Day trading is popular among traders. Many aspiring traders view day trading as a worthwhile pursuit, to make the most out of rising and falling markets. Before we go into the many terms involved in day trading, it is important to understand what day trading entails. It refers to the buying and selling of stock, securities, and assets on the same day.
- Day trading entails the same-day buying and selling of stocks or securities, using technical analysis for predicting price movements and fundamental analysis to evaluate intrinsic value.
- Leverage amplifies both potential profits and losses by using borrowed funds for trading, while margin is the required deposit to open and maintain a leveraged position.
- Understanding trading terms like bullish and bearish markets, volatility, and employing strategies like stop orders are crucial to managing risks and emotions in day trading.
Here are the important terminologies a trader may familiarise with before start trading;
1. Technical Analysis
Technical analysis uses market data or technical indicators to predict the future movement of the price of a security. This method of evaluation assumes that the collective buying and selling of a particular security within a market reflects all the necessary information pertaining to that security .
2. Fundamental Analysis
Fundamental analysis is an evaluation of the intrinsic value of a stock or security and factors that can affect its value in the future. There are two ways of how fundamental analysis works:
This approach takes an overview of the economy, assessing the entire market first. Thereafter, it narrows down into a sector, then an industry, and finally a company .
This approach inverts the top-down analysis by starting out with a specific stock and scaling upwards to the general economy.
Leverage involves using borrowed funds to increase your exposure to a trading position that exceeds your cash deposits. In most cases, your broker allows you to access leverage using your margin. If your broker offers leverage, they’ll also provide the borrowed funds .
As a new trader, it is critical to understand that leveraged trading comes with high risks. Leverage can amplify both your profits and losses, so be cautious whenever you trade with leverage.
In day trading, margin is the amount of money required for you to open a leveraged position.
There are two types of margins:
This is the initial amount of money required to open a position. Most times, brokers refer to it as a “deposit”. The deposit is also the amount of money needed to access leverage from your broker .
This is the amount of money needed to keep your positions open. If your trade incurs a loss or your deposit can no longer keep your position open, your maintenance margin kicks in. Without maintenance margin, your broker will give you a margin call.
A margin call requires you to fund your account with more funds, which essentially becomes your maintenance margin.
5. Buying Power
In day trading, you need to be able to buy and sell whenever you need to. This means that you should have the balance and leverage in balance ready for any transaction you decide to take.
Your buying power is the balance you have with your margin. For example, if you have 4 times leverage with a $100 balance, your buying power is $400. If you trade with $200 then you will remain with a $200 buying power .
Equity is the current value of your trading account, or essentially, your account balance. Equity also accounts for any potential upside or losses from your open positions. For this reason, your equity may fluctuate based on your account activity. If your trades rise and fall in value, your equity follows suit .
Bullish means that the stocks are moving upwards and the general stock market sentiment is strong. When a trader describes the market to be bullish, they suggest that they expect stock prices to rise. When a trader is bullish on a stock or the market, they are expecting it to go up and hence, are likely to take a long position when day trading.
When the market is weak and the stocks or a specific stock is going down, traders refer to it as bearish. When the general market sentiments are bearish, traders have the opportunity to take short positions on different securities.
Volatility is the upward and downward fluctuations in the price of a stock or currency pair over time. It provides a measure of the risk and potential reward possible within the price movements of a given security .
10. Trading Psychology
Trading psychology involves assessing and learning to manage all the emotions and feelings as a trader may experience in the markets. While some emotions will be helpful in your trading journey, others may not. Strong trading psychology helps you manage emotions like fear, anxiety, greed, and anger which can have a detrimental effect on your trading outcome .
11. Stop Order
Day trading is risky and losses are inevitable in the long run. A stop order comes in to ensure that you limit your losses to a particular price point. This order will trigger automatically when the price reaches the figure you have set so to lower the trading risks. This way, you will not suffer losses more than you will be able to recover .
You’ll run into plenty of these trading terminologies during your trading journey. You’ll see them often from various education materials, your trading platform and any trading communities you may have joined.
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