Glossary of terms
The term ‘paper trading’ originates from when traders on the stock market wanted to practice trading before trading for real and would write their investments on paper and follow the market movements.
Paper trading is also sometimes called virtual trading or demo account trading and enables you to simulate a live trading environment with virtual funds before risking real money.A paper trading account helps you get used to your broker and the trading platform you are using, as well as test and refine your trading strategy. All traders should demo trade for at least 30 days before graduating to live trading.
CFI offers you the ability to trade the global financial markets with no risk using a free demo account. With a demo account, you get an identical trading environment to that of a real account so when you make the transition, the only difference will be using real funds.What Should You Look for Account?
A paper trading account should enable you to simulate real trading with the only difference being that you are using ‘pretend money’. You should gain access to the latest trading insights, the latest financial news, and real-time market data.Key Takeaways
- Opening a paper trading account with a broker lets you get familiar with the trading platform and learn how it works from a user perspective.
- Before you enter the markets for real, it is crucial that you can comfortably open, amend, and close trades when you need to.
- Knowing how to efficiently use a platform removes a lot of unwanted stress when it comes time for live trading.
The term Pip stands for point in percentage and is the measurement of the smallest price move that a currency can make. Take your time to understand this term in detail as it is especially important for Forex traders. A pip measures the fluctuation in the exchange between the bid and ask prices for a Forex instrument and is calculated using the last decimal point.
Major currency pairs are priced to 4 decimal places(0.0001 of a unit), the smallest change therefore is presented in the last decimal point which is equivalent to 1/100 of 1%, also known as one basis point.
The spread in Forex trading is quoted in pips and is a measure of the price movement in the foreign exchange market. The value of a pip depends on three things: what currency pair is being traded,the exchange rate and the trade size. Most pairs are shown with 5 decimal places, but there are some exceptions like Japanese yen pairs that are shown with 3 decimal places.For example, for GBP/USD, it is 0.00001, and for USD/JPY, it is 0.001.Example of a Pip
Let us say we have a USD/CHF quote of 0.77471. What this means is that for USD 1, you can buy 0.77471 CHF. Assuming there was a rise in value of one-pip this quote would increase to 0.77472. The value of the U.S. dollar would rise relative to the Swiss Franc, because USD 1 would allow you to buy slightly more CHF.Key Takeaways
- A pip references a one-pip move in a forex trade
- Traders often refer to pips to reference profit and losses
- Most major currency pairs are priced to five decimal places, a pip is usually equal to the fifth figure after the decimal point
Position traders, sometimes also known as “buy and hold” traders, employ the longest-term trading style out of all trading styles, and may hold their trades for months or even years. This trading approach is reserved for individuals with an excellent understanding of the fundamentals and ultra-patient traders.
Fundamental themes rather than technical analysis take the centre stage when analysing the market, and these Position Traders seek to understand how economic data will dictate the long-term trends of the instrument they are trading.
Those who prefer to postpone gratification in favour of a greater upside are well suited to position trading. The style requires that you have a thick skin and absolute trust in your analysis so that you can remain calm and weather short-term market volatility when your trades seem to be going against you. However, it is also a style that often requires large capital reserves to withstand several hundred pips of draw down without receiving a margin call when the market turns against you.
Other trading styles are [the Fundamental Trader], [the Swing Trader], [the Day Trader] and [the Scalper].Example of a Position Trader
A position trader will open a trade for a currency pair, commodity, or equity that they expected will experience a major trend. This type of trader does not worry about minimal price fluctuations instead they focus on capturing much of the trend. Usually they will identify products where they predict the trend will continue for weeks, months, or sometimes even years.Key Takeaways
- Identifying a trend is the main task for a position trader
- They often make a small amount of trades over the course of a year
- Because small price fluctuations are not considered relevant, there is minimal monitoring or maintenance needed for these type of positions
Price action is a form of technical analysis used to identify buy or sell opportunities when trading stocks, commodities, indices, or equities. When traders talk about price action, they are referring to the fluctuations in the price of financial products.Technical traders gauge a financial assets price action by monitoring patterns and indicators to help them identify trading opportunities in otherwise random price movements.
If you are new to trading, learning price action analysis makes for a great starting point.Price action trading is often used by institutional and retail traders who use [leverage] to place large trades based on anticipated smaller price movements.
A popular form of technical analysis used to identify price action are candlestick charts.Traders use these to help them put price movements into context. Although very “technical” technical analysis is still very personal and unique to each trader; two different people can be presented with the same price action but then arrive at different conclusions about what the pattern signifies.Example of Price Action
A price action trader believes that the only true source of information comes from the price itself. If the price for a commodity goes down, that tells the price action trader that people are selling. The trader then assesses, based on the speed of the market movements changing, whether this trend will likely continue. For these kinds of traders, it is often not important why something is happening, simply that it is happening is enough to make trading decisions.Key Takeaways
- Price action refers to the fluctuations in the price of a financial product.
- Price action trading can be used as a trading strategy where trades are executed strictly on the basis of a financial products price action.
- Institutional and retail traders use leverage to place large trades to benefit from small underlying price movements.
A price-weighted index is a stock index where the companies in the index form a fraction of the total index relative to that company's stock price per share.
To calculate a price-weighted index in its simplest form you take the price of the total members' stock prices and divide them by the total number of companies in that index.A stock with a higher price will have more influence than a stock with a lower price and, therefore, will have a bigger impact on the index's overall performance.
The Dow Jones Industrial Average (DJIA) is one of the most well-known and most followed Indexes in the world. When it was first created the DJIA consisted of only 12 stocks and was priced at 40.94. Today it has increased to 30 stocks, making it one of the least diversified indexes around. Although the calculating the Dow’s value is not exactly straightforward, the calculation essentially comes from adding up the prices of all 30 companies within the index and dividing that number by the divisor (the "magic number").Example of Price Weighted IndexFor example, if you want to calculate a price-weighted average of four stocks with prices$200, $100, $85, $30 as follows:$200, $100, $85, $30Price weighted average =___________________ = $415 4
Let us say that one of these stocks releases some positive news, and its shares jump by 10%. This would also raise the price-weighted average.Key Takeaways
- A price-weighted average is a simple mathematical average of several stock prices.
- The most well-known price-weighted index in the U.S. is the Dow Jones Industrial Average.
- The price movements of companies with the highest share price have the biggest impact on the value of the index.
CFI’s online trading account MetaTrader5 provides traders with access to major online trading products, including Foreign Exchange (Forex) and CFD Contracts (Contract for Difference) contracts on indices, energies, precious metals, and stock indices. With the online [trading platform] MT5 and live streaming prices, investors can trade the full range of online trading products from their desktop 24 hours a day, 7 days a week.
Below is an overview of each product that can be traded with CFI so that you can gain a deeper understanding of each asset class and see which will best suit your trading plan throughout your trading journey. Please note it’s only possible to trade CFD contracts with CFI and not physical equities, indices, currencies or commodities.Example of a Products you can trade with CFI
- [Foreign Exchange]Foreign exchange, also known as Forex or FX, is the trading of currencies from different countries around the globe. Traders aim to profit by exchanging one currency for another, in the hope that the currency they bought will increase in value in relation to the one that they sold.
- [Precious Metals CFDs]Precious metals are excellent trading products to use to diversify your portfolio and should certainly be considered when formulating your trading strategy.
- [Energy CFDs]Energies are important trading products in the commodities markets. Energy trading can be attractive to speculators because their prices experience abrupt fluctuations. Generally, it involves products such as wind power, electricity shares on the power grid, crude oil stocks, and natural gas supplies.
- [Equities CFDs]Equities, stocks, or shares are trading products that enable you to buy a stake of ownership in a company. Trading equities involves buying and selling shares of a company in the stock market.
- [Indices CFDs]A stock index measures how a group of stocks from an exchange perform. They give an overview of how the stock market or a section of it is performing.
- CFI’s online trading account MetaTrader 5 provides traders with access to major online trading products
- It’s only possible to trade CFD contracts with CFI and not physical equities, indices, currencies or commodities.
- Products you can trade with CFI include Foreign Exchange (Forex) and CFD Contracts (Contract for Difference) contracts on indices, energies, precious metals, and stock indices
The Purchasing Managers Index (PMI) is an indicator of the economic health from across 19 industries consisting of mainly manufacturing and service sectors. The index is compiled of surveys from senior executives such as business owners and supply chain managers at more than 400 companies. These executives are asked because they have access to a huge amount of data about their firm such as prices of products, hiring and what is actually happening on the ground. The PMI is recorded and released monthly by the Institute for Supply Management (ISM).
These senior executives get a questionnaire where they must answer questions about the business and give scores between 1-5 indicating the outlook they have on their business.
- 1 = Higher
- 5 = The Same
- 0 = Lower
These figures are then added up to build an average score which gets placed onto a chart. A reading over 50 is a representation that an economy is expanding and improving, whereas when it’s below 50 this is seen as negative. Traders and policy makers often look towards the PMI to get an indication of an economies health and use this alongside GDP data.
Another reason why this index is so useful is because it gives a quick view on how an economy is changing it is easier for countries to change interest rates if they foresee this is required, before they drop into a recession for example.Key Takeaways
- PMI is a measure of the current direction of economic and global trends in manufacturing.
- The index is compiled of surveys from senior executives such as business owners and supply chain managers at more than 400 companies.
- The PMI is recorded and released on a monthly basis by the Institute for Supply Management (ISM).