Trading Terminology

Traders often chat with one another about a variety of topics related to financial markets, giving their perspectives and discussing trading ideas and current moves on the markets. While communicating with each other they often use slang to express their thoughts in a shorter form. Some of the most popular slang is listed below.

Asset Allocation: Dividing instrument funds among markets to achieve diversification or maximum return.

Bearish: A market view that anticipates lower prices.

Bullish: A market view that anticipates higher prices.

Chartist: An individual who studies graphs and charts of historic data to find trends and predict trend reversals.

Counterparty: The other organization or party with whom trading is being transacted.

Day Trader: Speculator who takes positions in instruments which are liquidated prior to the close of the same trading day.

Economic Indicator: A statistics which indicates economic growth rates and trends such as retail sales and employment.

Exotic: A less broadly traded market instrument.

Fast Market: Rapid movement in a market caused by strong interest by buyers and / or sellers.

Fed: The U.S. Federal Reserve. FDIC membership is compulsory for Federal Reserve members.

GDP: Total value of a country's output, income or expenditure produced within the country's physical borders.

Liquidity: The ability of a market to accept large transactions.

Resistance Level: A price which is likely to result in a rebound but if broken may result in a significant price movement.

Spread: The difference between the bid and ask price of a market instrument.

Support Levels: When a price depreciates or appreciates to a level where analysis suggests that the price will rebound.

Thin Market: A market in which trading volume is low and in which consequently spread is wide and the liquidity is low.

Volatility: A measure of the amount by which an asset price is expected to fluctuate over a given period.

Margin Requirements

Margin requirement is only applicable to margin trading. It allows you to hold a position much larger than your actual account value. Margin requirement or deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. Trading platforms often perform automatic pre-trade checks for margin availability and will execute the trade only if you have sufficient margin funds in your account.

In the event that funds in your account fall below margin requirement, most trading systems will automatically close one or more open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.

For example, you may be required to have only $1,000 in your account in order to trade position that would normally require $20,000. The $1,000 (5%) is referred to as "margin". This amount is essentially collateral to cover any losses that you might incur. Margin should reflect some rational assessment of potential risk in a position. For example, if a market instrument is very volatile, a higher margin requirement would normally be justified.

Overnight Interest

Overnight interest is only applicable to margin trading. Trading on margin means that a trader borrows money to buy or sell a market instrument using actual account value as collateral. Traders generally use margin to increase their purchasing power so that they can own more market instruments without fully paying for it.

Considering that trading on margin involves borrowing money, trader has to pay interest on the loan. That interest is referred to as Overnight Interest and is generally charged based on number of days a position on margin was held. Most trading systems will charge daily interest portion at the end of each trading session and charge three times more on Monday or on other preset weekday (if market is closed on weekends).

In case of Forex, Overnight Interest is calculated as interest rate differential between interest rates for particular currencies that make the currency pair that is being traded. For example, if a trader wants to sell USD/JPY on margin, he or she will have to pay 4.0% (e.g. U.S. interest rate at 5.0% subtracted by Japanese interest rate at 1.0% makes the interest rate differential) of the amount borrowed per year to hold the position.

Before trading on margin it is highly recommended to get information on exact interest rates charged for borrowing money and how that will affect the total return on investments.

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