Day trading can seem overwhelming to beginners, especially with all the technical jargon and concepts traders use daily. However, understanding the key terms is one of the first steps toward building your knowledge and confidence as a trader. In this blog, we’ll break down the top 10 day trading terms every beginner should know, making it easier for you to navigate the exciting world of trading.
1. Bid and Ask
Bid: The highest price a buyer is willing to pay for a stock or asset.
Ask: The lowest price a seller is willing to accept for a stock or asset.
The difference between the bid and ask prices is known as the spread, which reflects market liquidity. Narrow spreads indicate high liquidity, while wider spreads suggest lower liquidity.
2. Spread
The spread is the gap between the bid price and the ask price. For example, if the bid price of a stock is $100 and the ask price is $100.50, the spread is $0.50.
Why it matters: A smaller spread usually means lower transaction costs for traders, while larger spreads can reduce profitability.
3. Volume
Volume refers to the total number of shares or contracts traded for a specific stock, asset, or market during a given time period.
Why it matters: High volume indicates strong interest in a stock and often leads to better price movement, making it easier for traders to enter and exit positions quickly.
4. Volatility
Volatility measures how much the price of a stock or asset fluctuates over a period of time.
High Volatility: Prices move rapidly and unpredictably—ideal for day traders looking to profit from quick price swings.
Low Volatility: Prices remain relatively stable, offering fewer trading opportunities.
Day traders often rely on volatile stocks because they provide more opportunities for profit.
5. Leverage
Leverage allows traders to borrow money from their broker to control a larger position than they could with their own funds.
For example: With 10:1 leverage, you can control $10,000 worth of stock using only $1,000 of your capital.
Why it matters: While leverage amplifies potential profits, it also increases the risk of significant losses, making proper risk management crucial.
6. Margin
Margin is the money borrowed from a broker to trade using leverage. It’s also the minimum amount of capital that must be maintained in your trading account to support open positions.
Margin Call: If your account falls below the required margin level, your broker will issue a margin call, requiring you to deposit more funds or close positions to avoid liquidation.
7. Stop-Loss Order
A stop-loss order is a risk management tool that automatically sells a stock or asset when it reaches a predetermined price.
Why it matters: It helps limit your losses by exiting a trade before the price moves too far against you.
Example: If you buy a stock at $50 and set a stop-loss at $45, your position will automatically close if the stock drops to $45.
8. Take-Profit Order
A take-profit order is an instruction to sell a stock or asset when it reaches a specific profit level.
Why it matters: It locks in profits automatically, so you don’t need to constantly monitor the trade.
Example: If you buy a stock at $50 and set a take-profit order at $60, the position will close when the price reaches $60.
9. Candlestick Chart
A candlestick chart is a popular tool for analyzing price movements. Each “candlestick” represents price data for a specific time period (e.g., 1 minute, 1 hour, 1 day).
Key Components:
Body: Shows the opening and closing prices.
Wicks (or Shadows): Represent the highest and lowest prices during the time period.
Color: Green (or white) indicates a price increase, while red (or black) indicates a price decrease.
Candlestick patterns are widely used to predict future price movements in day trading.
10. P&L (Profit and Loss)
P&L is a summary of your financial results from trading activities.
Unrealized P&L: Gains or losses on open positions that haven’t been closed yet.
Realized P&L: Gains or losses from trades that have already been closed.
Why it matters: Tracking your P&L helps you understand your performance and adjust your strategies as needed.
Bonus Terms
If you’re eager to learn more, here are a few additional terms to keep in mind:
Liquidity: How easily an asset can be bought or sold without affecting its price.
Breakout: A price movement beyond a defined support or resistance level.
Scalping: A trading strategy focused on making small, quick profits from minor price movements.
FOMO (Fear of Missing Out): A psychological trap that can lead to impulsive trading decisions.
Understanding these essential day trading terms is the first step toward becoming a confident and informed trader. As you continue to learn and practice, these concepts will become second nature, helping you navigate the markets with ease.
Remember, day trading requires patience, discipline, and constant education. Start small, use demo accounts to practice, and always prioritize risk management to protect your capital.
What are your favorite day trading terms or strategies?
