Key Trading Terms Every Trader Should Know
Starting your trading journey can feel like learning a whole new language. Financial jargon runs deep, and many seemingly foreign terms are tossed around casually in the industry.
However, once you understand the terminology, things like charts and platforms become much less intimidating. If you’re a beginner, this article is a great entry point to decode these terms, equipping you with the financial lingo.
Here’s a breakdown of some essential terms every beginner should know before diving into the intricacies of trading.
Bid and Ask
The bid is the highest price buyers are willing to pay, while the ask is the lowest price sellers are willing to accept. The difference between the bid and ask is the spread.
Example: If the bid is $100 and the ask is $101, the spread is $1.
Liquidity
Liquidity measures how easily an asset can be bought or sold without significantly moving the price. Highly traded stocks such as Apple are liquid, while obscure penny stocks are not. Liquid markets tend to have lower spreads and a higher chance of your order getting filled.
Market Order
A market order tells your broker to buy or sell immediately at the best available price. It guarantees execution, not price. Market orders are more prone to slippage.
Limit Order
A limit order lets you set the exact price at which you’re willing to buy or sell. Execution happens only if the asset hits the price you’ve set.
Stop-Loss Order
This is an automated sell order placed at a pre-set price to limit your losses if the market moves against you. Stop-loss orders are useful to limit the risk, especially in volatile assets.
Example: If you buy at $50 and place a stop at $45, your broker will trigger a sell order if the market price hits $45.
Leverage
Leverage allows you to control a bigger position with a smaller amount of money. It amplifies gains—but also losses.
Example: If you are trading with $100, and your leverage is set to 10:1, this means any gains or losses are multiplied by 10. Thus, a 1% increase in the asset’s price will result in a 10% profit on your initial investment.
Margin
Margin is the money you must deposit as collateral when trading with leverage. It’s like a security deposit with your broker. This collateral deposit is known as the initial margin, while the maintenance margin is the minimum amount to keep your positions open.
If your asset value drops below the maintenance margin, your broker will issue a margin call, requiring you to top up the difference. Failure to do so will result in your assets being liquidated. Positions may be immediately liquidated if losses are substantial, reaching past the stop-out threshold determined by your broker.
Volatility
Volatility refers to the extent and speed at which prices fluctuate. High volatility means big swings, while low volatility means steadier prices. If an asset is volatile, then there is increased risk—but also more opportunities.
Bull Market
A prolonged period when prices rise and optimism dominates market sentiment. A prime example is the stock market rally from 2009 to 2021, the longest bull market in history, following the economy's rebound from the 2008 global financial crisis.
Bear Market
The opposite of a bull market: a prolonged period of declining prices and widespread pessimism. Although market sentiment is negative during a bear market, there are usually ample investment opportunities to accumulate assets while they are trading at discounted prices.
Short Selling
Short selling, or shorting, is betting against a stock. You borrow shares from your broker to sell them immediately, with the intention of buying them back later at a lower price. Short selling is a bearish strategy. Inversely, buying an asset with bullish intent is known as a long position.
Slippage
Slippage is the difference between the expected price of a trade and the price at which it’s actually executed. This usually occurs in fast-moving markets. High slippage tends to occur in fast-moving markets, particularly during high-impact news releases.
Support
Support is a price level where an asset tends to stop falling because buying pressure steps in. Traders see it as a “floor”.
Resistance
Resistance is the opposite of support: a level where price struggles to rise because selling pressure builds, acting like a “ceiling”.
Technical Analysis
This involves analyzing charts, price patterns, and indicators to forecast future price moves.
Fundamental Analysis
Fundamental analysis is the study of broader economic and financial data, such as a company’s earnings or a country’s Gross Domestic Product (GDP) growth, to judge an asset’s true value.
Order Book
The order book shows the live list of buy and sell orders, providing a snapshot of market depth and liquidity. Market depth is a measure of a market's ability to absorb large orders without significantly impacting the price of the asset.
Candlestick Chart
A candlestick shows the open, high, low, and close for a period of time. Green candles usually mean upward movement, while red candles mean downward. Candlestick charts are the most widely used trading charts.
Moving Average
A moving average is an indicator that smooths price data over a period of time, helping traders identify overall trends instead of short-term noise. There are two types of moving averages: simple moving average (SMA) and exponential moving average (EMA).
The main difference is that an SMA assigns equal weight to all prices in a period, while an EMA puts more emphasis on recent prices, making it more responsive to new information.
SMAs are a powerful indicator for identifying long-term trends because they are less volatile, whereas EMAs suit short-term traders who want to react quickly to price changes at the cost of more noise.
Drawdown
A drawdown measures how much your account drops from a peak to a low point. It’s a key measure of risk and recovery time.
Final Word
These terms only scratch the surface of the complex world of trading. Once you’re familiar with them, market conversations, platform interfaces, and strategy guides will make more sense.
Trading is all about managing risk and making informed decisions. Therefore, understanding the language is the first step toward confidence.