Useful Trading Terms Explained
Following up on my last post about how to use eToro, I thought it’d be useful to cover some of the terms you might come across for the first time when using the platform, and cover what they mean in the context of eToro. Many of these definitions are taken wholly, or in part, from Investopedia. I recommend using this to look up any new terminology you encounter, but the list below should be enough to get you started.
An instrument is any asset that is tradable; on eToro this is a stock, a commodity, cryptocurrency, ETF, derivative, or index.
A position is the amount of an asset you hold, these can be either short or long. A position can be used to describe your entire holdings of an asset even if across multiple trades, or those trades individually.
“Building/taking a position” - opening multiple trades over time in an asset “Closing a position” - closing one, or several trades in an asset
“Opening a position” - opening one, or several trades in an asset
A short position is when you purchase an asset from someone who has a long position with the agreement to sell it back at the same price in the future. After purchasing it, the position is sold immediately. When you wish to close the position, you purchase it again and sell it back to the original holder. Profit is made by purchasing it at a lower price than you sold it. A short position is taken when you expect the price to decrease
A short squeeze is when an instrument that has been heavily shorted rapidly increases in price, triggering stop losses or putting pressure on short sellers to close their positions. In closing their positions they are forced to purchase the stock, so with a strong enough squeeze the price can continue to be pushed higher
A long position is when you purchase an asset with the intention of selling it at a higher price than you bought it. You open a long position when you expect the price to increase
A long squeeze is significantly rarer than a short squeeze, and occurs when a rapid drop in price causes long positions to either hit a stop loss or puts pressure on holders to sell. The reason this is more rare is that value buyers will often step in to purchase stocks that have fallen rapidly without any fundamental basis as they often begin to rise again shortly afterwards.
The difference between your starting equity and your current equity, assuming you closed all held positions instantly
Opening a position in an instrument, either a short or a long
Closing a position in an instrument, selling it to a buyer
The total value of an instruments assets if combined. For example, if a company sells a hundred shares at $10 dollars each, the instrument is said to have a market cap of $1,000, generally this is only used for companies and crypto assets.
The short name for an instrument. For example, Advanced Micro Devices Inc. has a tag of $AMD. These also function as quick links on many websites, including eToro and Twitter
CFD (Contract for Differences)
A CFD is a tradable contract between you and eToro, exchanging the difference in the current value of an instrument to its value at the end of the contract. Functionally, these are bought and sold the same as any other instrument on eToro, but allow you to make trades you otherwise couldn’t, such as shorting a cryptocurrency
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur
An index functions as a hypothetical portfolio of assets, normally covering a specific stock market or investment sector. They provide an indication of how the market is performing, while also being tradable on eToro as a CFD
Technical Analysis (TA)
There are many different techniques used by technical traders in an attempt to map the future of market prices. Critically, to be effective it must assume that all fundamental analysis has been taken into account by the market. A technical analyst will analyse price data using various charts in order to identify patterns that can help predict future price movements
Fundamental Analysis (FA)
Fundamental analysis involves examining the earning potential of a company issuing a stock, or the underlying technology and adoption in the case of a cryptocurrency, on the assumption that the market price is a function of the underlying value of the company as a whole. This type of analysis relies heavily on quarterly reports and public accounting
Macroeconomics is a branch of economics that studies how markets behave as a whole, examining economy-wide phenomena such as inflation, GDP, and growth rates
A business ecosystem is the network of organizations — including suppliers, distributors, customers, competitors, government agencies, and so on — involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem. Many companies and cryptocurrencies work hard to build and control entire ecosystems for their customers to use.
A chart is any kind of graph that shows the price movement of one or more instruments over a regular period of time
A candlestick is a price chart that displays the high, low, open, and closing prices of an instrument for a specific period. The wide part is known as the body and shows whether the closing price was higher or lower than the opening price (Red if lower, green if higher) and the thin part, known as the wick, shows how much price movement existed in that period
Weekly/Daily/Hourly (Candle timeframes)
When making a candlestick chart, you can set the timeframe for each candle, the most common choices being weekly, daily, or hourly. This decides what time period each individual candle will cover, and seeing similar patterns on two or more of these time periods can point to stronger technical analysis
A bear market is a condition in which many instruments in the same market sector fall, causing pessimism over the market in general, often causing it to fall further in a self-sustaining cycle. Individual traders can be ‘bearish’ by feeling pessimistic about market conditions, or a market can be considered ‘bearish’ when a few similar instruments begin to fall at the same time. A downturn of 20% over a period of two months is generally the point for a market to be considered a bear market, although many traders will call a bear market much sooner
A bull market is a condition in which many instruments in the same market sector rise, and are often recognised only once they have concluded. As prices rise, so does investor confidence, leading to more money being invested and prices continuing to rise. Being positive on an instrument or market is known as being ‘bullish’
A cycle is a wide term referring to trends or patterns that emerge during different market or business environments. New market cycles form when trends within a particular sector or industry develop in response to meaningful innovation, new products or regulatory environment. These cycles or trends are often called secular. During these periods, revenue and net profits may exhibit similar growth patterns among many companies within a given industry, which is cyclical in nature
A technical analysis tool, an instruments support level is the price below which it doesn’t historically fall. This often acts as the price at which traders will buy in during a drop, meaning support levels are often self-fulfilling
Resistance is the price level at which a growing number of short sellers cause the price to stop rising. It usually takes positive news, or an overall bull market, to break through a strong historical resistance
A trendline is a line drawn over highs or under lows on a price chart to show the prevailing direction of price. Trendlines are a visual representation of support and resistance in any timeframe. They show direction and speed of price, and also describe patterns during periods of price contraction
A trading range, otherwise known as a channel, is when the price of an instrument trades within consistent highs & lows over a period of time. The top of the range is its resistance, while the low is its support
A moving average is a tool used by traders to smooth out price movements on a chart. Price movements can be volatile in the short term, so many traders will use a moving average in order to identify or gauge the direction of a trend
The number of shares traded within a specific market period, often a day. Volume is an important indicator in technical analysis as it is used to measure the relative worth of a market move. If the markets make a strong price movement, then the strength of that movement depends on the volume for that period. The higher the volume during the price move, the more significant the move
Liquidity is the amount of an instrument that can be quickly bought or sold on the market at a stable price
An exchange is a marketplace where financial instruments are traded. Examples include the New York Stock Exchange, and Binance
In cryptocurrency terms, a wallet is the digital storage containing your cryptocurrency. A vital piece of software, the wallet stores the public and private key used to access your cryptocurrency, and can interact with the blockchain to allow for transactions to be made
A deliberate corruption of the word ‘hold’ this describes the action of not selling your cryptocurrency during a bear market, instead ‘hodling’ in the belief that the price will rise massively again in the future. It stems from a drunken forum post where a stubborn trader admitted that attempting to trade was losing him money and holding would be a better strategy
Earnings describes the quarterly report that all publicly-traded companies are required to disclose (usually quarterly). These come in the form of a written report released alongside a public call in which the revenue figures within are discussed, along with plans for the future and a Q&A with investors, reporters and analysts
The market is a catch-all term to describe the trading that takes place on exchanges around the world each day. These are commonly categorised based on asset type or geography.
Leverage on eToro refers to the ability to increase the size of your trade or investment by using credit from eToro. When trading using leverage, you are effectively borrowing from the platform, while the funds in your account act as collateral. Usage of leverage magnifies both gains and losses, allowing you to make significant gains from small price variations
A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions
A trade or position becomes realised when you close it, at which point the profit or loss is reflected in your wallet, rather than just in your equity
The difference between the buy and sell price on eToro is known as the spread. When you buy an asset, you pay slightly more than the seller receives, the difference is kept by eToro as a fee
Stop Loss (SL)
A stop loss is an order placed to close a position when it reaches a certain price below its current level, designed to stop you losing significantly during big market moves or periods of inattention. It is important to note that execution of a stop loss is not guaranteed at that price, the order is placed when the price is met and will be filled at the next available price. eToro may also suspend trading during periods of high volatility
Take Profit (TP)
Often used in conjunction with a stop loss, a take profit is an order to close at a target price, the position is then automatically closed at the next available price. Inverse to the stop loss, the risk of setting a TP too low is that you sell early on when the instrument is breaking out, missing out on greater profits