Broker terminology

An underlying asset is an active financial instrument that serves as the basis for entering into futures or options contracts. This asset can be of various types, including stocks, bonds, commodities, currencies, indices and other financial instruments. When transacting in futures or options contracts, investors are betting on the future change in the price of the underlying asset. The underlying asset determines the outcome of the transaction and its behaviour plays a key role.

Examples of underlying assets vary depending on the type of contract and the market. For example, in the case of gold futures, gold becomes the underlying asset, while in the case of stock options, the respective stocks act in this role. The use of underlying assets in financial instruments allows investors to diversify their portfolios and protect themselves from the risks associated with fluctuations in the prices of these assets.

A currency pair is a key instrument in the foreign exchange (Forex) market and consists of two currencies – a base currency and a quoted currency. The base currency plays the role of the basis for trading and the quoted currency is used to express the value of the base currency. An example is the EUR/USD pair, where the euro is the base currency and the US dollar is the quoted currency. The price of a currency pair shows how much of the quoted currency is required to buy one unit of the base currency.

Bulls are traders or investors who take a more optimistic stance in the market and assume that asset prices will rise. They actively trade upwards, buying assets in the hope that prices will rise later. Bull trading is based on confidence in the long-term strengthening of the market or a particular asset.Bull Market:
A bull market is characterised by a situation in which the prices of general trending assets increase over a long period of time. Under such conditions, bullish trends become dominant and many investors anticipate further price increases. A bull market encompasses a variety of financial markets including stocks, commodities, currencies, etc.

Often a bull market is accompanied by increased trading volume, investor confidence and general optimism about the economic outlook. Investors may employ strategies to buy assets during a bull market in order to capitalise on perceived price increases.

However, it is important to note that bull markets are not permanent and market conditions can change. Bull and bear market periods alternate depending on various factors such as economic indicators, political stability, changes in global trade and other events that affect financial markets.

Bears represent traders or investors who adopt a pessimistic stance in the market and expect asset prices to decline. These market participants actively engage in downside trades, selling assets in the hope that prices will subsequently decline. Bear trading is based on the assumption of a long-term weakening of the market or a particular asset.

Bear Market:

A bear market is characterised by a situation in which asset prices generally decline over a long period of time. In a bear market, pessimistic sentiment becomes dominant and traders expect prices to continue to go down. A bear market encompasses a variety of financial markets including stocks, commodities, currencies and others.

In a bear market, investors often take actions to protect their portfolios, such as selling stocks, shifting to more conservative investments, or using strategies to profit from lower prices. Bear market periods can be caused by a variety of factors such as economic downturns, geopolitical instability, deteriorating financial performance, and others.

It is important to note that market conditions are constantly changing and a bear market period can be followed by a bull market period and vice versa. It is important for investors to monitor changes in economic and financial conditions in order to make informed decisions regarding their investments.

Currency pairs come in forward (e.g. EUR/USD) and inverse (e.g. USD/JPY). Traders in the foreign exchange market use currency pairs to buy and sell, and understanding the dynamics of their value helps them make decisions about trading and investing in the Forex market.

The bid represents one of the two main prices in any trade transaction and reflects the maximum price at which a buyer is willing to purchase a particular asset. This term is also known as the bid price. When a trader or investor intends to purchase an asset, he or she provides a bid, indicating the highest amount willing to pay for that asset.

The trading process usually involves two main prices: bid (bid price) and ask (ask price). The bid and ask make up the price spread – the difference between the price at which a buyer is willing to buy and the price at which a seller is willing to sell. It is important to note that bid is always lower than ask.

Example:

Suppose an asset has a current price of $50. If a trader puts in a bid to buy this asset at $48, his bid becomes visible in the market as the maximum price at which he is willing to buy the asset. If another trader agrees to sell the asset for $48 or less, a trade is made.

It is important to note that the bid can change depending on market conditions and the trader’s strategy. The bid and ask provide information about liquidity and current trends in the market, which are key elements in determining the price of an asset at a particular point in time.

Ask is one of the two main prices in any trade transaction and refers to the minimum price for which a seller is willing to sell a particular asset. This term is also known as the “bid price”. When a trader or investor intends to sell an asset, he or she sets an ask, indicating the lowest amount he or she is willing to accept for his or her asset.

The trading process usually involves two main prices: bid (bid price) and ask (ask price). The difference between the bid and ask prices is called the price spread, with the ask always higher than the bid.

Example:

Suppose an asset has a current price of $50. If a trader sets an ask to sell this asset at $52, his ask becomes visible in the market as the minimum price at which he is willing to sell the asset. If another trader agrees to buy the asset for $52 or more, a trade is made.

It is important to note that the ask can change depending on market conditions and the seller’s strategy. Ask and bid provide information about liquidity and current trends in the market, being key elements for determining the price of an asset at a given point in time. They also serve as the basis for calculating the price spread, which can serve as an indicator of volatility and activity in the market.

Spread is the difference between the bid price (bid) and ask price (ask) in the market. This indicator plays an important role in assessing liquidity and the degree of sparsity of market orders. The spread is measured in pips, per cent or dollars depending on the asset type and trading platform.

Bid Price (bid): This is the maximum price for which a buyer is willing to buy an asset.

Ask price: This is the minimum price for which a seller is willing to sell an asset.

Spread Calculation:

Spread=Offer Price(ask)-Ask Price(bid)

Spread=Offer Price(ask)-Ask Price(bid).

Example:

Suppose an asset has a current bid price (bid) of $50 and an ask price (ask) of $52. Then the difference between them (spread) will be equal to $2.

The spread is an important indicator for traders because it reflects the degree of liquidity and transaction costs in the market. A smaller spread usually indicates a more liquid market, making it easier to execute trades. A larger spread may be associated with low liquidity or higher transaction costs. Traders can use spread information to assess current market conditions, choose the best time to enter or exit trades, and make trading decisions.

A futures contract is a standardised contract between two parties that commits to buy or sell a certain quantity of an asset at a fixed price in the future. This financial derivative allows protection against the risks of price fluctuations and speculation on changes in asset prices.

The main elements of a futures contract include the asset (to which the contract refers), the price (fixed when the contract is entered into), the term (expiry date of the contract), the size of the contract (quantity of the asset) and the margin (collateral when the position is opened).

The uses of futures contracts include hedging (protection against unfavourable price changes), speculation (making money from price changes) and arbitrage (profiting from price differences between markets or contracts). These contracts are traded on organised exchanges, which ensures their standardisation and liquidity.

Leverage (or “leverage”) in finance and trading is a financial instrument that allows traders to increase their positions using borrowed funds from a broker. This allows for increased potential profits, but comes with an increased risk of loss.

The main characteristics of leverage include proportion (the ratio of own funds to borrowed funds), borrowed funds (provided by the broker) and margin (the proportion of own funds required for trading). An example of leverage: with $1,000 of equity and 50:1 leverage, a trader can control a $50,000 position.

The benefits of leverage include increased profit potential and access to markets for traders with limited funds. However, there are risks such as increased losses and the possibility of a margin call by the broker.

Margin is a share of a market participant’s personal funds, which must be deposited to open and maintain a trading position. It acts as a security and guarantee of fulfilment of financial obligations of the trader to the broker, especially in case of using leverage.

The main elements of margin include initial margin (required to open a position) and maintenance margin (minimum amount to hold a position). An example of using margin: with $1,000 of equity and 10:1 leverage, the initial margin to open a $10,000 position might be $1,000.

Margin plays an important role in enforcing obligations, managing risk and preventing additional losses through margin calls. Its use requires careful management and matching the trader’s financial capacity.

Stop Loss is a protective order that a trader sets to automatically close a trading position when the price of an asset reaches a certain level. This order helps to minimise losses and prevents additional losses in case of unfavourable changes in market conditions.

The main characteristics of Stop Loss include the target level at which the stop loss is set, activation when the trigger level is reached, execution at the market price and its role in minimising losses.

Using Stop Loss in a trading strategy helps to manage risk, avoid emotional decisions in stressful situations and structure trading operations. Traders are advised to use Stop Loss with caution, taking into account market volatility and their financial goals.

Stop Loss is a protective order that a trader sets to automatically close a trading position when the price of an asset reaches a certain level. This order helps to minimise losses and prevents additional losses in case of unfavourable changes in market conditions.

The main characteristics of Stop Loss include the target level at which the stop loss is set, activation when the trigger level is reached, execution at the market price and its role in minimising losses.

Using Stop Loss in a trading strategy helps to manage risk, avoid emotional decisions in stressful situations and structure trading operations. Traders are advised to use Stop Loss with caution, taking into account market volatility and their financial objectives

Take Profit is a type of order that a trader sets to automatically close a trading position when a certain price level is reached. This order provides an opportunity for a trader to capture positive results and close a trade at a predetermined price before market conditions may change in an unfavourable direction.

The main characteristics of Take Profit include setting a target profit level, which is determined by the trader based on technical analysis, support and resistance levels, as well as other factors. When the set price level is reached, the Take Profit order is automatically executed, which leads to closing the deal and fixing the profit.

Take Profit plays a key role in the planning of trading operations, provides psychological satisfaction by closing profitable transactions and helps the trader to effectively manage his portfolio, balancing between potential profits and losses.

A trading terminal is a specialised computer application designed for financial transactions and stock trading. These terminals provide traders with access to a variety of market information, analysis tools and the ability to trade directly from a computer or mobile device.

The main features of a trading terminal include an intuitive interface with price charts and analysis tools, providing up-to-date market information, access to various trading instruments, the ability to place various types of orders and instant execution of trades. Trading terminals also provide analytical tools, portfolio management and news feeds to inform traders about current market events.

Examples of popular trading terminals include MetaTrader 4 and MetaTrader 5 for forex and CFD trading, Thinkorswim for trading stocks, options and futures, Bloomberg Terminal for professional traders and investors, and E*TRADE for trading stocks, options and other financial instruments. Trading terminals provide all the necessary functionality for successful exchange trading in the modern financial environment.

• Liquidity and Trade Assurance: Market makers provide liquidity to the market, making it easy to execute trades without significantly affecting prices.
• Pricing and spread: They set prices for assets by creating a spread and making money on the difference in prices.
• Smoothing market fluctuations: Market makers are able to smooth out market fluctuations by preventing price spikes through their active participation.
• Determination of current prices: active participation of market makers helps determine the current prices of assets.
• Active trading participation: Market makers actively participate in trading, providing liquidity and a willingness to buy and sell in large volumes.

• National Banks: Central banks can act as market makers for their national currencies.
• Investment Banks: Large investment banks serve as market makers in various financial markets.
• Financial companies: Some financial companies that specialize in trading are also market makers.

• Conflict of interest:
  • There may be a conflict of interest, since market makers can have their own positions in the market and make money on price differences.

• Market manipulation:
  • Some market makers may face charges of market manipulation, including setting artificial prices.

• Concentration of power:
  • The activities of large market makers can lead to the concentration of power in the hands of a limited number of market participants.

• Lack of Unambiguous Direction:
  • The main feature of a flat is the absence of a clear upward or downward trend in the market. Prices fluctuate around support and resistance levels.

• Horizontal Levels:
  • Prices form horizontal support and resistance levels between which the market fluctuates.

• Low Volatility:
  • During sideways movements, market volatility is usually lower than during trend periods.

• Propensity to Change:
  • A flat market can turn into a trend movement at any moment, so traders carefully monitor signals of changes in market dynamics.

• Range Limits:
  • Traders use support and resistance levels to determine the boundaries of a range during sideways movements.

• Oscillator Indicators:
  • Indicators such as RSI (Relative Strength Index), Stochastic Oscillator and others can be used to identify periods of low volatility and possible turning points.

• Trade Volume:
  • Analysis of trading volume can also help identify flat periods.

• Timeframe Duration:
  • The duration of the time frame can vary from a few seconds to several years, depending on the choice of the trader and the goals of the analysis.

• Graphic Type:
  • The time frame determines how price information is presented on the chart. For example, short-term time frames (such as 1-minute or 5-minute) use candlestick charts to display prices during each time frame.

• Trading Solutions:
  • Different time frames can lead to different trading decisions. For example, short-term traders may prefer shorter time frames to quickly react to price changes, while long-term investors may use daily or weekly time frames.

• Volatility:
  • Time frame can also affect market volatility. Short-term timeframes may be more susceptible to short-term fluctuations, while longer-term timeframes may show more consistent trends.

• 1-Minute (M1)
• 5-Minute (M5)
• 15-Minute (M15)
• 1-Hour (H1)
• Daily (D1)
• Weekly (W1)
• Monthly (MN)

• Trend Confirmation:
  • Price analysis on different time frames can help confirm the presence of a trend in the market.

• Search for Input and Output Points:
  • Time frames can be used to determine optimal entry and exit points for trades depending on the trading strategy.

• Determination of Support and Resistance Levels:
  • Time frame analysis helps identify support and resistance levels.

• Risk Management:
  • Time frames can influence the level of risk, and traders can tailor their risk management strategies according to the chosen time frame.

• High Volatility:
  • Rapid Price Movements: During periods of high volatility, there is rapid and significant price movement over a wide range.
  • Sharp Price Jumps: Price charts can display sharp ups and downs, presenting traders with both risk and opportunity.

• Low Volatility:
  • Slow Price Movement: During periods of low volatility, prices move slowly and the market becomes more stable.
  • No Jumps: Sharp and large price changes become less likely, which may be attractive to conservative strategies.

• Standard Deviation: Measures the spread of prices from their average.
• Volatility Index (VIX): Measures expected volatility in the US market and serves as an indicator of investor anxiety.
• True Range (TR): Determines the maximum difference between the current high and low prices, and the current high price and the previous closed price.

• Definition of Risk: High volatility presents risk, but also creates opportunities for profit. Low volatility may be attractive for more conservative strategies.
• Strategy Selection: Traders can tailor their strategies depending on the current level of volatility, preferring short-term strategies during periods of high volatility and long-term strategies during periods of low volatility.
• Determining Entry and Exit Points: Knowing the volatility level helps traders determine the optimal stop loss and take profit levels.

• Preventing Price Falls: A support level serves as a barrier that prevents an asset from falling below a certain level.
• Increased Demand: At the support level there is usually increased interest from buyers, which can be perceived as an opportunity to enter a position.

• Preventing Price Rising: A resistance level serves as a barrier that prevents an asset from rising above a certain level.
• Increasing Supply: At a resistance level there is usually increased interest from sellers, which can be perceived as an opportunity to close a position or sell.

• Entry and Exit Points: Support and resistance levels can be used to determine optimal entry and exit points for trades.
• Stop Loss and Take Profit: Determination of stop loss (loss protection) and take profit (profit taking) levels based on support and resistance levels.
• Trend Confirmation: A break through support or resistance levels can serve as an indicator of a change in the current trend.
• Trading System Signals: Some trading systems are based solely on price dynamics relative to support and resistance levels.

• Spring Effect: When prices reach a support level, demand for the asset increases, and prices, as if bouncing off a “spring,” begin to move upward.
• Multiple Touches: The level of support is usually not static; it is confirmed by repeated touches, when prices repeatedly drop to this level and move away from it.

• Psychological Levels: Numbers ending in round numbers often become support levels due to the psychological perception of traders.
• Previous Lows: Previously reached lows may become support levels as traders anticipate increased demand for these levels.

• Entry Points: Many traders use support levels to determine the optimal entry points for a trade.
• Stop Loss Levels: The support level can also serve as a definition of the stop loss level that prevents losses if the level is broken.
• Trend Confirmation: Prices holding a support level can confirm the current uptrend.

• Glass Ceiling: When prices reach a resistance level, growth slows and prices often fail to rise above that level.
• Multiple Touches: A resistance level is confirmed by repeated touches when prices rise to this level several times and fail to overcome it.

• Psychological Levels: Numbers ending in round numbers often become resistance levels due to the psychological perception of traders.
• Previous Highs: Highs previously reached may become resistance levels as traders anticipate increased supply at these levels.

• Entry and Exit Points: Traders often use resistance levels to determine optimal entry and exit points for trades.
• Stop Loss Levels: The resistance level can also serve as a definition of the stop loss level that prevents losses if the level is broken.
• Trend Confirmation: A break through a resistance level can serve as an indicator of a change in the current downtrend.

• Mathematical Formula: Indicators are based on mathematical formulas that include price data, volume or other market parameters.
• Graphical View: Indicator results are displayed on charts in the form of lines, histograms or other graphical elements.
• Signals and Levels: Indicators can generate buy, sell, and overbought or oversold signals in the market.

• SMA (Simple Moving Average): An indicator that displays the average price of an asset over a certain period of time to determine the current direction of the trend.
• RSI (Relative Strength Index): Evaluates speed and price changes, helping to identify overbought or oversold market conditions.
• MACD (Moving Average Convergence/Divergence): Helps identify trend strength and direction, and provides buy and sell signals.
• Bollinger Bands: Assess market volatility by showing how far prices have deviated from a moving average.

• Entry and Exit Points: Indicators are used to determine the optimal entry and exit points for trades.
• Trend Confirmation: Can be used to confirm an existing trend or identify possible changes in market direction.
• Risk Management: Helps determine stop loss and take profit levels, as well as assess risks and opportunities.

• Opening to Buy: A long position is opened when a trader purchases an asset in hopes of its future growth.
• Goal – Price Growth: The main goal of a long position is to make money on the upward movement of the asset price.
• Loss on Falling Prices: If prices begin to decline, the long trader may suffer losses.
• Closing a Position: A long position is closed when the trader decides to sell the asset, locking in profits or limiting losses.

• Opening a Position: The trader purchases 100 shares of Company X at a price of $50 per share, opening a long position.
• Price Increase: Company X’s stock price increases to $60 per share.
• Closing a Position: The trader decides to sell his 100 shares at the current price of $60, taking a profit.

• Trending Markets: Long positions are usually used in conditions of an established uptrend in the market.
• Long-Term Investments: Investors can take long positions to hold assets for the long term.
• Combination with Other Strategies: Traders can combine long positions with other strategies, such as the use of stop losses and take profits.

• Potential Losses: Long traders expose themselves to the risk of losing funds when prices decline.
• Diversity: Long positions can be part of a portfolio diversification strategy.
• Careful Analysis: Traders should conduct a thorough analysis of the market and fundamental factors before opening a long position.

• Sell: A short position is entered when a trader sells an asset in the belief that its price will fall.
• Goal – Price Fall: The main goal of a short position is to make money on a downward movement in the price of an asset.
• Losses when Prices Rise: If the price of an asset begins to rise, the short trader may suffer losses.
• Closing a Position: A short position is closed when the trader decides to buy back the asset, locking in profits or limiting losses.

• Opening a Position: The trader sells 100 shares of Company Y at a price of $70 per share, opening a short position.
• Price Fall: Company Y’s stock price decreases to $60 per share.
• Closing a Position: The trader decides to buy 100 shares at the current price of $60, taking a profit.

• Trending Markets: Short positions are taken in conditions of an established downward trend in the market.
• Use of Leverage: Traders can use leverage to increase the earning potential of short positions.
• Hedging: Investors can use short positions to hedge their long-term investments.

• Unlimited Losses: Potential losses on short positions can theoretically be unlimited, since the price of the asset can increase indefinitely.
• Difficulty of Forecasting: Predicting price declines can be difficult, and traders should be careful when taking short positions.
• Leverage Risk: Using leverage on short positions can increase risk as losses are also magnified.

• Normal Gaps: Occur due to natural changes in supply and demand in the market. May be due to news, events, company decisions, etc.
• Uptrend and Downtrend Gaps: Gaps can fill (prices return to the closing level of the gap) or remain open, which can indicate the strength of the trend.
• Exotic Gaps: Occur due to various events such as dividend payments, insider information and even geopolitical crises.

• News and Events: Sudden news or events that occur during a temporary lack of trading can cause a gap when the market opens.
• Increased Volatility: During periods of increased volatility, such as as a result of major events, gaps may be larger.

• Gap trading: Traders can actively use gaps for trading, seeking to profit from rapid price corrections.
• Gap Fading: Traders can employ a fade strategy by assuming the gap will be filled and trading in the direction of the gap closing.

• Gap Filling: In some cases, a gap may be filled when prices return to the gap’s closing level during subsequent trading sessions.
• Gap Left Open: Sometimes a gap remains open, which can indicate the strength of the trend and lack of reverse price movement.

• Price Jumps: Gaps can be accompanied by price jumps, which can lead to significant changes in asset values.
• Weak Liquidity: When the market opens, there may be low liquidity, which increases the risk for traders.
• Uncertainty: Gaps can be caused by unexpected events, and their direction and impact are often difficult to predict.

• No US Dollar: Cross currency pairs do not include the US dollar, which distinguishes them from major pairs.
• Lower Liquidity: Cross-currency pairs tend to have lower liquidity compared to major pairs due to generally lower trading volumes.

• US Dollar Presence: All major pairs include the US dollar paired with another major currency, serving as the base or quote currency.
• High liquidity: Major pairs have high liquidity and trading volumes, which makes them attractive to many traders.
• Stable trends: Typically, major pairs are characterized by more stable trends and predictable behavior.

• EUR/USD (euro to US dollar)
• USD/JPY (US dollar to Japanese yen)
• GBP/USD (British pound to US dollar)
• USD/CHF (US dollar to Swiss franc)
• AUD/USD (Australian dollar to US dollar)
• USD/CAD (US dollar to Canadian dollar)

• Composition:
  • Cross-currency pairs: Includes two currencies excluding the US dollar.
  • Major pairs: Includes the US dollar paired with another major currency.

• Liquidity:
  • Cross-currency pairs: May have lower liquidity.
  • Major pairs: Characterized by high liquidity and trading volumes.

• Examples:
  • Cross-currency pairs: EUR/GBP, AUD/JPY.
  • Major pairs: EUR/USD, USD/JPY.

• Trading opportunities:
  • Cross-currency pairs: Provide traders with a variety of options when the US dollar is not available.
  • Major pairs: They have stable trends and often attract the attention of traders.

• Liquidity and Trade Assurance: Market makers provide liquidity to the market, making it easy to execute trades without significantly affecting prices.
• Pricing and spread: They set prices for assets by creating a spread and making money on the difference in prices.
• Smoothing market fluctuations: Market makers are able to smooth out market fluctuations by preventing price spikes through their active participation.
• Determination of current prices: active participation of market makers helps determine the current prices of assets.
• Active trading participation: Market makers actively participate in trading, providing liquidity and a willingness to buy and sell in large volumes.

• National Banks: Central banks can act as market makers for their national currencies.
• Investment Banks: Large investment banks serve as market makers in various financial markets.
• Financial companies: Some financial companies that specialize in trading are also market makers.

• Conflict of interest:
  • There may be a conflict of interest, since market makers can have their own positions in the market and make money on price differences.

• Market manipulation:
  • Some market makers may face charges of market manipulation, including setting artificial prices.

• Concentration of power:
  • The activities of large market makers can lead to the concentration of power in the hands of a limited number of market participants.