Trading terms - a place to start

The world of trading can sometimes appear very inaccessible and has a habit of creating terms for the sake of it, so this page aims to break some of these barriers down and provide simplified explanations to the most commonly used terms that you should know. Many of these do have more to them, such as how they are calculated but at this stage lets just start off with the basic principles. Don't forget that as long as you can explain what you are doing, the terminology doesn't really matter.

Spot: The price of the most recent trade

Bid: The price that buyers are willing to pay

Ask: The price that sellers are willing to accept

Spread: The difference between the Bid and the Ask. For some forms of trading (such as spread betting), this will also be the commission that you will pay your broker. For example, if you open a BUY position, it will open at the current Bid price which is below the Spot price, opening with a slight loss. The Spread typically depends on how "liquid" the market is.

Liquidity: A qualitative term used to define how many and how frequently trades are made in that market. High volumes and high frequencies of trading lead to highly liquid markets and are generally perceived as being more healthy and have smoother price transitions, while low frequency and volume markets can experience sudden price movements and even "gaps".

Gapping: When the price jumps substantially from one point to another without trade transitioning the two.. An indicative example is shown below:

Level: The price at which a position was opened.

Stop: The price at which a position will automatically close resulting in a loss. This is an automatic trigger which is activated when the price has moved either to a certain price or a specific distance from the Level. They are used to limit losses for each trade and help provide an understanding of how much you are willing to risk on each individual trade.

Limit: The price at which a position will automatically close resulting in a profit. As above, this is an automatic trigger which is activated when a price is hit or a certain distance from the level is reached. This can help to define what is a realistic target for the trade.

P&L: This one is fairly self explanatory but just in case, this is your current Profit and Loss and is typically just represented as the net of these values.

FX: Shorthand for foreign exchange where currency pairs such as GBP/USD are traded. We won't cover these in detail but there will be the occasional post dedicated to them and as always, much of the trading fundamentals we cover can be applied to any underlying asset.

Hit Rate: The percentage of trades that were successful. This does not account for the magnitude of trades but can still be a useful indicator to use to adjust your trade positioning and methodology later down the line.

Risk : Reward Ratio: When setting up a trade, this would be the ratio between your limit and stop distances. When reviewing your portfolio, this would be the ratio between your average profit and average loss.

That should give us a good starter for ten, now lets move on to some trading theory.