Basic Trading Terms
Starting to trade can feel confusing and complicated when you are a beginner without any previous knowledge or experience. On the other side, there is a large amount of information available, which is distracting most of the time, and as a beginner you will find yourself lost in plenty of information. It is important to understand that keeping everything simple will make it easier for you to start understanding the logic behind trading in the financial markets.
Leverage exposes you to a larger amount of capital, per consequence to a larger number of assets and trading volume, compared to what you might have invested as a first deposit. When you see something like 1:100, it is referring to the leverage which can be applied. We, here at Uniteex, are using different levels of leverage (from 1:100 up to 1:500), depending on the account you are trading with.
Advantages of using leverage
• Trade larger positions, by investing a fraction of your one capital;
• Take larger positions than you would even if you were buying the assets physically;
• The returns from the leveraged invested capital can be much greater;
• Trade in a wider range of assets by having more capital available.
Disadvantages of using leverage
• Same as your profits can be magnified, your losses are potentially high;
• If your investment goes all wrong, you will lose your capital at all, so it is important to understand how leverage works and how to manage it.
A pip stands for ‘percentage in points’, as the smallest change the price of an asset is able to go through. Pip changes across different assets. For example, if the GBP/USD price moves from 1.2547 to 1.2548, it is said that the movement was one pip.
Everyone who has a trading account, for sure, has noticed the two buttons which lead to buy or sell the asset. Well, every trader is provided with two prices: the ask (buy) prices and the bid (sell) price. The selling price is always lower than the buying one, and the difference between them is called spread, and it is one of the costs of opening a position in any financial instrument.
The spread is the difference between the asking and buying price, the tighter the spread, the lower the cost of the position opened, and vice versa. In other words, spread is the minimum distance the market has to move in your favour so you would start earning a profit. If the spread of an instrument is 1 Pip and the market starts moving in your favour with 1 Pip, this is when you start making profits.
Experienced traders know very well that risk cannot be avoided, but it can be managed, by the techniques available. Stop loss is a closing order that specifies a certain level the price needs to reach, so the position will be closed automatically. The order effectively stops your losses.
This order will be closed once it reaches a certain level of profit. When the price hits a certain level, it is closed automatically, to get the maximum profits and protect them from decreasing. It tends to protect the trader’s profits from any additional decreasing price moves. The specific profit will be taken from the table and the position will be closed.
A support level can be identified beneath the current price of an asset and tends to where the decreasing prices find a floor of support. This expects the price to bounce off this level, rather than break through it. So if you notice a level, where the prices find it difficult to jump down to a specific level, this is a support level. Support levels tend to stop prices falling below a certain level. It attracts buyers, since it is said ‘The price will not go any lower, so I am going to buy the asset now. Like, it will not go worse.’
A resistance level can be identified above the recent price of an asset, and acts like the maximum level a price can reach. The opposite of support level, resistance level mean that the price has more chances to fall back and not go any higher. It stops the prices from increasing further. In this case a trader would say ‘The price will not go any higher, so I’m going to close the position, believing that this is the maximum of the profits it can be made.’
There are two ways to open a trade, instant execution which opens your trade immediately at the price available. And, pending orders which open your trade when the price reaches a specific level, chosen in advance by you. Usually both orders are used by traders, depending on the analysis they perform before deciding on opening a position. The point is that, if you do not have to monitor the market all the day long, but you make a certain analysis in advance and check the news and events which are able to affect the prices, the trader decides pending orders, and they will be open or closed once the condition is met.
Learning to read the graphs and trends will strengthen your knowledge on how you can use them to improve your trading performance. If you are a technical analyst, charts are the tools you will be dealing with the most. Firstly, you need to notice what chart type can be used to predict market moves. There are three main types of charts: line, bar and candlestick charts. Line charts provide only the closing part for an instrument; bar charts provide opening and closing prices as well as the highs and lows for that period; candlestick charts present the same information, but are arguably visually more accessible.
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Fund your account with a minimum of €250, and expose small portions of your capital into financial markets.