Trading Terminology: Top Trading Terms Every Trader Should Know!
There was a time, many years ago, when the only people who could actively trade on the stock market were those working for large financial institutions, brokerages, and trading houses. However, over the last 25 years, developments such as the growth of discount brokerages and online commerce, coupled with instant news coverage around the world and very low commissions, have flattened the gaming – or should we say trading – field. The popularity of trading platforms like Robinhood and zero commissions in recent years has made it easier than ever for retail investors to trade like professionals.
Day trading can turn into a lucrative career (as long as you do it right). However, it can also be a bit overwhelming for novices, especially for those who aren't quite ready for a well-planned strategy. Even the most experienced day traders can go through tough times and take losses.
Basic Day Trading Terminology
Day Trading: Day Trading is defined as the act of buying shares of stock to sell it the same day.
Professional Day Trader: A professional day trader can be considered informally as someone who trades for a living, but from a regulatory perspective it means a licensed trader with Series 6, 7, 63, 65 or 66. Licensed traders pay higher fees for market data. So, when you open an account, you must tell them whether you are a professional (licensed) trader. Day traders do not need a license if they are buying and selling their coins.
Pattern Day Trader Rules: (see full definition) The Model Day Trader (PDT) Rule states that if a trader trades 3 or more days in 5 days, he or she is a day trader and must maintain a minimum account balance of $25,000. Many traders who cannot maintain this balance will either trade with a Prop Firm.
Swing Trading: (see full description) Swing Trading, unlike Day Trading, requires overnight wait times. Swing traders will hold stocks for at least 1 night, but perhaps many nights. These are very short-term investments.
Stock Market Hours: The market is open Monday through Friday from 9:30 am to 4:00 pm EST. There are holidays when the market is closed or closes at 1 pm. Pre-market and after-hours trading is available, but liquidity is often very low because there are not many buyers or sellers trading after hours.
Bull or Bullish: This term refers to a strongly rising stock market. This can even be used to reference a specific position the trader has taken. If they rise, they expect the stock to rise.
Bear or Bearish: This term refers to a weak market. This means that traders think their stock or the price of a particular stock will go down. If they are falling, they can sell their bullish positions or even take a short position.
Initial Public Offering (IPO): (see full definition) When a company goes public, it sells a fixed number of shares on the open market to raise money. This could be 10 million shares, for example. If these shares are priced at $10/share, they will raise $100 million from the IPO. This money is invested in the company for future growth (building factories, strategic investments, etc.).
Float: (see full definition) Float refers to the number of current shares available for trading. The company issued stock when it went public. This number is typically a float, although there are 3 ways the number of shares can change. Float equals supply level. Stocks with limited supply and high demand are those that move up or down the fastest.
Day Trading Terminology: Bulls and Bears
Long Side Trading: When traders have a "long" stock, they buy shares. This means they have a "long" position and expect the stock to rise. These traders will make a profit when the stock rises or lose money when the stock falls. They also have a "bull" position. To exit a bullish or long side position, a trader may "scale" or sell their shares in small portions.
Scaling In or Scaling Out: A trader can “scale” to enter or exit a position. When this technique is used to scale, it means buying a partial position at 5.50 and adding (or scaling) it with the 2nd position at 6.00. Due to the scaling of equal dimensions, the average cost for the trader is 5.75.
Cost Average: Cost average is the average price of the stock you pay. So if the stock was bought at 10.00 first, then went up to 11 and you doubled your position, it would cost an average of 10.50.
Dollar-Cost Averaging: Dollar Cost Averaging is a strategy that many traders use, although it is not used much by day traders. This means that if you add $1,000 of shares each month, even though you add at various prices throughout the year, you'll have a dollar-cost averaging that helps offset any major ups and downs that may have occurred in taking a position.
Decreasing the Average or Increasing the Average: This is the same process as scaling, except that lowering the average is not something many traders do. It is not generally considered a smart trading style. The average downgrade, when you buy a stock at 10, the price drops to 8.00, so you add more shares and lower your average cost to 9.00. If you add 2x or even 3x the size to 8.00, you can lower your cost average by as much as 8.50. The risk is that you're adding to a position where you've already lost money, and some traders say it's throwing good money into bad money.
Short Sided Trading: (see full definition) Traders who are "short" on stock will short the stock and create a negative stock balance. This means they will own -1000 shares. As soon as they sell the shares, they make a profit from the sale, BUT they have to buy back the shares. It was borrowed from the brokerage house to sell it in advance to buy back the shares in a short time.
Borrowing: To short-circuit, you must borrow stock from your brokerage firm. If your broker does not have stock that you can borrow, you cannot issue the stock. IPOs never short-circuit, as brokers will not yet have shares to borrow.
Close: To close a short position, a trader must “close” his position. This is buying shares to cover the shares they borrow from their brokers. Like long-term traders, they can scale from a short position in small increments.
Days to Cover: Brokers give traders who borrow shares a certain number of days to cover. This is 7 days, 14 days etc. it could be. After this period, if the trader has not closed his position, the broker can do this manually and will charge the trader a liquidation fee.
Short Interest: Short interest refers to the number of shares that all traders around the world currently hold as a short position against the stock. If a company has 10 million outstanding shares (floating) and 1 million of these shares are short, the short interest is 10%. When stocks have short interest rates of 30% or more, there is potential for short-term squeezes.
Short Squeeze: (see full definition) This is when a stock suddenly starts to rise and traders holding a short position start buying to close their positions or their brokers have covered their positions for them because they have hit their maximum loss. account. This creates an extreme buy/sell imbalance and can cause stocks to move between 50-100% during the day.
Short Selling Restriction: A Short Selling Restriction (SSR) occurs when a stock drops 10% or more in a single day. When a stock has an SSR, traders cannot short positions except when the stock is rising. Positions can only be taken on “increases”. In other words, while stocks are rising. This means that traders have to short the Ask Price and wait for a buyer to buy the shares they are trying to short.
Day Trading Terminology: Placing Orders
Bid Price: (see complete definition) Bid Price is the price traders are currently bidding on a stock. Each stock has an offer. Let's say traders bid 10.00. Traders can place a buy order at 10 am and will have to wait for a seller to come and sell them shares. Alternatively, they can purchase from a seller who claimed 10.02.
Ask Price: (see full definition) The asking price is the price at which traders are currently willing to sell the stock. Every stock has a demand. Let's say traders want 10.02. Traders can place a sell order at 10.02 and will have to wait for a buyer to come and buy shares from them. Alternatively, they can only sell to a buyer sitting on the offer at 10:00.
Level 1: (see full description) Level 1 is the comparison of the Current Bid Price with the Current Asking Price. In the example above, 10.00 x 10.02
Spread: Spread is the difference between the Bid price and the Ask price. In the example above we have a spread of 2 cents.
Market Makers: (see full description) Market Makers create spreads. Large corporate banks are both buyers and sellers of a stock. They will send and Submit an Offer and Ask. They create profit by selling the shares between the spread and the spread. The larger the spreads, the more profits market makers can make
ECNs: (see full description) Electronic Communications Networks. If you think of the stock market as an island, there are many bridges we can take to reach the island. These bridges are called ECNs or Market Makers and they charge "tolls" or fees for using their networks.
Routes: Market Makers provide a path that connects individual traders to the market. When traders choose to use certain market makers or ECNs, they make direct referrals. The advantage is that this can increase order speed. Returning to the idea of an island, ARCA (short for archipelago) is a popular route. Other popular routes include NYSE, EDGX, JPCC, POST, INET.
Smart Routing: Most brokers offer smart forwarding. Rather than asking you to direct your order, they will choose the route they think is best. If they have set a discounted price with a particular broker, they can use that route as the preferred route. They can also see if they are buying shares from traders within the firm before forwarding your order to the “candidate”. This may not always be in the trader's interest. Therefore, I choose not to use smart forwarding and instead forward my orders.
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