Lesson 6 of 8
Estimated time: 20 minutes
Essential Trading Terminology
Master the language of trading to communicate effectively and understand market discussions
Speaking the Trading Language
Every profession has its own language, and trading is no different. Understanding trading terminology is essential for communicating with other traders, reading market analysis, and following financial news.
Why Terminology Matters
Trading terminology might seem overwhelming at first, but it's actually quite logical. Most terms describe specific market actions, conditions, or strategies in precise ways that eliminate confusion.
Learning these terms will help you understand market commentary, follow trading discussions, and express your own analysis more clearly and professionally.
Basic Market Terms
Bull Market / Bullish
A market characterized by rising prices and optimistic sentiment. Bulls attack by thrusting upward.
Bear Market / Bearish
A market characterized by falling prices and pessimistic sentiment. Bears attack by swiping downward.
Volatility
The degree of price fluctuation. High volatility means large price swings; low volatility means stable prices.
Liquidity
How easily an asset can be bought or sold without affecting its price. High liquidity = easy to trade.
Bid
The highest price a buyer is willing to pay for an asset at a given moment.
Ask (Offer)
The lowest price a seller is willing to accept for an asset at a given moment.
Spread
The difference between the bid and ask prices. Tighter spreads indicate better liquidity.
Volume
The number of shares or contracts traded during a specific time period.
Position and Order Terms
Position Types
Long Position
Owning an asset with the expectation that its price will rise. "Going long" means buying.
Example: Buying 100 shares of Apple stock
Short Position
Selling an asset you don't own, expecting the price to fall so you can buy it back cheaper.
Example: Short selling Tesla stock
Entry and Exit Terms
Entry Point
The price level at which you open a position.
Exit Point
The price level at which you close a position.
Stop Loss
A predetermined exit point to limit losses.
Order Execution Terms
Risk and Money Management Terms
Risk-Reward Ratio
The ratio of potential profit to potential loss on a trade.
Example: Risking $100 to make $300 = 1:3 ratio
Position Size
The amount of capital allocated to a specific trade, usually expressed as a percentage of total capital.
Drawdown
The decline in account value from a peak to a trough, usually expressed as a percentage.
Margin
Borrowed money from your broker to increase your buying power and potential returns (and losses).
Leverage
Using borrowed capital to increase potential returns. Amplifies both gains and losses.
Example: 2:1 leverage means $10,000 controls $20,000
Margin Call
A demand from your broker to deposit more money when your account falls below minimum requirements.
Portfolio
The collection of all your investments and trading positions.
Diversification
Spreading risk across multiple assets, sectors, or strategies to reduce overall portfolio risk.
Technical Analysis Terms
Chart Pattern Terms
Support
Price level where buying emerges
Resistance
Price level where selling emerges
Breakout
Price moving beyond support/resistance
Breakdown
Price falling below support level
Consolidation
Price moving sideways in a range
Reversal
Change in trend direction
Indicator Terms
Candlestick Terms
Doji
Candlestick with very small body, showing indecision
Hammer
Bullish reversal pattern with long lower wick
Shooting Star
Bearish reversal pattern with long upper wick
Engulfing
Large candle that engulfs the previous candle
Trading Style Terms
Time-Based Styles
Scalping
Very short-term trading, holding positions for seconds to minutes
Day Trading
Opening and closing positions within the same trading day
Swing Trading
Holding positions for days to weeks to capture price swings
Position Trading
Long-term trading, holding positions for weeks to months
Strategy-Based Terms
Momentum Trading
Trading in the direction of strong price movements
Mean Reversion
Trading on the assumption that prices return to average
Arbitrage
Profiting from price differences in different markets
Contrarian
Trading against prevailing market sentiment
Market Sentiment and Psychology Terms
FOMO
Fear of Missing Out - the anxiety that drives impulsive trading decisions when seeing others profit.
FUD
Fear, Uncertainty, and Doubt - negative sentiment that can drive prices down irrationally.
Dead Cat Bounce
A temporary recovery in a declining market that's followed by continued downward movement.
Bag Holder
An investor stuck holding a declining asset, hoping for recovery that may never come.
Diamond Hands
Holding positions through significant volatility without selling, showing strong conviction.
Paper Hands
Selling positions quickly at the first sign of volatility, showing weak conviction.
Quick Reference Guide
Most Important Terms for Beginners
Essential for Day 1:
- • Bull/Bear Market
- • Long/Short Position
- • Bid/Ask/Spread
- • Support/Resistance
- • Stop Loss
- • Volume
Learn Within First Week:
- • Risk-Reward Ratio
- • Position Size
- • Leverage/Margin
- • Breakout/Breakdown
- • Volatility
- • Slippage
Key Takeaways
- Trading terminology is logical and descriptive - most terms make sense once explained
- Focus on essential terms first, then gradually expand your vocabulary
- Understanding terminology helps you communicate effectively and follow market discussions
- Many terms have synonyms - learn the most common variations
- Keep a trading journal to practice using new terminology correctly
Continue Your Learning Journey
Now that you understand the language of trading, it's time to learn how to choose a broker - your gateway to the markets and the platform where you'll execute your trades.