Trading in the financial markets is a popular side income for many around the world, mainly thanks to the flexible nature of this type of activity. However, like any other profession, you need to acquire knowledge about how the industry functions in order to succeed, as well as to design a viable trading strategy.
If you are a beginner trader, the initial learning steps are key to the rest of your trading journey. You can start off with an MT4 download for PC and make yourself familiar with this software, but wait before placing your first trade. Here are some basic trading terms you can’t afford not to understand before getting started.
Leverage
By using leverage, a trader is able to place larger trades and use additional purchasing power. The broker basically lends the trader an extra fund on top of their deposit, helping the trader gain a potentially larger exposure on the open market. Brokerages offer different leverage levels, depending on the asset type and the users’ preferences. Your country of residence is also an important factor since financial regulation for using leverage varies around the world.
Spread
If you’ve already installed the platform, you’ve probably noticed there are two prices for each asset. One is the bid (buy price) and the other is the ask (sell price). The difference between the two is called the spread. This represents the main cost of trade you need to pay. Spreads can be fixed or varied, meaning they are either constant or they change depending on market volatility, time of the day, etc.
Bull/Bear Market
A bull market occurs when prices are rising over a given period, forming higher lows and higher highs. For example, the commodities market is now considered a bull market because prices have been rising consistently for over a year.
On the other hand, a bear market occurs when prices are falling, forming lower lows and lower highs. Bonds are among the assets that are now posting negative returns, which means sellers hold the upper hand.
Volatility
Volatility represents the rate of price fluctuations for assets. A volatile asset commonly experiences larger daily up/down swings, while a low-volatility asset shows tighter ranges. Traders use various measures for determining volatility, including the Volatility Index (VIX), or IV Rank. By analyzing volatility, you can adjust risk parameters as well as your trading strategy. With a flexible approach, it is much easier to cope with challenging market conditions.
Financial derivatives
Developments in the financial industry led to the appearance of derivatives. These are assets widely available, especially for retail traders, which track the price of an underlying instrument (stocks, currencies, commodities, or indices). Popular derivatives include contracts for difference (CFDs), options, and futures.
Technical/fundamental analysis
Analysis is a must before opening a trade. There are multiple techniques for doing that, and the most popular two of them are technical and fundamental analysis. When examining technicals, you can analyze price developments using indicators, patterns, trends, and other structures.
Fundamental analysis refers to variables that don’t deal with the asset price. It can be, for example, gross domestic product (GDP) figures, inflation data, unemployment rates, or industrial activity. For stocks, fundamentals are the earnings generated by the underlying company.