There are a large number of trading terms.  As in any other field, it helps to know what the industry words mean. Whilst this list is not exhaustive, it covers many terms used in trading stocks, futures, options and forex:

Alpha - The measure of a fund’s risk adjusted performance compared to the overall market.  A fund with a high alpha has outperformed its peers for the same level of volatility.

American Option - An option that may be exercised at any time prior to its expiration date.  These are the most commonly traded options.

Ask – The price at which a financial instrument is offered for purchase. Also called the offer, ask price or ask rate.

Aussie - The Australian dollar, which has an ISO currency code of AUD.

Base Currency – The first currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the U.S. Dollar would be the Base Currency.

Bearish – Where trader sentiment towards a market is negative, with prices expected to fall.

Bear Market - A market where the overall market prices are in prolonged decline.

Bear Trap - Where there is a sudden recovery within a bear market which entices traders to buy, but the recovery is not sustained and is followed by a sudden fall.

Beta - The measure of an investment’s volatility relative to the overall market

Bid – The sell price of a trading instrument. Also known as a bid price or bid rate.

Bid/Ask Spread – The difference in points between the bid and ask price. Also called the bid/offer spread. This represents dealer margins.

Bullish – Where trader sentiment towards a market is positive, with prices expected to rise.

Bull Market - A market where overall market prices are in prolonged ascent.

Butterfly Spread - An options strategy that limits both risk and returns by using four different options with different strike prices and the same expiration date.

Call Option - An option gives the buyer the right, but not the obligation, to purchase a financial instrument (such as a futures contract, amount of currency or quantity of stock) at a pre-agreed price.

CFD (Contract For Difference) -A leveraged contract that allows a trader to gain exposure to a selected quantity of stocks or commodities.  Unlike a futures contract, there are no contract periods and interest is charged for the gearing.

Commodity - A physical quantity of standardised goods traded on a futures exchange, for example, gold, wheat, or propane.

Condor - An options strategy similar to a butterfly spread, but the two middle options have different strike prices within the range established by the other two options. This strategy is used when volatility is expected to increase since it allows profits over a large range of underlying prices.

Convertible Stock - A bond or stock that can be exchanged for another stock at a pre-stated price.  These offer some benefits of both bonds and stocks.

Cross-rate - The exchange rate between two currencies, not expressed in US dollars.

Currency Pair – The two currencies comprising the FX rate. This is normally expressed using the ISO currency symbols for each currency, for example USD/AUD.

Dealer – A licensed trading firm that provides retail customers with access to the market.

Delta - The responsiveness of an options price to changes in the value of the underlying financial instrument.

Delta Neutral -  An options position that does not change in value with small changes up and down in the underlying security.

Dividend - A share of a company’s profits paid as an amount proportionate to holding to stock holders.

Euro – The official currency of most of the European Union, with an ISO symbol of EUR.

European Option - An option that can only be exercised on the date it expires.

Expiration – The date on which an option must be exercised or offset.

Fast Market - Where market conditions are so volatile that they don’t allow orders to be placed close to the last quoted price.

Financials - Futures contracts that include interest rate futures and stock index futures.

Floor Trader - A trader who actually works in the trading pits of a futures exchange, trading either on their own account, or on behalf of their firm.

Forward Transaction - An agreement for actual delivery and payment for currency to occur at a specific date in the future.

Futures Contract - A standardised contract for a commodity or financial exposure to be settled either in cash or by delivery of goods at a future date.

Futures Exchange - An exchange where specified futures contracts are traded.  Some exchanges still use open outcry, but the trend is towards electronic trading.

Greenback - The US dollar, which has an ISO currency code of USD.

Hedge Fund - A managed investment that aims for absolute rather than relative performance, and uses a variety of financial techniques such as trading in options and futures, currency trades, going both long and short, and using pairs trading.  In the US, these are generally offered only to wealthy and sophisticated investors.

Interbank Market – Currency transactions that are negotiated between banks or between large financial organisations.

Leverage – A trader’s ability to control a large amount of currency with a relatively small amount of capital invested. Also called gearing.

Local - A member of a futures exchange, authorised to trade on their own account.

Loonie - The Canadian dollar, which has an ISO currency code of CAD.

Long - A position that is expected to appreciate in value as the market increases.

Limit - An order which specifies the maximum price the trader is willing to pay for the order.

Margin – The amount of money required before anyone can open or maintain a position. Also called a Security Deposit.

Margin Call - A demand for a trader to immediately provide either cash or other marketable securities to ensure that sufficient security deposit is available to cover adverse price movements.  This occurs when the market moves against the trader’s position.

Margin Loan - A lending facility secured by a charge over an investor’s stock.  This allows the trader to purchase more stock and thereby gain the benefits of gearing.

Market Maker - A trading firm that will both buy and sell at the current market price, thereby providing liquidity.

Market Order - An order that is executed as soon as possible at the next available market price.

Offer - The price at which a financial instrument may be purchased. Also called the ask price or ask rate.

Open position – Any transaction which has not been closed out by an opposite transaction, and will therefore fluctuate in value with market movements.

Option - The right but not the obligation to either sell or buy a specified financial instrument at an agreed price within a certain time period.  Options are either put or call options.

OTC - Over The Counter.  A mechanism for trading stocks or options outside of a stock exchange.

Pairs Trading - A trading technique that involves identification of correlated pairs of financial instruments, and finding situations where they diverge.  The trade sells one side and buys the other with the expectation that the pair will again converge.  Also called statistical arbitrage.

Pip – The smallest unit of price movement for a currency.

Premium – The price paid by an option buyer, excluding broker commissions.

Put - A put option gives the buyer the right, but not the obligation, to sell a specific currency pair at a pre-agreed price. The opposite of a put is a call.

Quote Currency - The second currency in a trading pair. In the case of a trade involving the U.S. and the Australian Dollar (USD/AUD), the AUD would be the Quote Currency Also called the secondary or counter currency.

Rollover – The act of extending the settlement date for an open position until the next settlement date.

Resistance – A price level that defines a temporary upper boundary for a financial instrument.  When viewed on a chart, it appears difficult for the price to move beyond this level.

Retail Customer – Any forex trader who is not a party to the Commodity Exchange Act, or a trader who is not a floor member or member company of a futures exchange, or stock exchange.  Included in this group are traders whose assets are below $10 million.

Settlement – The delivery of a financial instrument, as agreed, after a specified period of time.

Short – Selling a financial instrument that the trader believes will decline in value. The trader does not own the instrument being sold, but as long as the price that the trader purchases it for is less than the sale price, a profit can be realised.

Softs - Futures contracts in cocoa, coffee and sugar.

Spot Market – A transaction where payment and delivery is immediate.  This can be contrasted with a futures market which typically provides deferred settlement.

Spread – The price difference between the ask and bid price of a financial instrument.  For example,  a currency may be quoted as 15/10, which indicates a 5 pip spread.

Spread Position - A position that has long and short positions in different time periods, or for different but related commodities.

Statistical Arbitrage - Also known as pairs trading, this is based on expected reconvergence of a correlated pair of financial instruments.

Stop Loss – A standing order with a broker which liquidates an open position if their is a price movement to a specified level.

Straddle - An options position where the trader buys a call option and a put option on the same financial instrument with the same strike price and expiration.

Strike Price – The price at which the buyer of a call or the seller of a put can exercise a trade.  This is also called the exercise price.

Support – The price level that defines a temporary floor which traders are unwilling to sell below.  On a chart, it appears that the price action does not fall below the support level.

Theta - A measurement of the change in the value of an option against time decay.

Time Decay - The underlying reduction in the value of an option as it approaches its expiration date.  This is because as time goes on, the likelihood of being able to exercise the option reduces.

Trend – The direction in which the market is heading. The three categories of trends are: major, intermediate and short-term. Trends move in one of three directions: up, down, sideways.

Turning point – The point where the previous upward or downward trend of a market definitively reverses.  Identification of turning points is a major goal of traders.

Vega - The responsiveness of the value of an option to changes in the volatility of the underlying financial instrument.

Volatility -  Upwards and downwards movement in the price of a financial instrument.

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Tags: forex terms, futures terms, Glossary, options terms, stock terms, trading glossary, trading terms

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