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CFD Trading - Glossary of Terms

 

Over the course of this guide, we’ve talked about a wide range of subjects, many of which may be new to you. Although not every term listed here was specifically mentioned in what you just read, these represent the core language of the professional trader, and are all terms you need to be familiar with. Use this as a handy reference.


A   B   C   D   E   F   G   H  I   L  M   O   P   Q   R   S   T   U   V


A
Average True Range (ATR)

This is a measure of market volatility over a specified period of time. To calculate, you simply take the average of the difference over a select number of days between the highest price and the lowest price, including any gap.

 

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B

Back Testing
Testing, using historical data to see if your chosen strategy is effective and profitable. Used to validate whatever system you’ve devised for yourself.

Base Currency
The first currency listed in a currency pair

Bear Market
A market that’s going up.

Bull Market
A market that’s going down.


C

Commodity CFD
A type of CFD that derives its price from the underlying commodity it’s meant to track, such as soybeans, wheat, oil, or gold.

Consolidation Market
A market that’s neither clearly moving up or down.

Contracts For Difference (CFDs)
A formal agreement between two parties to pay the difference in price from when the contract was opened until the contract is closed. CFDs can be traded over share, index, commodity, or forex markets.

Countertrend Trading
Entering a trade when planning/expecting the price to reverse direction.

Currency Crosses
Any currency pair that doesn’t have the US Dollar on either side of the equation.

Currency Pair
The means by which forex trading happens. The price is quoted in terms of the relative values of one currency against another.

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D

Debt-To-Equity Ratio

The ratio of the total debt of a company to the amount of capital that shareholders have invested in the company.

 

Derivatives
Any financial instrument that derives its price from the underlying security, index, currency pair, or commodity it tracks.

Donchian Channel
An indicator that has two boundary lines determined by the highest and lowest point in the last “X” number of days. It’s a useful method for differentiating a breakout from a consolidation.

Down Trend
Any series of lower highs and lower lows in the market price of any asset, over time.

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E

Earnings Per Share (EPS)
The profit a company makes, divided by the number of outstanding shares the company has. This is each share’s slice of the profits.

Ex-Dividend Date
The first day in which the buyer of a share is no longer entitled to a payment of the dividend the stock (or CFD) offers.

Exposure
The sum total value of all your positions in the market at any particular time. The greater your total exposure, the greater the chance of a big win or loss.

 

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F

Finance Charge
The cost to hold a given position from one trading day to the next. This charge is generally calculated, based on the country’s cash rate plus a small interest charge, added by your broker.

Fixed-Dollar Model
This is a risk management model, where you allocate a fixed amount of money to risk on any given trade.

Fixed Percent Risk Per Trade
This is a risk management model where you allocate a fixed percentage of your overall trading capital to risk on any given trade (generally, traders following this model keep their risk on any one position limited to 1-2%).

Forward Testing
The inverse of back testing. This is you testing your strategy in real time, as movements in price unfold. Forward testing is more reliable than back testing, though much slower to complete.

Fundamental Analysis
A method of evaluating the value of a company that relies on fundamentals like their financial statements, PE ratios, future growth projections and company financial statements.

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G

 

Guaranteed Stop Loss Order (GSL)
A type of stop order that guarantees a set price for which you can close your trade, regardless of whether the market traded at that value.

H

Hedging
A risk management technique designed to either reduce, or completely eliminate your financial risk.

I

Index CFD
A CFD that derives its price from the underlying index it’s tracking, like FTSE, Nikkei, The Aussie 200, Dow Jones, NASDAQ, etc.

Initial Margin
The minimum amount of investment capital required as collateral to establish a CFD position. Many CFD brokers, for example, only require a 5% margin.

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L

Leverage
The ability to invest with other people’s money as a means of amplifying your profits. WARNING: Using leverage is a two-edged sword, and will also magnify any losses you experience!

Leveraged Trading
Controlling an asset even though you only put up a small amount of your own money.

Liquidity
How actively a contract or market is traded, and the ability to get in and out of any given trade easily. If a market is highly liquid, there are almost no barriers to entry or exit. By contrast, a market with low liquidity is slower and more difficult to enter and exit. Example: Forex trading is highly liquid. Investing in real estate is relatively illiquid.

Long Trade
The act of buying a contract first and selling second. This is the traditional “buy low, sell high” approach to trading.

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M

Margin Call
The amount you will be required to pay y our broker to bring your account up to the appropriate initial margins to cover your current trades.

Marked to Market
The process by which margins are updated in real time, or at the end of each trading day, and the resulting cash payments credited or debited to your account.

Market Capitalization
The total value of a given company, calculated by multiplying its current share price by the total number of shares issued.

Market Makers
A company whose goal is to provide buying and selling prices over various financial instruments in the market.

Martingale Strategy
An investment strategy that recommends increasing your position size when a loss occurs, on the thinking that you’ll turn a profit when the price turns around.

O

Opening Gap
The difference between the closing price and the subsequent opening price of any given asset.

Options
A derivative that gives you the right to buy or sell a set number of shares on or before a specified date. Options work like insurance, where you pay a small premium and may benefit from a large payout if you’re correct.

Oscillators
An indicator useful in technical analysis that ranges between two set levels to show whether a security or contract is overbought or oversold.

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P

Percentage Stop
A type of stop-loss order that is placed a set percentage below the current share price, designed to close out a losing position before your losses become unmanageable.

Position Sizing
This is a risk-management technique that tells you how many shares of a certain position to invest in, and the amount of risk you’ll be allocating to that particular trade.

Post-market Auction
The last available trading opportunity of the day, just before the market closes. The ASX (Australian Stock Market) has a volume weighted average calculation that determines the actual closing price, depending on the number of buyers and sellers at the close.

Pre-Market Auction
The identical matching out of prices, as described in the definition of the post-market auction, where sellers are able to bid for a contract and the ASX determines the opening price as a result of that calculation.

Price-to-Earnings Ratio (PE)
A means of valuation calculated by dividing the current market price by the earnings per share.

Product Disclosure Statement (PDS)
A document that every financial services company is required to provide when offering or recommending a financial produced that is licensed under the Australian Financial Services Reform Act. This document will outline how the product in question worked, its potential benefits, and associated risks.

Pyramiding
A position-sizing rule where traders add to their existing position(s) in an attempt to maximize the potential profits on winning trades.

Q

Quote Currency
The second currency listed in a currency pair.

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R

Range-Bound Trading
Trading in a range, where prices fluctuate between two set points, over and over again. The two points are typically referred to as “Support” and “Resistance.” Oscillators are the most appropriate technical indicators in range-bound trading systems.

Requote
When you attempt to buy a certain number of CFD shares at a certain price, and your broker does not have that quantity available. Your broker may requote you a higher price, giving you the opportunity to accept or reject the offer.

Resistance
A price that a given asset struggles to break through at various times. The more times the market flirts with this price without breaking through it, the stronger the resistance is said to be.

Return On Equity (ROE)
The return a company generates based on the net assets they hold. It provides a good snapshot of how efficient the company is. To calculate, divide profit by net assets.

Return On Investment (ROI)

The amount of return you’ve realized on your invested capital. Calculated by dividing your return by your initial capital outlay.

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S

Scaling In
The act of initiating a trade by opening a small position in order to determine whether you should add to it to bring it up to your normal position size. For instance, if you’re using a fixed percent risk per trade risk management strategy that specifies buying 1000 shares in a given position, you may test the waters by only buying 500, with a plan to add the remaining 500 shares later, if the position develops in your favor.

Scaling Out
The act of gradually closing your trade as it moves in your favor or reaches some specified profit objective. It’s the opposite of scaling in, and is especially useful as trades approach resistance levels.

Sector CFD
A CFD that derives its price from the underlying sector it’s tracking, such as the tech or health sector.

Share CFD
A CFD that derives its price from the underlying company’s stock it’s tracking.

Short Trade
Selling high and buying back low. This is the opposite of a long trade. You open by selling on the expectation that the price will soon drop, so you can buy back at a profit.

Slippage
The difference between where you want to get in and where you actually get in for any given position you take.

Spot Price
The price that is quoted for immediate settlement. The spot price is often called the market price at a particular point of time.

Stop-Loss Order
A conditional order type you place with your broker to close your position if the price of your asset drops to a predetermined level (set by you).

Support
The opposite of a resistance price. A price that the asset is unable to fall below for a certain amount of time. The more often the price hits a support level, the more significance traders place on it.

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T

Technical Analysis
Any application of mathematical formulas applied over the price and/or volume history of the market in an effort to determine the probable next move of any particular asset.

Technically-Based Stop
A type of stop order where the placement is determined by information gleaned from a chart. Such a stop could be placed when an asset moves beyond support or resistance, veers away from a trend line, or other such conditions.

Tick
The smallest unit of measure by which the market price of any asset moves.

Time-Based Stop
A type of stop order (used to exit from a trade), based on a specified amount of time. Very rarely used, but can be valuable in certain situations.

Time Decay
The drop in value of a derivative as time passes. Time decay is especially relevant in terms of trading options.

Trading Plan
Your overall trading strategy that defines your entry, exit, and risk-management parameters. Your trading plan should be back-tested before you ever enter the market.

Trend-Following Trading
A trading strategy that attempts to profit from markets that tend to move either up or down for extended periods of time. As a (very general) rule of thumb, trend-following strategies allow you to make the most money with the least amount of effort.

Trend Line
A line drawn across a chart to line up successively higher bottoms in up-trending markets, or progressively lower tops in down-trending market. Basically, it just helps to clarify what you’re looking at.

Trending Market
A market that is moving consistently in one direction for an extended period of time.

Turnover
A measure of the dollars traded each day in a company and is calculated by multiplying the price by the volume.

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U

Up Trend
A series of higher lows and higher highs in an asset’s market price.

V

Variation Margin
Profits or losses on open positions on your CFD trades that are debited or credited daily.

Volatile Breakout Trading
Trading strategies that attempt to take advantage of short, sharp movements in the market over relatively short periods of time. Many volatile breakout trading strategies use support and resistance levels, trend lines, or pattern-trading techniques to identify opportunities.

Volatility Stop
A stop order where the placement of the stop loss adjusts as the volatility of the market adjusts. The ATR stop is an example of a volatility-based stop.

Volume
A measure of the number of shares or contracts that change hands during the time period being observed. Volume behavior is independent of price behavior and can be used to improve your analysis.

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