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Basic Trading Terms Everyone Should Know

When entering the world of trading there are certain terms and definitions you need to be aware of. Knowing these terms makes it much easier to do research, ask questions, and get help since most experienced traders use these terms without even thinking about it. If you want to trade, familiarize yourself with the following trading terms.

Long/Long Position Definition

If a trader is long in an asset it means that trader has bought shares (stock market), contracts (futures market) or a currency (forex market) and now owns it. You may hear traders say “I am long XYXZ” meaning they bought shares of XYXZ, or “I am considering a long in XYXZ” meaning they may buy shares.

Short/Short Position Definition

To go short means you sold something, and will buy it back later. Most people view trading as buying at $5 and selling at $7, for example, but you can also do the opposite. You can sell at $7 and buy at $5. In both cases, you make $2 per share. In the former case you made $2 from the price rising, and in the latter case you made $2 from the price declining. In the forex market and futures market you can buy or sell (short) at any time. Specific rules apply to short selling stocks though (see: short sales).

Flat or Neutral Definition

When a trader says they are “flat” it means they have no positions.

It can also mean they are “even” for the day, meaning no profits or losses.

Flat may also refer to the market conditions. When the market is doing very little, some traders may call it flat or neutral.

Bullish Market Definition

When prices are increasing, marked by the price making higher swing highs and higher swing lows (see chart below).

Bull and Bullish

Someone who is a bull or bullish believes an asset will rise. An asset that is rising may be referred to as “bullish.” The term is based on the bull attacking upwards with its horns.

Bear Market Definition

When prices are decreasing, marked by the price making lower swing highs and lower swing lows (see chart below).

Bear and Bearish

Someone who is a bear or bearish believes an asset will fall. An asset that is falling in price may be referred to as “bearish.” The term is based on the bear swiping downwards with its paw.

Figure 1. Uptrend (bull market) and downtrend (bear market) in Apple (AAPL) Stock

Bid and Ask (Offer) Definition

There always two prices for an asset, the price buyers are bidding at (bid) and the price sellers are offering at (ask). For more on this, see The Bid Ask Spread Explained.

Spread Definition

The spread is the difference between the bid and ask. In a liquid stock, it will usually be $0.01, $13.45 by $13.46 for example. In high-priced stocks, or stocks that aren’t actively traded, the spread may be bigger, such as $100.35 by $100.51. To learn more about the spread in Forex trading, see How Much the Spread Affects Forex Day Traders.

Open and Close

The Open typically refers to the official opening time or opening price (first transaction price of the day) of a market. The Close refers the official closing time or closing price (last transaction price of the day) of a market.

Open can also mean making a trade. When you make a trade you “open” a position. When you exit the trade, you “close” the position.

Slippage Definition

When you open or close a trade you expect to get the price that you see (bid or ask), but that doesn’t always happen. If the price changes before your order reaches the market you may end up with a different price than expected. This difference is called slippage. Slippage is more prevalent in stocks (and other assets) which have low volume (discussed in a moment) and/or a wide spread. Slippage is usually quite small, but occasionally it can be massive.

High and Low Price Definition

The high price is the highest price reached during a specific time period. The low price is the lowest price reached during a specific period.

Last Price

The price of the most recent transaction. See Bid, Ask and Last Price – Understanding Stock Quotes for how some of these elements work together to move the price.

Intraday Range

The difference between the price of the highest trade and the price of the lowest trade for the daily session. The average intraday range gives an idea of how much an asset typically moves during the day; this information can aid in making trading decisions (see: Use the Daily Range Strategy to Improve Your Trading).

Retracement or Pullback

A retracement or pullback is when the price makes a move in the opposite direction of the trend. For example, if the price had a rally from 10 to 15, and has now dropped back to 12.5, that is a pullback because part of the gain has been erased.

Pullback is a general term, while retracement can be more specific. For example, you may hear someone say this stock has had a 50% retracement. They are comparing one price wave to the another. Since the price rallied 5 when it moved up, and has now fallen back 2.5, the price has dropped 50% of the rally (see Fibonacci Retracements).

Pullbacks and retracements occur whether the price is in an uptrend or a downtrend. If the price dropped and then started to move back up, that is a pullback because the price is starting to retrace the decline. For more information on discerning pullbacks from the larger trending waves, see Impulse and Corrective Waves.

Rip Definition

A dramatic upward move in the price of an asset, relative to surrounding price moves.

Occasionally, a rip also refers to a trading fee.

Tank or Tanking Definition

A dramatic downward move in the price of an asset, relative to surrounding price moves. “XYZ just tanked!” is a common expression for a dramatic price decline.

Volume Definition

The number of shares or contracts that change hands during the day. For example, volume of 1,000,000 shares changed hands. For day traders, typically the higher the volume the better, since volume means a day trader can enter and exit trades whenever they want, with ease.

 

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