TRADING DEFINITIONS & TERMS

STOP LOSS

The stop order is used for minimizing of losses if the financial instrument price has started to move in an unprofitable direction. If the price reaches this level, the whole position will be closed automatically. Such orders are connected to an open position or a pending order.

The stop-loss order is a simple but powerful investing tool

LEVERAGE

Leverage, or more precisely a financial leverage in trading, is a tool to multiply profits, though the risk of the corresponding multiplication of loss emerges at the same time. The leverage allows for the replenishment of equity by often much higher volume of external capital.

In a simplified way, the size of the leverage is directly proportional to the size of a profit or a loss. For example, if a trading transaction would close at a profit of USD 100, using leverage 1:5 the profit reaches USD 500 and leverage 1:100 would mean a profit of USD 10,000. Generating a loss of USD 100, however, would mean in case of leverage loss of the same volume as is the profit above.

Do more of what works and less of what doesn't.

SPREAD

Spread in online trading is the difference between the bid price and ask price of an underlying asset in the same time. Generally, the bid–ask spread is the difference between the prices quoted in the market.

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LOT

A lot is a fixed quantity of units and depends on the instrument traded. When traders purchase and sell financial instruments in the capital markets, they do so with lots. For example, when trading forex, there are micro, mini, and standard lots. A micro lot is 1,000 of the base currency, a mini lot is 10,000, and a standard lot is 100,000. While it is possible to exchange currencies at a bank or currency exchange in amounts less than 1,000, when trading through a forex broker, typically the smallest trade size is 1,000 unless stated otherwise.

PIP

Used in forex, a pip is one-hundredth of one percent, or the fourth decimal place (0.0001). A pip is the smallest price move that an exchange rate can make based on the forex market convention. Most currency pairs are priced out to four decimal places and the pip change is the last (fourth) decimal point. Currency base pairs are typically quoted where the bid-ask spread is measured in pips. For example, the smallest move the USD/EUR currency pair can make is $0.0001 or one basis point.

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MARGIN

Margin in trading usually means the necessary guarantee funds so as to open or maintain open positions in a transaction. Open position is either a long position or a short position, in other words, the process of buying or selling an asset, which has not been completed yet.

SHORT POSITION

Definition of short selling (shorting)

  • Short selling refers to any investment or trading strategy, which speculates on the decline in a stock or other securities price. Investors appreciate their investment when prices fall.

When investors short sell securities

  • Investors short sell when they believe that securities price is about to drop. They use shorting either for speculation or hedging. Speculation is used for investment appreciation from potential decline of a concrete security. Another option is hedging employed to offset losses in securities or portfolios.

 

How short selling works

  • When the investor decides to short sell, he offers his position through financial instrument, which is expected to be declining. The investor offers these borrowed financial instruments to a buyer willing to pay the market price. The seller must commit that the price will further decline and its purchase is possible before return of the financial instruments.

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