Trading can seem daunting to anyone just starting out, and all the terminology you have to learn makes it worse.
Learning some key terms can help a beginner trader start to understand the basics of trading, and prepare them for more in-depth trading education.
Below is a list of 50 terms that all traders should know. This is an amazing way to start your trading education journey.
This guide to trading lingo is especially helpful for T3 Live subscribers — it will prepare you to better follow our instructors and to start profiting quickly.
Arbitrage is the practice of buying and selling an asset in two different venues simultaneously to profit off a difference in the price. There is typically no holding period because both transactions happen at the same time.
The ask price is the price a seller is willing to accept for their stock. An ask quote will include the price and the number of share available to be sold at that price.
A bear market is a market that has declined 20% from the highs. The phrase “bear market” sometimes also refers to an individual security or commodity that has declined by at least 20%.
In comparison to the ask price, the bid price is the amount a buyer is willing to pay for a stock.
Blue Chip Stocks
“Blue chip stocks” are big name companies that are well-established and with a large market value. The name comes from blue poker chips, which are the most valuable chips. Blue chip companies are usually valued at $10 billion or more and can be found in a major market index, like the S&P 500 or Nasdaq 100.
A bull market is the opposite of a bear market. In a bull market, stocks are 20% off the lows.
A candlestick looks like the wax part of a candle, and marks the opening or closing price of the stock and will be either black or red (if the stock closed lower) or white or green (if the stock closed higher). The thinner parts of a candlestick on the top and bottom, which look like the wicks on a candle, mark the highest and lowest prices of the day.
T3 Live Director of Education Sami Abusaad explains the candlestick chart in the Strategic Day Trader Ultimate Guide
Common stock is the type of stock that most people invest in; it represents a share of ownership in a corporation and affords the investor the right to vote on the company’s board of directors and policies. Common stock owners also have a claim on profits, although they are at the bottom of the priority ladder if the company goes bankrupt (creditors and preferred shareholders receive their shares first).
Covering is the closing (or reducing of a short position). When a short position is initiated, the trader is selling shares they don't actually own. Covering is when some or all of those shares are bought back.
A trade is one where thee position is bought and sold within the span of a single trading day. Day traders capitalize on short-term market moves in order to make a profit.
T3 Live's Strategic Day Trader subscription will help you understand day trading and guide you into making the best trades.
When a company makes a profit, they can distribute portions of their earnings to stockholder through dividends. Dividends may come in the form of cash, additional shares of stock, or other property. Not all stocks pay dividends.
Each quarter, public companies publish an earnings report detailing their most recent performance. The report includes an update of the company’s profit and loss statement, assets, liabilities, equity and cash flows. Shareholders can learn more about the company’s financial health and change their investment accordingly. The value of the company’s stock will fluctuate wildly on the day the report is released.
There are multiple financial definitions for “equity,” although the most common refers to the amount of assets that shareholders can claim if the company liquidated or paid off their debts. This is also called stockholders’ equity. In comparison, owner’s equity refers to the money that remains when the company has repaid its creditors after liquidating its assets.
In some cases, equity is simply used to refer to stocks, particularly common stocks.
ETF stands for exchange-traded fund, a grouping of multiple securities that can be traded on major exchanges like a stock. ETFs are divided into shares, which give the shareholders proportional shares of the total assets, although they do not own the underlying assets (which are owned by the fund provider).
ETFs are designed to track the value of an asset, although they trade at prices determined by the market. ETFs that track a stock index will pay out lump dividend payments to investors for the stocks that make up the index.
When an order is placed to buy or sell a stock, the fulfillment of that order is called a fill. There are multiple ways of filling an order, depending on which type it is. If a market order is placed, the investor is telling the broker to either buy or sell that stock at the best available current price.
If a limit order is placed, the order will be filled once the stock reaches a specific price; if that price is not met during the predetermined period of time, the order will not be filled.
A stop order, or stop-loss order, is a limit order that becomes a market order once the set price is achieved. The order will be filled at the next available market price.
Forex is simply a nickname for the foreign exchange market. The market includes multiple countries and exchanges currencies rather than assets. Forex is the largest exchange market in the world, with trading occurring 24 hours a day, 5 days a week.
Futures contracts are agreements to buy or sell an asset at a predetermined price and date at some point in the future. When the contract is put in place, the buyer is agreeing to buy the asset at the agreed-upon price, and the seller is agreeing to sell the asset at that price. This allows buyers and sellers to trade at a future date while avoiding any volatility in the asset’s price.
Futures contracts can be traded over an exchange like a stock. The contract will include information on the unit of measurement used and quantity of the asset, how the trade will be settled, the currency (or currencies) used, and any quality or grade requirements.
When the price of a stock rises or falls from the closing price of the previous trading day without any trading occurring in post-market hours, the movement will show up as a gap on a chart. A gap signifies that a large number of buyers or sellers flooded into the stock, often because of a news headline or an event.
A hedge fund is a type of investment partnership in which multiple people pool their money into one fund. The investors, also called limited partners, provide the money for the fund, while a fund manager, or general partner, will manage the fund according to a specific strategy. The people involved in a hedge fund expect to be able to profit from a bullish or bearish market and believe that the fund will eliminate risk, even though a hedge fund is actually very risky and aggressive.
A stock index reports on the movement of a particular market or set of stocks within the market. The index will show the average price of the stocks included in the index, which may be weighted according to the price of each stock (for example, a higher-priced stock will make up a larger percentage of the index) or according to each stock’s capitalization.
The most well-known indices in the United States are the Nasdaq (market capitalization weighted), S&P 500 (price-weighted) and Dow Jones Industrial Average (price-weighted).
IPO stands for initial public offering, which is the first time that a company allows shares to become available to the public. Once a company begins issuing shares, they transition from private to public and can start raising capital from public investors.
The liquidity of an asset refers to how easy it is to get in and out of a trade. An asset is considered illiquid if you can't quickly execute a trade at a reasonable price.
When a trader places a limit order, they are asking that the order be filled at a specific price (or better than that price). Buy limit orders will only be filled at or below the limit price, while sell limit orders will only be filled at or above the limit price. If the stock never reaches the limit price, the order will not be filled.
When a trader enters a long trade (they may say that they are “going long”), they expect the price of the stock to rise. If the price rises, the trader will profit.
Market capitalization is the total market value of a company's stock. It is calculated as the current price of the stock multiplied by the number of outstanding shares.
Market makers are the institutions (usually banks or brokerage companies) that accommodate traders wishing to get in and out of stocks, making money off the spread between the bid and ask prices. This allows trading on the market to move much more quickly and easily.
Moving averages (MA) are popular price indicators used to determine the trend of a stock. They are calculated as the average closing price over a certain period of time. For example, the 50 day moving average is the average closing price over the last 50 days. MAs are considered “lagging” indicators because they are based on past prices.
T3 Live's Chief Strategic Officer, Scott Redler, explains how he uses moving averages in his trading in The Ultimate Guide to Moving Averages.
Multiple Time Frame Analysis
Multiple time frame analysis is an analysis technique that involves the use of multiple time frames to analyze a stock's trend. Larger time frames are used to find overall trends in movement, while smaller time frames can track smaller moves and find the best entry points.
Low-priced stock from a small-cap company (i.e., a company whose capitalization is between $300 million and $2 billion) is considered a penny stock. These stocks are usually priced at less than $5. Penny stocks are often traded in over-the-counter transactions, but they sometimes trade on large stock exchanges like the NYSE.
Standard market hours for American exchanges (like the NYSE and the Nasdaq) last from 9:30 AM to 4:00 PM. Pre- or post-market trading occurs anytime between the close of one trading day and the start of the next.
In comparison to common stock, preferred stocks give shareholders a higher claim on distributions (like dividends) and a higher place on the priority ladder in the event that a company is liquidated. Dividends for preferred stockholders typically pay out more than those of common stockholders. However, unlike common stockholders, preferred stockholders are given limited rights which do not usually include voting rights.
Profit and Loss Statement (P&L)
Also called an income statement, a Profit and Loss Statement (P&L) gives an outline of all revenues, costs and expenses incurred within a certain amount of time, most often a fiscal year or quarter. Companies use P&Ls to provide information about their economic health, while some traders use the statements to keep track of their total income.
All US-based public companies publish their P&L statements each fiscal year and quarter, along with their balance sheets and cash flow statements.
A pullback is when a stock pauses or drops moderately from a recent peak in a continuing uptrend. Typically, this only lasts for a short period of time before the stock continues its upward trend. If the drop lasts for a longer period of time (more than a few consecutive sessions), it is called a consolidation. A pullback for a stock can be a buying opportunity for traders.
Sami Abusaad shows you how to anticipate a pullback in this Strategic Swing Trader video.
A period of sustained increases in stock price is called a rally. Rallies are referred to as bull market rallies or bear market rallies, depending on the market in which they occur.
A resistance level indicates that a stock has reached a point where the price will not go any higher. Any increase in price has been halted due to a large number of market participants wanting to sell at that price.
Resistance level can be measured in technical analysis by drawing a line along the highest highs in the chart. The line may be slanted from a change in price action over time.
When a stock temporarily reverses from a trend, it has gone through a retracement. Retracements return to the trend after a short time (as opposed to a reversal, which does not return to the trend). When combined with other technical analysis indicators, a retracement can identify a change or continuation in a trend.
Risk refers to the potential that the outcome of an investment or trade will not match what is expected. A high-risk investment has a higher chance of loss than a low-risk investment. High-risk investments may also come with major rewards, but a low-risk investment could mean that losses incurred won’t be as devastating as with a high-risk investment.
Scalping is a form of trading that takes advantage of small changes in price throughout the day. Scalpers may place anywhere between ten and hundreds of trades each day. They believe smaller movements are easier to catch than larger ones, and they can make multiple small profits intraday that add up to a large profit for the entire day.
In comparison to a long trade, a short trade is an investment in which a trader expects the price of a stock to go down. The trader will sell the stock before they buy, hoping that the price will drop and they can buy the stock at a lower price. Their profit or loss will be the difference between the price that they initially paid and the price at which they bought the stock.
When a trade is executed at a different price from what is expected, the difference between the two prices is slippage. Slippage may be either positive or negative. It can also occur when the bid/ask spread changes between the time the order is placed and the time it is filled.
The difference between the bid and ask price in a trade is called the spread (or the bid/ask spread).
A stop order is initiated when the price of a stock moves past a certain point. It ensures that a predetermined entry or exit will likely be reached, and when the stock reaches that price point, the stop order turns into a market order. Stop orders are often initiated by traders that are not able to watch their portfolios for an extended period of time.
There are two main types of stop orders: buy stop orders, which are used to protect against bullish movement by triggering a trade once the stock reaches a certain price to the upside, and stop-loss orders, which are used to protect against bearish movement when the stock reaches a certain price to the downside.
Swing trading occurs when a trader attempts to take advantage of profits in a stock over an extended period of time. They may hold the stock for a few days or for several months. Swing traders must be able to predict long-term trends in a chart because they are subject to changes that can happen overnight or on weekends when the stock market has closed.
Learn more about swing trading and how you can profit with little effort with the Strategic Swing Trader subscription.
Stocks (and other securities traded on an exchange) are represented by a group of characters, usually letters, called a ticker or ticker symbol. The ticker depends on the market that the security is traded on – those on the NYSE will have no more than three letters, while stocks traded on the Nasdaq will have four or five letters.
Most of the time, a ticker will be a shortened version of the company’s name. However, because shortened names aren’t always available, some companies choose to use another combination of letters that are representative of their name, such as HOG for Harley-Davidson or BOOM for Dynamic Materials Corporation.
Trends are the general direction of a stock’s movement in price. If the price is trending upward, then the stock is generally moving upward with higher highs and higher lows. Trends can be measured in charts by using trendlines that mark the highs and lows of the stock price.
Opening Range Breakout (ORB)
An Opening Range Breakout occurs when the price of a stock breaks out of the opening range, which is established by taking the high and low prices of a stock when the market opens. Traditionally, the range is calculated from the first hour of trading, although it can also be calculated from the first half hour, 15 minutes, or even the first minute.
T3 contributer Jeff Cooper often uses ORBs in his trade ideas (provided in the Hit and Run Newsletter) as an entry point for both day and swing trades.
Options are a type of asset that derive their value from underlying securities; in some cases, from the value of stocks. Options holders have the choice to buy or sell their assets, although they are not required to do so. There are two types of options: call options let the holder buy at a certain price, while puts options let the holder sell at a certain price. Options contracts all have stated expiration dates by which they need to be bought or sold.
To learn more about trading options, check out T3 Live's Options in Play newsletter.
The number of shares traded within a specified period of time is the stock’s volume. Buy and sell transactions are only counted as one transaction. Typically, volume is reported for the trades that took place within a day, although stock charts can map the volume for other time frames.
Volume Weighted Average Price (VWAP)
VWAP stands for Volume Weighted Average Price, which is the average price that an asset has been traded at for a specified time period, based on volume and price. It is typically represented by a line on a stock chart, similar to a moving average. Traders can use the VWAP line to confirm trends and to know when they should initiate long or short trades.
Yield is the amount of income generated on a security over time, such as interest or dividends. It is typically shown as a percentage, and is calculated by adding the increase and price and the amount of the dividend paid, then dividing by the price at which the security was purchased.