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Day Trading Terminology Every Trader MUST Understand

Day trading terminology is something every trader will need to understand. We’re going to start with basic terms that most day traders will already be familiar with. Then we’ll jump into the more advanced terms that you may still have questions about.

Remember, to quickly search for a term you can search this page using the Control + F button! If you have any questions as you are reading these definitions please don’t hesitate to reach out by contacting us today. Remember, as part of our Day Trading Courses I will explain each of these terms & how I use them in my day-to-day career as a trader.

Basic Day Trading Terminology

Buy-Side

A business involved in buy-side activities will purchase stocks, securities, and other financial products based on the needs and strategy of their company’s or client’s portfolio needs. Buy-side activity takes place in many settings not limited to the financial institutions mentioned above. They also work with hedge funds, trusts, equity funds, and proprietary traders to supply the assets needed by these large commercial entities.

Sell Signal

A sell signal is a condition or measurable level at which an investor is alerted to sell a specified investment. Sell signals can be generated through a variety of methods, such as a pre-determined percentage decline in the asset’s value, a technical indicator, fundamental change in the asset, or a trailing stop-loss. The sell signal may automatically close the trade, like in the case of a stop-loss order, or the investor/trader may need to manually close the position after receiving the sell signal from their method/strategy.

Short (Short Position)

A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when she believes that the price of that security is likely to decrease in the near future. There are two types of short positions: naked and covered. A naked short is when a trader sells a security without having possession of it. However, that practice is illegal in the U.S. for equities. A covered short is when a trader borrows the shares from a stock loan department; in return, the trader pays a borrow-rate during the time the short position is in place.

Long Position

A long position—also known as simply long—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. Holding a long position is a bullish view.

Long position and long are often used In the context of buying an options contract. The trader can hold either a long call or a long put option, depending on the outlook for the underlying asset of the option contract.

Call

A call can mean two things. It can refer to an option contract giving the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time. It can also refer to a call auction, a time when buyers set a maximum acceptable price to buy, and sellers set the minimum satisfactory price to sell a security on an exchange. Matching buyers and sellers in this process increases liquidity and decreases volatility. The auction is sometimes referred to as a call market.

Put on a Put

The buyer of a put option is a trader who expects the asset upon which the option is based to fall in price. The trader purchases a put option, usually for 100 shares, that allows the shares to be sold at a certain price (or strike price) by a set expiration date. If the trader is right and the asset drops in price, the option is exercised and the trader makes the difference between the option price and the market price.

Put Option

is a stock market instrument which gives the holder the right to sell an asset (the underlying), at a specified price (the strike), by (or at) a specified date (the expiry or maturity) to a given party (the buyer of the put). The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock.[1] The term “put” comes from the fact that the owner has the right to “put up for sale” the stock or index.

Stock

s all of the shares into which ownership of the corporation is divided. In American English, the shares are collectively known as “stock”. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company’s earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt), or voting power, often dividing these up in proportion to the amount of money each stockholder has invested.

Exempt Commodity

An exempt commodity is any exchange traded commodity other than those classified as an excluded commodity nor an agricultural commodity. Transactions in an exempt commodity may only take place between eligible contract participants or commercial entities, and cannot usually be executed on a trading facility.

Security

The term “security” is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation—via stock—a creditor relationship with a governmental body or a corporation—represented by owning that entity’s bond—or rights to ownership as represented by an option.

Stock Market

The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.

Fractional Share

Less than one full share of equity is called a fractional share. Such shares may be the result of stock splits, dividend reinvestment plans (DRIPs), or similar corporate actions. Typically, fractional shares aren’t available from the stock market, and while they have value to investors, they are also difficult to sell.

Stochastic Oscillator

A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values.

Stochastic Modeling

Stochastic modeling is a form of financial model that is used to help make investment decisions. This type of modeling forecasts the probability of various outcomes under different conditions, using random variables.

Qstick Indicator

The Qstick Indicator is a technical analysis indicator developed by Tushar Chande to numerically identify trends in candlestick charting. It is calculated by taking an ‘n’ period moving average of the difference between the open and closing prices. A Qstick value greater than zero means that the majority of the last ‘n’ days have been up, indicating that buying pressure has been increasing. In summary, the measure provides an approximation for a security’s exponential moving average (or EMA), opening price, closing price, and their difference, as well as these values simple moving averages (or SMA).

Parabolic SAR

The parabolic SAR attempts to give traders an edge by highlighting the direction an asset is moving, as well as providing entry and exit points. In this article, we’ll look at the basics of this indicator and show you how you can incorporate it into your trading strategy. We’ll also look at some of the drawbacks of the indicator.

Exponential Moving Average

An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.

Simple Moving Average (SMA)

A simple moving average (SMA) is an arithmetic moving average calculated by adding recent closing prices and then dividing that by the number of time periods in the calculation average. A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by that same number of periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

Down Volume

Down volume occurs when a security’s price decreases accompanied with a high volume of trading. Down volume is a trading scenario that may also be referred to as down on volume.

Up Volume

Up volume generally refers to an increase in the volume of shares traded in either a market or security that leads to an increase in value. Overall, volume can be influenced by a number of factors and may have various affects.

Market Depth

Market depth is the market’s ability to sustain relatively large market orders without impacting the price of the security. Market depth considers the overall level and breadth of open orders and usually refers to trading within an individual security.

Deep Market

A stock or other security is said to have a deep market if it trades in a high volume with only a small spread, or difference, between the bid price and the ask price.

By contrast, a security has a thin market if the trading volume for it is low and the spread is wide. This is sometimes described as a narrow market.

Covered Straddle

A covered straddle is an option strategy that seeks to profit from bullish price movements by writing puts and calls on a stock that is also owned by the investor. In a covered straddle the investor is short on an equal number of both call and put options which have the same strike price and expiration.

Straddle

A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and the same expiration date.

Covered Straddle

A covered straddle is an option strategy that seeks to profit from bullish price movements by writing puts and calls on a stock that is also owned by the investor. In a covered straddle the investor is short on an equal number of both call and put options which have the same strike price and expiration.

Straddle

A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and the same expiration date.

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