Glossary of terms
Take-profit (T/P) and stop-loss (S/L) orders are widely used as trading risk management techniques. The point at which you are willing to sell a stock and take the profit on your trade position is called a take-profit point. This is when there is a limited upside on the trade compared to the risk.
For example, let us say that there has been a large move upward, and the price is nearing a key [resistance level]. You may want to sell before the price reaches a period of consolidation and set your take-profit appropriately.
On the other hand, a [stop-loss] is a point at which you are willing to sell a trade asset at a loss when price action does not move in your favour. These points help you limit further losses on your trade position by cutting them earlier before they escalate.
For example, if price breaks below a key support level, you may want to sell by setting your stop-loss point slightly below support to nip the losses in the bud.
You can use both trend lines and moving averages to determine key support and resistance levels based on past price action, so that you can determine the best points to place your stop-loss or take-profit either below and/or above support and resistance.
Wars are won not on the battlefields but in the strategy room. Planning effectively will mean the difference between failure and success before you even enter the financial markets.
Losing traders do not take the time to determine the points at which they are willing to sell either at a profit or a loss. To be a successful trader, determine the points at which you are willing to buy and the price at which you are willing to sell, in terms of both profit and loss.
Rising prices can tempt you to keep holding on to your positions in the hope of increased profits, while falling prices can make you hold on in the hopes of recovering your losses. Setting a clear point at which to buy or sell can help you avoid these emotional pitfalls which often lead to losses.Key Takeaways
- The point at which you are willing to sell a stock and take the profit on your trade position is called a take-profit point.
- Take-profit (T/P) and stop-loss (S/L) orders are widely used as trading risk management techniques.
- Plan the trade and set take-profit and stop-loss points appropriately.
The two most common forms of analysis used by traders are fundamental analysis and technical analysis. Sometimes these are used in combination with each other and other times separately. It all depends on your trading style and strategy.
Technical analysis makes it easier to identify support and resistance levels. When you can do this, you can make better trading decisions as it helps you decide whether it is a good idea to invest in specific financial instrument or not. When prices break these price points, known as support and resistance levels, that have been identified, it means that there have been significant changes in these markets.
Support levels generally identify a price point which the markets are unlikely to move lower than and resistance levels are prices identified in a chart which the market is unlikely to break above. If either of these support or resistance points are broken, then this usually indicates a significant change in market movements for that product.
Technical analysis can be done manually or through automated systems such as Expert Advisors, also known as EA’s. These EA’s are systems programmed to behave in a certain way, depending on what they have been told to do on a trading platform. Generally, they analyse past price movements and statistical trends of financial markets and suggest trades based on this data. If this is done manually then it’s down to an individual to collect and analyse the data and make these trading decisions.
Remember, even with an automated system there’s no secret to success, if there was, they wouldn’t be available to buy as the developer would want to keep it for themselves!Key Takeaways
- Technical analysis makes it easier to identify support and resistance levels.
- Support levels generally identify a price point which the markets are unlikely to move lower.
- Resistance levels are prices identified in a chart which the market is unlikely to break above.
Whether you trade Forex, commodities or equities with CFI, there are hundreds of opportunities to place a trade whenever markets are open, therefore knowing what a Trade Trigger is and when to enter a trade is vital.
The biggest challenge is usually deciding when to place a trade and when to decide against it – the potential for profit is not always equally high. It is essential that a new trader learns to evaluate each trade against certain criteria so that they can identify the opportune moment to place a trade in a sea of infinite trading possibilities.
A trade trigger helps you decide when to enter a trade. The first thing to be clear on when deciding when to enter a trade is your trading plan. Only enter trades that align with your trading strategy. After you have established that the market has the right conditions for your trading strategy, you need to have a specific trigger that tells you "now is the time to enter or exit the trade".
Whether the market is in an [uptrend] or [downtrend], there are specific features in each trend that provide better opportunities to trade than others. For example, after the price has widened, you may wait for a pullback, or for new highs to form. If you are bearish and you think that the trend will reverse, wait for a bearish engulfing pattern. You should always look for precise events that help you distinguish trading opportunities from the overall price movements.
At first it will take some practice, but once you become familiar with the process, you can follow these steps to see if a trade passes the trade trigger test, telling you whether you should trade or not.Key Takeaways
- A trade trigger helps you decide when to enter a trade.
- After you have established that the market has the right conditions for your trading strategy, you need to have a specific trigger that tells you "now is the time to enter or exit the trade".
- You should always look for precise events that help you distinguish trading opportunities from the overall price movements.
Trading Capital refers to the funds a trader has available to them to buy and sell various assets on the global financial markets. Without trading capital,it is not possible to be a trader.
Many brokers, including CFI allow you to start trading with a small deposit amount. CFI has a variety of account types which are suitable for different individuals and institutions and have different trading capital requirements. It is important you compare the different account types and eligibility details so that you can make an informed decision about which is the most suitable for you.
A trader should never deposit more money to their trading account than they would be willing to lose.
The 1% rule is a rule of thumb which many successful traders follow. This rule advises that you should never put more than 1% of your trading capital into a single trade position. Say, for example, you have $1000 capital in your account: you should not put more than 1%, or $10, in your position in any given asset you are trading. If your trading account balance is less than $100,000, the 1% rule is a good guideline, though some traders with large balances can afford to go up to 2%.
Remember: as your account balance dwindles, so does your position in the market. So, the best way to keep losses at bay is to stick with a risk below 2% so that you do not lose a huge amount of your trading account on one or two trading deals that go badly.
The expected return is the amount you expect to gain if all goes well, as well as the amount you expect to lose if the trade turns against you.
Calculating your possible loss or gain from a trading deal is an important technique. It helps you to rationalise your trade by forcing you to think through them carefully and enables you to compare different trades systematically and select the ones with high profitability potential. It is important to ensure that you are ready to live with the results of your trade, and calculating the possible outcome prepares you for that. If you would be unable to cope with the potential loss, do not take the risk.Key Takeaways
- Trading Capital refers to the funds a trader has available to them to buy and sell of various assets on the global financial markets.
- Never put more than 1% of your trading capital into a single trade position.
- If you would be unable to cope with the potential loss, do not take the risk.
The first thing to be clear on when deciding when to enter a trade is your trading plan. Only enter trades that align with your trading plan, because they will give you higher profit potential and you will be able to manage your risk better. Knowing what kind of trader, you are, and what your plan is, will help you choose the trades that align with your personality portfolio.
Are you an investor, day trader, swing trader or a trend-following trader? If you are a trend-following trader, is there an established trend in the market? Is the market going up or down? If you are bearish, then avoid trading when the market doesn’t reflect a bearish pattern – wait for possible reversal points before you enter a position.
A trade trigger helps you decide when to enter a trade. After you have established that the market has the right conditions for your trading plan, you need to have a specific trigger that tells you "now is the time to enter or exit the trade". Whether the market is in an uptrend or downtrend, there are specific features in each trend that provide better opportunities to trade than others.
For example, after the price has widened, you may wait for a pullback, or for new highs to form. If you are bearish and you think that the trend will reverse, wait for a bearish engulfing pattern. You should always look for precise events that help you distinguish trading opportunities from the overall price movements.
How much are you likely to make from the trade you intend to place? Is it worth your time and effort? Don't just choose your profit target randomly but base it on something measurable. Look through the charts to see the targets that are being projected based on the pattern. Trends will also show you the possible reversal points based on past price action to help you determine the profit potential of the trade.
For example, if you buy near the bottom of the chart, you can set your price target closer to the top of the chart. Having a price target helps you identify the right moment to exit a trade so that you do not hold it for too long and start incurring losses.Key Takeaways
- No matter what your level of trading is or your experience in the finical markets, a trading plan will always help you enhance your trading activities.
- Knowing what kind of trader, you are will help you develop a trading plan that aligns with your trading personality.
- Define your tradable trend to avoid placing a trade when market conditions do not reflect your trading plan.
A trading platform is a web-based software tool that allows traders and investors to execute trades to buy and sell securities in the financial markets. It acts as the intermediary between the traders and the brokers. Brokers tend to offer trading platform to access the financial markets free of charge.
The best trading platforms come bundled with features such as news feeds, real-time quotes, premium research, charting tools, among others. Platforms may also be customised and specifically tailored for specific markets like currencies, futures, options, or stock markets.Example of Trading Platforms
CFI offers the world-renowned Meta trader 5 (MT5), trading platform which is one of the most widely used trading interfaces in the world and comes with a range of features which support traders on their trading journey.Some examples are:
- Advanced charting capabilities
- Trade directly from charts
- Full hedging support
- Live news tab
- Automated trading
- Highly secure platform
This trading platform is available on Windows, Mac and mobile phones. It has been adapted to offer the same functionality of the desktop platform on iOS and Android smartphone devices. There is also the web trader option which provides access to traders accounts from any web browser or computer.Key Takeaways
- A trading platform is a web-based software tool that allows traders and investors to execute
- The best trading platforms include news feeds, real-time quotes, premium research and charting tools
- CFI offers the world-renowned Meta trader 5 (MT5), trading platform which is one of the most widely used trading interfaces in the world
Trailing stop orders are a special type of a stop-loss order that trails with price fluctuations that come with the financial markets. Instead of being set at an absolute amount, the stop-loss price is at a certain percentage. If the price moves up, the stop-loss order trails along with it. When the price stops rising, the trailing stop remains fixed at the new level that it was dragged to, enabling a trader to lock in more gains while minimising losses.
Trailing stops only move in one fixed direction this is since they are designed to lock in profit or limit losses.The crucial thing to remember when setting a trailing stop order is to not set it at a level that is too close to the current marker price or too far away. It is especially important that during volatile times, a wider trailing stop is set.Example of Trailing Stop Order
For example, a trader buys a stock at the market price of $20.00 and they do not want to lose more than 5% of their investment if the price turns against them.
Placing a trailing stop order will alert the broker to fill your trade at $19.00 (5% below the market price).
But if the price keeps on rising, you want to lock in more profit. So, if the price rises to $30.00, the trailing stop order comes along with it and a sell trigger will only be activated when the price falls below 5% of $30.00. That means your order will be filled at $28.50, enabling you to lock in more profit.Key Takeaways
- A trailing stop is designed to lock in profits or limit losses as a trade moves favourably.
- It is especially important that during volatile times, a wider trailing stop is set.
- Trailing stops can be set as limit orders or market orders.
Most trading strategies assume that, regardless of the time frame being observed, technical analysts expect prices to exhibit trends. The goal of the trader should be to identify either an uptrend, a downtrend, or a ranging trend in the market.
This technique presumes that all factors from economic factors to market psychology are already priced into the current market price of the asset. With all those factors already priced in, the only thing an investor needs to do is study price movements which technical analysts believe to be subject to the law of supply and demand of the security in the market.
Technical analysis boils down to the use of charting tools to identify a bullish, bearish, or ranging trend in the market, and use of different types of tools and indicators to spot ideal entry or exit points.Technical Analysis Tools
- Charting tools are used to generate buy or sell signals e.g. candlesticks.
- Technical indicators indicate trends or patterns in the market.
- Overlays like Fibonacci lines, moving averages, and Bollinger bands.
- Oscillators like Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD).
- Regardless of the time frame being observed, technical analysts expect prices to exhibit trends.
- The goal of the trader should be to identify either an uptrend, a downtrend, or a ranging trend in the market.
- Technical analysis boils down to the use of charting tools to identify a bullish, bearish, or ranging trend in the market,