Glossary of terms
Entry point refers to the price at which a trader [sold] or [bought]a financial [instrument] and therefore entered a trade. It is sometimes also referred to as the entry trigger method.
For a trader to profit, it is vital that they enter and exit their positions at the most profitable price points.Traders will commonly undertake [fundamental analysis] to determine if they view an asset as undervalued or overvalued in the marketplace. They will then tend to use [technical analysis] to determine the most likely pricing directions, given the asset’s current valueand market conditions, based on historical data.
Once they have concluded on the direction that they believe the price will go, the trader can then set entry and exit points. For example, if they conclude that Gold, at $1,685.60 is undervalued by the market, and their technical analysis leads them to believe that should the price rise toward $1,690.00, it will gain momentum and continue upward towards $1,700.00 and perhaps beyond. The trader may set $1,690.00 as their entry point.
For a trader to accurately predict when the market’s turning points are at play, they mustpossess a strong understanding of the influence of supply and demand within that market, along with strong technical analysis skills.
While the above example is a common approach, there are multiple strategies that a trader may employ, as it is highly unlikely that the accurate entry point can be determined with use of a single strategy.
Some of the most frequently used market entry strategies are
- Using boundaries to identify ranges in which an asset’s price has been trading and then setting breakout points at either the high-end (buy) or low-end (sell) as entry points to the trade
- Using trendline and candlesticks to identify the[moving average]of prices, support and resistance points that can then be used to predict future [price action] and set suitable entry points
- The entry point refers to the price at which a trader buys or sells an instrumentin the market.
- The point of entry is determined by assessing an instrument’s value and predicted future price action
- There are a range of technical analysis techniques that can be applied to aid in identifying the most suitable entry point
Equities, in the simplest terms, can be described as shares in the ownership of a company.
Equities, along with [bonds], are the most common means by which a company will raise finance from the markets. However, they differ from bonds, which are loans made to the company and do not constitute any ownership of the company at all, as a company will offer shares to investors which, in turn, give the buyer of the shares (the investor or trader) part ownership of the company.
Equities are listed on global stock markets and traded worldwide in the secondary market after they have been issued/sold by companies. There are millions of equities listed on [stock exchanges] worldwide includingthe FTSE in the UK, the Dow Jones and S&P 500 in the US, the CAC 40 in France, and the Nikkei 225in Japan to name just a few. Multi-national companies may even be listed on multiple stock exchanges, issuing equities in different currency denominations globally.
Investors, more often than not, buy equities as longer-term investments, hoping that the price of the stock will rise over a number of years. It is common that equity investments are made as part of a diversified portfolio to help with long-term financial plans, such as retirement plans.
Investors will, however, receive dividends on the stock they hold. Companies usually make dividend payments on an annual, but sometimes quarterly or bi-annual basis. The dividend will be based on company profits, and a specific amount per share will be allocated.
As an example, Company A may announce an annual dividend of £1.50 per share, and if Investor X owns 1,000 shares of the company, they will receive £1,500(1,000 x £1.50) as a dividend payment.
While investors will seek the longer-term investment, traders may look to buy or sell equities over shortterm periods looking for quick movements in price which may occur as a result of a number of factors.
For example, a company could be set to release annual or quarterly profit figures which a trader believes are likely to be weak. Therefore,the trader may sell the equities of the company([go short]) in the hope that price will drop relatively quickly over a short period and they will then be able to buy the shares back at a cheaper price and bank good profits.
Conversely, a company may land a big contract and a trader may quickly buy([go long]) some stock in the company expecting that the will price rise sharply over the coming days as news of the contract disseminates and demand for the company’s shares increase, after which the trader can then sell at a higher price and again bank some profits.Key Takeaways
- Equities, in their simplest form, give the holder a part ownership of the company issuing the equity.
- Companies may issue equities in various currencies on different stock exchanges around the world.
- Investors will often invest in equities for longer term periods as part of a diversified investment portfolio.
- Traders may take shorter equity trades, hoping to take profits after specific news events involving companies.
Exchange-Traded Funds or ETFs are investment funds that trade onvarious stock exchanges. ETFs trade over a session (the course of one day of trading) and trading closes at its net asset value. The investment funds can comprise of various assets such as commodities, [bonds], or stocks and can only be bought or sold from authorised participants and then only in specified blocks of shares in the ETF.
ETFs tend to track [stock indices] but may also consist of shares in various companies all of which may operate in the same industry sector such as a gold miners ETF.
Traders need to take into consideration that there are numerous costs associated with this investment fund. Two of these costs are;
- Commissions payable - the more one trades, the higher the commission to be paid from your investments. However, some platforms offer commission-free options.
- Spreading impact –meaning in most cases a loss is suffered as one would purchase at a certain price but the impact of [spreading] dictates that these shares have to be sold at a lesser price than what it was bought for, therefore it's advisable to go for a smaller spread.[Limit orders] can be used to mitigate this factor.
Some of the key advantages of ETFs include the fact that they are completely transparent, offer great diversification, they offer a reduced tax liability in most countries and lastly, a liquid market enables ETFs to be bought and sold easily.
There are also several challenges associated with ETFs that traders need to take note of. When derivatives are used with ETFs, one party might not make good on the agreement between them and there is also the risk of tracking errors involved as ETFs don’t always track their indices accurately.Key Takeaways:
- ETFs are investment funds that trade on stock exchanges.
Execution in financial trading terms refers to the finalisation of an order by a trader to either buy or sell an [instrument] with a broker. In simpler terms, the order has to be completed and not just initiated. Only when the order has been [filled] is it deemed as executed.
By simply initiating the order, there is no certainty that the trader is entering into the trade, they are merely placing an order to either buy or sell. The broker will then in turn have to execute the order that was placed by the trader.
There are three main types of order execution. Firstly, instant execution or a market order - where the broker has to process an order immediately after it has been placed by the trader at the prevailing market price. The second method is a [limit order] where a trader agrees to a trade being executed at a specific price. Lastly, execution can occur at a request whereby the trader can choose to accept or reject the trade at hand.
Different orders will be executed at different times, for example [Good Until Cancelled] (GTC) orders can be executed at any time until the trader decides to retract the order, however, in the case of day orders they have to be executed on the day that they were placed before they expire at the end of the session or market day.
There are two ways in which a broker can carry out the orders, either they place this order digitally to be approved or they can submit it directly to the order books to be carried out immediately.Key Takeaways:
- Execution refers to an order being carried out by the trader. This is applicable to both the buying as well as the selling of an instrument.
- There are three methods of execution, namely: instant execution, market execution and execution on request.
- Different orders are carried out at different times. Day orders have to be executed before the end of session and GTC orders are in play until a trader makes the decision to retract the order they placed.
The exit point is the time that a trader decides to close their position. Knowing when to take or bank profits that were earned is one of the most crucial factors of trading.
Locating the perfect exit point is not a clear-cut process and can become quite troublesome for traders. There is no singular sure-fire way to implement this process in a profit-earning capacity.
There are three strategies that have proved effective in aiding with a profitable exit point; the ATR or average true range, the [moving average] and lastly the conventional method of [stop-loss]. However, over the continual trading process, each trader develops their own set or multiple sets of different strategies that work for them by means of risk management.
Both [entry] and exit points are pivotal to a trader’s strategy as they seek to increase their profits and manage their losses at the same time.
For first time traders, it is highly recommended to begin with a demo account or a [paper trading] with CFI. Having a demo account allows a new trader to test new strategies and techniques as well as test and refine their trading strategy in a risk-free environment, helping them to prepare for the scenarios that they will face in the markets, before introducing the risk of sacrificing actual securities or assets.
The recommendation will always be “enter low and exit high” but not without proper strategies for each point mentioned. It is common for traders to be overly focused on the entry point and not have a workable strategy in place for exiting, leading them to lose out on profit-earning opportunities.
Two common approaches for an effective strategy are to either exit on strength or exit on weakness.Key Takeaways:
- An exit point is when a trader decides to close a position.
- Knowing when to take profits is a crucial factor in FX trading.
- ATR, moving average, and stop-loss are three effective exit strategies.
A currency pair is referred to as “exotic”when it consists of one major currency and one currency from a developing or emerging nation. An example of this is the USD/TRY,a currency pair that consists of the US Dollar as the [base currency] and the Turkish Lira as the [counter currency]. Another example would be EUR/MXN which consists of the Euro as the base, and the Mexican Peso as the counter currency.
While trading with exotic currency pairs has the potential to [yield] higher profits due to the wider price fluctuations, they are much riskier to trade than a standard currency pair.
These pairs are prone to higher levels of price [volatility], and because they are not frequently found, do not provide a great deal of[liquidity]. They are also more expensive to trade due to higher commission or [margin] requirements, and also possess a wider spread than their traditional counterparts.
The counter currency in an exotic currency pair can originate from one of 150 emerging countries and trading is centred around 18major currency pairs.
Due to the counter currency in the exotic pair being that of an emerging or developing nation, price fluctuations are deeply driven by factors such as economic or political climate, the instability of which, often results in increased volatility in the price of the pair.
To illustrate the difference in liquidity between standard currency pairs and exotic pairs, it was reported that in one trading year, the EUR/USD accounted for 23.1% of daily foreign exchange transactions whilst USD/TRY only accounted for 1.3%. This much lower level of demand means that it can prove harder to exit a trade. However, the liquidity of an exotic currency pair is often increased when a major currency is used as the base currency.Key Takeaways
- An exotic currency pair consists of one major currency and a counter currency from a developing or emerging nation.
- The profits from trading an exotic currency pair tend to be higher, but so does the risk.
- Risks include greater price volatility, lower liquidity, and higher trading costs