Being clear on your style and strategy as a trader can help you to find and get the most from a platform that meets your needs. Here we look at some of the terminology involved and what it means, from scalping to Fibonacci trading.
IN A FEW WORDS
Trading glossary Definition of trading terms Understanding trading jargon
4 min reading
There are a number of different strategies that traders can employ. Understanding the jargon can help you understand the type of trader you are or aspire to be.
Day traders aim to make money from very short-term movements in markets. As the name suggests, most of these will be intra-day, with the trader closing out all open positions by the time the market shuts for the day. This has some advantages, not least that you don’t have open positions at any point while you’re not watching the market. This can help avoid the unexpected.
Day traders will usually be speculating on the response of an individual asset to a market announcement – the response of government bond prices to central bank announcements, for example, or the response of individual stocks to trading updates. Day traders often operate in high volatility markets such as foreign exchange because there needs to be enough price movement to support the strategy. It is generally considered to be a high-risk strategy.
Swing trading is a longer-term strategy than day trading. It aims to profit from price movements over a few days, up to a few weeks. Swing traders tends to use a combination of previous price movement and fundamental analysis to predict the ‘swing’ for an asset.
This is the opposite of ‘buy and hold’ investing. Instead of letting their profits run, the trader using ‘scalping’ is trying to profit from small price changes. The trader may see the market start to move, buy in and then sell almost immediately.
As a strategy, it holds some risks, as small profits can be quickly eaten up by one large loss, or by trading costs. Most traders deal with this by setting up a strict exit strategy (using automatic sell instructions, for example). Trades may be leveraged, which multiplies any gains but equally magnifies losses, adding to the level of risk involved. Scalping requires some significant time commitment – traders need instant access to information and to be able to execute trades immediately.
Fibonacci trading may appeal to the mathematicians. The concept of the Fibonacci sequence is straightforward – each number is the sum of the two preceding numbers, starting at 0 and 1. The ratios of sequential Fibonacci numbers are close to the so-called ‘golden ratio’ of 1.618. This ratio is found in nature, the petals of flowers or the seeds of sunflowers.
Traders can work with Fibonacci numbers to guide them on their investment strategy. Retracement, for example, gives an indication of where support and resistance points are likely to be for different securities. They can be applied to almost any security and can help traders know the level at which to place stop-loss orders and set target prices. While these movements are not assured, they can act as a rough guide for traders.
Position traders follow trends. Having identified a trend, they can then look for an investment which follows that trend, holding it until the trend peaks. The trader should identify their entry and exit point in advance and set parameters. It can be a low maintenance form of trading: once the position has been set, the trader has little to do except wait to see if it comes to fruition.
Momentum investing aims to profit from momentum in asset prices. It assumes that trends can persist for some time – and often longer than people expect – and therefore following them can be a relatively easy way to make short-term returns. The entry and exit points for a momentum trade are often governed by technical indicators, such as 50-day moving average price performance.
Spread trading is profiting from divergences in the price of two related securities, each called a ‘leg’. The trader will go long on one side and short on another. This can be used to take ‘pure’ exposure to an individual stock in a specific sector. By going long one oil stock and short another, the trader just gets the performance of the stock, rather than any exposure to the oil sector. It can be a less volatile way to take exposure to individual securities and will usually be executed through derivatives.
Common types of spread trade include intra-commodity (where the two legs are contracts for the same commodity but on different dates), inter-commodity (where the legs are two related commodities, such as oil and gasoline, or soybeans and soy oil), or inter-exchange (the same asset traded on two different exchanges).
Make sure your platform can meet your trading needs
Traders should make sure that their platform can accommodate the type of trading style they want to adopt. High costs can ruin the most carefully planned trading strategy.
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