Trading glossary
Plain-language definitions of 34 trading, forex and stock market terms, each with its own page, an example and a longer explanation.
B
- Bid / Ask
- The bid is the price you can sell at and the ask is the price you can buy at; the gap between them is the spread.
C
- CFD
- A contract with your broker on the change in an instrument's price between opening and closing the trade, without owning the asset, usually traded with leverage.
- Copy trading
- A service that automatically copies another trader's positions into your account in a proportion you choose, with the risk still on your money.
- Currency pair
- The price of one currency in another: the first is the base currency and the second the quote currency, so EUR/USD at 1.10 means one euro costs 1.10 dollars.
D
- Demo account
- An account with virtual money and real prices for trying a platform or strategy without risking your own money.
- Drawdown
- The fall in an account from its highest value to the lowest point after it, measuring a run of losses.
E
- ECN account
- An account that routes your orders to a network of liquidity providers, with raw spreads near zero plus a fixed commission per lot.
- Equity
- Your account balance plus the profit or loss of open positions: what the account would be worth if everything were closed now.
F
- Financial regulator
- A government body that licenses and supervises brokers and sets investor-protection rules, such as the UK FCA, Cyprus CySEC and Australia's ASIC.
- Forex
- The global currency exchange market, where currencies trade in pairs such as EUR/USD, open 24 hours a day, five days a week.
H
- Hedging
- Opening a position that offsets an existing trade or investment to reduce the possible loss if the price moves the wrong way.
I
- Islamic account
- A trading account with no overnight swap charges on positions held past the trading day; some brokers charge an administration fee instead.
K
- KYC
- The check a regulated broker makes of your identity and address before activating your account or withdrawals, under anti-money-laundering rules.
L
- Leverage
- A ratio that lets you open a position larger than your balance, such as 1:30, which controls 30 times the margin set aside, magnifying both profits and losses.
- Limit order
- An order that fills only at the price you set or better, such as buying once the price drops to a chosen level.
- Liquidity
- How easily an instrument can be bought or sold quickly without moving its price; the more liquid it is, the tighter the spread.
- Long / Short
- Going long is betting the price will rise and going short is betting it will fall; CFDs and forex let you do both.
- Lot
- The unit of trade size: a standard forex lot is 100,000 units of the base currency, a mini lot 10,000 and a micro lot 1,000.
M
- Margin
- The amount a broker sets aside from your balance to open a leveraged position, equal to the position value divided by the leverage.
- Margin call
- A warning from your broker when your margin level falls to a set threshold, asking you to deposit funds or close positions before a stop-out.
- Margin level
- Your equity divided by the margin in use, times 100; it shows how close the account is to a margin call or stop-out.
- Market maker
- A broker that takes the other side of its clients' trades and sets its own buy and sell prices, usually earning from the spread.
- Market order
- An order to buy or sell immediately at the best price available when it is sent.
N
- Negative balance protection
- A broker's guarantee that you cannot lose more than your account balance: if a sharp move pushes it below zero, the broker resets it to zero.
P
- Pip
- The smallest usual price change of a currency pair: 0.0001 for most pairs and 0.01 for pairs quoted in Japanese yen.
R
- Risk/reward ratio
- A comparison of a trade's expected profit with its possible loss; 1:2 means risking one dollar to make two.
S
- Segregated client funds
- Keeping client money in bank accounts separate from the broker's own funds so it cannot be used for its business or debts; required by strong regulators.
- Slippage
- The difference between the price you asked for and the price your trade actually filled at, usually during news or thin liquidity.
- Spread
- The difference between the buy (ask) and sell (bid) price of an instrument; the main cost of a trade on most trading accounts.
- Stop out
- The automatic closing of your losing positions when your margin level reaches the minimum, set at 50% for retail clients in Europe, the UK and Australia.
- Stop-loss
- An order that closes your position automatically at a price you set in advance, limiting your loss if the market moves against you.
- Swap
- An amount charged or paid when you hold a position past the end of the trading day, reflecting the interest-rate difference between the two currencies or the financing cost.
T
- Take-profit
- An order that closes your position automatically when the price reaches the profit target you set.
V
- Volatility
- How fast and how far an instrument's price moves over a period; high volatility means bigger opportunities and bigger risks.