicators can only be used for assets within a certain range of liquidity.

Moving Average
This is the average of the closing price of a finical instrument over a specified amount of time. The moving average can be used as technical indicator for upward or downward trend, and therefore a signal to buy or sell.

Support and Resistance
The support and resistance are straight lines in the graph of share prices over a period of time, that connects three or more points of stock data. The support usually indicates when a downtrend is expected to pause due to high demand, whereas a resistance occurs when an uptrend is expected to pause due to a concentration of supply. The areas of support or resistance are identified on the charts using trendlines and moving averages.

Top-Down and Bottom-Up Approaches
The top-down approach in technical analysis first looks at the overall economy, before then focusing on the different sectors, and then the individual stocks, when it comes to buying opportunities. A bottom-up approach, however, focuses on particular stocks first, analysing ones that are of interest for potential entry and exit points within the trends.

Volatility
This is the term for the price movement of an asset or the market as whole. Highly volatile stocks can see extreme movement of prices daily, and are a riskier investment. Less experienced technical traders may find it harder to find the trending patterns in these types of stocks.

There is a huge number of terms that all traders need to understand when it comes to the world of investing, especially if involving technical analysis – with this guide to investment terms, you can become a more experienced and knowledgeable trader, and as a developer in the sector, you will be better equipped to understand the needs of traders, organisations and investors.