Glossary of terms
A Day Order is when a trader informs their broker to buy or sell a financial [instrument] at a predetermined price and this price will expire at the close of the day. For the trader to then take advantage of this price, it will imply that they would have to execute the trade when the price of the instrument hits that level at any time during the day the instruction was given. This type of order expires if the price stipulated in the order is not met by the time the market closes.
Another term that a day order is known as is a GFD or a Good for Day order and is an order that will expire at the end of the day’s trading session. Because the markets trade 24 hours a day, globally, the accepted time of day that a day order will expire is 17:00 EST, when the US markets officially close.
In most cases, a day order is used as a default means of trading and provides a great benefit in that the market does not have to be monitored continuously due to the day order being in place. Especially in the instance of an intraday trader, who is likely to trade several different instruments at the same time.Key Takeaways:
- A day order is when the trader informs the broker to buy or sell a financial instrument at a specific price on the day the instruction was issued.
- A day order will expire at close of trading for the specific day it was placed.
- Good for Day is another term a day order is referred to.
- Day order trading is used as a default means of trading.
Day trading refers to when traders buy and sell financial [instruments] over a period of a day and the intent is to profit from the small but rapid price fluctuations. These trades are normally executed via the internet.
It should be mentioned that this form of trading is not suitable for individual investors who do not possess both time and capital as it is a high-risk form of trading that requires a high amount of vigilance in order for it to be successful. The optimum conditions for a day trader are when the market is at its most volatile as they will see large movements in price in a relatively short period of time.Day traders can either work for a financial institution or operate individually.
One of the key strategies a day trader needs to possess is the know-how on which instruments to trade on as well as when to both enter and exit a trade. Most day traders trade with borrowed money commonly known as margin trading which utilises leverage amounts offered by brokers to gain greater exposure to the markets by only having to put up a smaller amount of capital as a deposit.
There are four main types of day trading techniques, these are momentum trading, pivot trading, scalping, and fading.Key Takeaways:
- When traders buy and sell financial instruments over a single session in the markets, normally a day, this is referred to as day trading.
- The key characteristics of a day trader are capital, time, experience, and knowledge.
- Momentum, pivots, fading, and scalping are four types of day trading techniques.
A decentralized market utilises a digital platform to allow traders to trade directly between themselves, rather than through a traditional centralised exchange.
Company stocks that are traded through stock exchanges such as the NASDAQ, the NYSE, or LSE, would be an example of centralised assets. Whereas, foreign currencies that can be traded directly between buyers and seller via a digital platform, and therefore do not require a centralised trading location are an example of a decentralised market.
One of the major advantages of a decentralized market is that should part of the system go down, the remainder of the network is still able to trade as normal. Also, a decentralized platform is managed on a peer-to-peer basis and therefore third parties do not have access to any information. This helps to maintain traders’ privacy and the security of their personal data.
The maindanger of a decentralised market is in that should the peer ever be hacked for their set of unique transaction keys or passwords; they will suffer a loss as the transaction cannot be reverted.
Digital or crypto currencies are decentralized currencies, that allow a buyer and seller to trade without need for a bank. Because they are not dispensed by a central bank such as the Bank of England or Federal Reserve, their value is deemed to be less susceptible to manipulation via a nation’s monetary policy. They are commonly used for trading in virtual markets.Key Takeaways:
- A decentralised market allows traders to trade directly with others, without the need for a central meeting place.
- Examples of decentralised trading instruments are foreign exchange currency and commodities
- A major benefit of decentralized markets includes greater protection of privacy and personal data.
- Decentralized currencies are currencies used to trade in virtual markets.
Direct Market Access or DMA is used when traders place trades directly in the electronic order books of exchanges. This process is facilitated in a digital manner. DMA is not commonly used by the majority of brokers and traditionally one would contact a broker by telephone or submit a request online and they would in turn firstly request a price quote from the liquidity provider.
Sometimes the opportunities to yield profits are very small. DMA shortens the time gap between orders that are placed and active trades for better results.
The DMA method can only truly work if there are a large number of traders that want to buy or sell the particular [instrument] in question. This means that instead of the trader being a price taker, it allows them to evolve into a price maker.
There are two types of DMA. With a one-touch DMA, an individual must literally press the button to authorise the order to be sent to the exchange. A true DMA permits the order to be sent directly to the exchange without any form of human intervention that must authorise it prior to sending.
DMA is a great way of trading for individuals who possess both the capital and the know-how to invest and should only be done by seasoned traders who make use of sophisticated trading strategies if they don’t make use of a brokerage platform that offers this as a service.Key Takeaways:
- DMA permits traders to place orders directly in the electronic order books of exchanges.
- During trading, the window for earnings might be very small, however DMA aids in quickening the process between when the order was placed and the active trade.
- DMA empowers the traders to become a price maker rather than a price taker.
- True DMA and one-touch DMA are two forms of Direct Market Access.
A downtrend refers to when the[price action] of a [financial instrument] moves to a lower price point over time. The price may fluctuate upwards and downwards during this time, but a downtrend occurs when these fluctuations amount to have a decline in the price overall over the course of the time frame.
Traders seek to distinguish downtrends from random downward price movements as the trend suggests that there is a significant likelihood that the price of the instrument is likely to continue moving downwards and that they should move to a [short position].In contrast, an [uptrend] is observed when price action is experiencing an overall upward trend over the course of the time frame.
Traders will often look for turning points in price action known as swing highs or swing lows, which may demonstrate that the price of an instrument is reversing. At these points, they would look to enter a trade in the opposite direction.For the trader to be convinced that the price was beginning to reverse, they would need to observe significant change in the underlying market conditions of the instrument.
Traders will utilise technical indicators to help confirm if a downtrend is taking hold. One major indicator to help with this is the [moving average],which can be applied over various time frames. If the price is below the moving average, it often confirms that an instrument is in a downtrend, with the reverse being true for an uptrend. Other indicators that may be used to help confirm a downtrend are the average directional index (ADX) or the relative strengthindex (RSI).Key Takeaways
- A downtrend is used to describe when the price of an instrument moves in a prolonged downward direction
- Traders seek trends and turning points to decide the types of orders they should place.
- If price is demonstrating lower high & lower lows, then a downtrend is often confirmed.
- Traders will often use technical indicators such as moving averages or RSI to help confirm that a downtrend is in place.
Drawdown is used by traders to measure any decline in investments over a specific time period and is important as a measure of historical risk when investors look at various stocks, [financial instruments],and investment funds.It is normally expressed as a percentage and measures the peak to trough movement (the decline) of an investment over a specific time period.
As an example,let us say that atrader buys aninstrument at £100 and the price rises to £115, before dropping to £90 and then rising again to £115.
As drawdown measures the distance from peak to trough, it would be calculated as follows:
Peak (£115) minusTrough (£90) equals £25.
Drawdown is then calculated as Distance (£25) divided by Peak (£115),equalling21.7%.
A drawdown value remains in effect until it moves back above the peak as it is unknown if a lower trough could be formed prior to the subsequent rise, resulting in a higher drawdown percentage.
It should be noted that traders will often also use drawdown to measure the number of [pips] or points a trade was ‘under water’ before starting to make a profit, rather than measuring the full amount from peak to trough.
As an example, Trader A may buy USD/JPY at 107.35 in the hope that the price rises.
If the price of USD/JPY drops to 106.90 before then rallying to 107.80, Trader A may describe his trade as having only 45 pips of drawdown (107.35-106.90).
In this example, we see that no peak has yet been formed as it is unknown if USD/JPY will continue to move upwards or reverse and start moving back towards Trader A’s [entry point].Key Takeaways
- Drawdown is used by traders to measure the maximum downside of a financial instrument or investment fund.
- Drawdown is usually expressed as a percentage and measures the peak to the trough price movement over a specific time period.
- Traders may, however, use drawdown to express solely the number of pips a trade showed to the downside and not calculate using the peak.