Basic Terminology and market analysis
If you are new on the market analysis, here you can read all the basics of trading you should know. Trading on financial markets may initially seem quite challenging and complicated. With the online accessible information, it is easy to cease to the fear of the unknown. On the other hand, it is an ever-expanding way of interpreting charts, data, and rapidly evolving markets. One of the best things to keep in mind is simplicity. Let’s start step by step with the basic concepts and definitions that you will use on your trading path.
Financial Leverage
Leverage allows you to achieve high market exposure with a relatively low initial deposit. Whenever you see a more than 5%, or 10:1, it’s the value of the financial leverage available in that market. This just happens when referring to an initial deposit.
Benefits of financial leverage
- Leverage allows you to make the most of your funds by trading significant positions with an initial deposit of a fraction of the traded value
- You can open more significant areas than you would be able to open in the case of a physical purchase
- Your returns as a share of your initial investment are much higher
- You can equate your capital by investing in various assets
Risks of financial leverage
- When your profits increase, your losses may do it as well. If you do not manage the risk carefully, injuries can become very significant for the entire investment.
Pip
The term pip is comes from percentage in points. Pip represents the smallest price change in the relevant market. For instance, pip size varies for different markets.
Price bid and ask price
Firstly, there are always two prices available for trading basics on financial markets: ask price and bid price. The bid price is always lower than the asking price. The difference between them is the spread, which is also the cost of opening a position on the market.
If you open a long position, or otherwise you “buy” on a specific instrument, your position will be opened at the asking price and closed at the bid price. On the other hand, when you execute a short position, or otherwise “sell”, your position opens at the bid price. Therefore, it will close at the asking price.
Spread on the market
Spread on financial markets is the difference between the asking price of an instrument and the bid price of an instrument. When opening trade on the market, the spread is also the main cost of the position. The narrower the spread, the lower the trading costs. The wider the spread, the higher the price. To start making money, spread is also the minimum distance that the market must cover in your favor.
Stop Loss and basics of trading
Experienced traders will surely confirm that prudent and consistent risk management is one of the keys to success in the long-term financial markets. Using stop loss is one of the most popular ways a trader can manage his risk.
Stop-loss is a type of closing order that allows the trader to specify a specific level in the market. This is is just happening if the price gets usually at a loss. Also, the trade will be automatically closed by our systems. This is where the stop loss comes from as the order effectively stops your losses. Therefore, stop loss helps to manage your risk and keep your losses at an acceptable and controlled minimum amount.
Risks of Stop Loss
Firstly, prices set by Stop Loss are not guaranteed closing prices. The broker executes the order at the same or best possible price, according to the law of received requests. In the event of high market volatility, there may be a significant difference between the entered and realized closing price. Similarly, the Stop Loss order at the nearest possible price. But just in the case of the so-called price gap. Also, when the broker will do the analysis of the market “skips” the registered price.
Take Profit
Certainly, this is must know in as a basics of trading. The take profit order is an order that closes your trade if it reaches a certain level of profit. If the Take Profit level you set is reached, the deal will be closed at the current market price.
Breakout and Pullback
One of the best breakout entries is to wait for the pullback/throwback to appear on the chart. This is a very useful concept often used by professional traders. It is an effective technique for trading forex breakout opportunities. It happens very often that, after a breakout of a strong support or resistance border, the market begins to lose strength and tries to return to the breakpoint. This is the pullback/throwback movement.
