Trading Terminologies
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Trading Terminologies

Our

TRADING TERMINOLOGIES


 

We like to trade individual stocks on the United States equity markets, but our true preference is to trade options on stocks because of the increased leverage and better risk management. Using long calls, long puts, or spreads, our rate of return can increase dramatically while our risk is reduced. Please go to the CBOE.com for more details on option terminology not found here.

 

Entry (or entry point)

The price or range of prices where the trader looks to open or “get into” a position.

Long

A long (or long position) is the buying of a security such as a stock, commodity, or currency with the expectation the price of the asset will rise in value. In the context of options, it is the buying to open of an options contract. A long position is the opposite of a short (or short position).

Profit Target or Target

This is where we expect the trade to go to make money for us. Sometimes we will have two, or even three profit targets, depending on how the security is trading and how the chart looks. Of course we will let you know when these choices are available!

Risk to Reward

Basically, this is how much you are trying to earn versus how much you are willing to risk to make the trade. Commonly, this is expressed as 3:1, 5:1, or whatever the trade may be. What this means is the trader is looking to make $300 (or $500, or whatever the trade may be), and will risk $100 to do the trade.

Short

A short (or short position) is where you sell the security first, with the expectation that the price will fall, where you can “buy it back” later. The opposite of a “long position.” In the context of options, it is the selling to open of an options contract.

Stop order (or stop loss)

An order to exit a position if the security has changed direction from the trader’s original analysis. When a position is first entered, the stop loss can prevent the trader from taking enormous losses. When the trade has moved your direction a predetermined amount, the stop loss will be moved to “lock in” profits. This is where the stop order becomes really fun! Locking in profits is one of the more satisfying things we can do as traders!

Win loss ratio

This ratio tells us how frequently a trader is “right” on their trades. Commonly expressed as wins out of ten, for example: 6:4 win:loss ratio would mean that a trader makes money on 6 out of every ten trades. This is the most over-emphasized, yet also nearly the most useless metric in the world of trading! If you make money on 9 out of 10 trades, you still may not be profitable. Why? If you take a one dollar profit on every winner, yet one hundred dollar loss that one time, guess what? You are still down $91! What happens if you have a win:loss ratio of 1:9? Just reverse the numbers, and you can see that this trader can still be very profitable. As a general rule of thumb, Wall Street professionals strive for a 6:4 win:loss ratio.

Call options

A “call option” is an agreement that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other instrument at a specified price (strike price) within a specific time period (the expiration date.) The buyer generally profits on a call option when the underlying asset increases in price.

Put option

A “put option” is an agreement that gives the buyer the right, but not the obligation, to sell a stock, bond, commodity, or other instrument at a specified price (strike price) within a specific time period (the expiration date.) The buyer generally profits on a put option when the underlying asset decreases in price.

Option spreads

At Investorsforce.com, one of our preferred strategies for investing in highly volatile stocks is to use an option spread. This involves the simultaneous buying and selling of options-for example, a vertical call spread would involve buying one strike price option while also selling a higher price option. This reduces our cost and risk-which is good!-while at the same time possibly limiting our profits. Professional traders are always more aware of their risk than their reward!

Moving Averages

Moving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action and filter out the noise. The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These moving averages can be used to identify the direction of the trend or define potential support and resistance levels. While there are as many different moving averages and their corresponding strategies as there are traders in the world, when combined with our other tools, moving averages can be extremely effective.

Resistance

Resistance (resistance level) is a price point on a chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level. Resistance levels are characteristically found at the upper levels of range bound markets. They may be very short lived, or may remain a resistance level over an extended period of time.

Support

Support or support level refers to the price level below which, historically, a stock or other security has had difficulty falling. It is the level at which buyers tend to enter the stock. If the price of a stock falls toward a support level, it is a test for the stock: the support is either confirmed or eradicated. Confirmation occurs as buyers move into the stock, causing it to rise. If the price moves past the support level, it means the support level failed, and the market is looking for a new level.

Trend line

A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trendlines are a visual representation of support and resistance in any timeframe. Trendlines are used to show direction and speed of price, and also describe patterns during periods of price contraction.

Over bought

Overbought refers to a situation in which the demand for a certain asset or security unjustifiably pushes the price of that asset or underlying asset to levels that are not justified by fundamentals. Overbought is often a term used in technical analysis to describe a situation in which the price of a security has risen to such a degree – usually on high volume – that an oscillator has reached its upper bounds.

Over sold

Oversold is a condition in which the price of an underlying asset has fallen sharply to a level below where its true value resides. This condition is usually a result of market overreaction or panic selling and is generally considered short term in nature. When an asset has been oversold, the price is expected to rebound in an event referred to as a price bounce.

As a subscriber, we at Invesorsforce.com will show you how we use a combination of the technical analysis studies above to consistently beat the markets!

When learning about what stocks, options, forex, and futures actually ARE, please refer to your broker’s website and customer service team.