2 percent rule
A method of building in stop-loss settings (automatic closing of a position) to limit the overall loss of a position to 2 percent of the cash balance of your total day trading account.
American Depository Receipt (ADR)
An ADR is a share of stock that is directly tied to the price of a share of stock of a company that is listed on a non-U.S. exchange.
Annual report
An audited listing of a publicly traded company's financial statements and statements to shareholders.
Arbitrage
The buying and selling of securities on different exchanges at the same instant in an attempt to gain on the price difference between the two markets.
Arms index
Attempts to read the conditions of the stock market by looking at the number of shares on the NYSE that have fallen and risen and the volume of these shares.
Asset valuation
A method of determining the value of property or claims on property without the actual sale of the property. To arrive at an effective valuation, the two pieces of property must be similar in nature, quality, and quantity.
Available margin
A form of a credit card for buying stock or other tradable sector.
Balance sheet
A financial document that shows the assets, liabilities, and owner's equity of a business. A balance sheet is divided into two parts; the asset side must equal the liability and equity side.
Bear market
A market condition when the investor's and trader's risk sentiment is low; also when a market is falling in overall price.
Beta (ß)
A measure of a securities' volatility in relation to the overall market. A beta of 1.0 would indicate the security moves in tandem with the market, while a beta of 2.0 would indicate the security's movement is twice as volatile as the overall market.
Basis point
The commission in FX accounts, equal to .01 percent.
Big Mac Index
A term coined by the publishers of the periodical The Economist. The Economist publishes their version of a PPP measurement by recording the cost of a McDonald's Big Mac in several countries around the world. The thought is that the Big Mac is a good measure of PPP, as it is the same commodity worldwide.
Book entry format
Accounting entries made to record the transfer of gold reserves from vault to vault.
Bourses
A European term for a trading area, usually where financial products, art or numismatics are traded in an organized exchange-like arena.
Bretton Woods system
Financial system in which the U.S. dollar was linked to gold. Foreign nations could easily exchange the dollars they had in reserve for the gold that was held in the vaults of the U.S. government.
Broker
The financial intermediary required in order to trade securities. A firm that holds trading and investing accounts for clients.
Bubble in the market
A condition of securities that are greatly overpriced due to ease of credit, allowing greater and greater price expansion in the market.
Bull market
A market where there is an overall good feeling; usually indicated by rising prices over an extended time.
Buy and hold
An investment strategy that uses security selection as its main requirement; usually for longer timeframe investors.
Buy on the dips
A method of allocating a certain amount of your portfolio to one security and adding to your position of this security when the price naturally hits low points throughout the trading horizon.
Capital gain
The money made on an investment when the sales price is higher than the purchase price.
Capitalization
The sum of the long-term debt and the stock in the set up of a company. This is often called the structure of the company, and the amount of debt in relation to the amount of equity in the company will tell you how conservatively the company is structured; the lower the amount of debt, the more conservative.
Carry trades
Trading long, high-yielding currencies versus low-yielding currencies.
Cash flow
A measurement of the inflows and outflows through a company for a given length of time.
CBOE Volatility Index
An intraday index; its main use is as an indicator of traders' and investors' emotional feelings about the market. The higher the VIX number is, the greater the negative feelings in the market. A normal reading is anywhere from 15 to 25. Also known as the VIX Index.
Certificate of Deposit (CD)
A financial product sold by a bank that operates much like a savings account, only with a maturation date.
Coffers
A term from the Italian Renaissance referring to the chest in money traders and banker's vaults that held the actual gold and silver coinage.
Combination brokerage firms
Firms that have trained licensed brokers available to assist in the setting up of a trade or a hedge trade. They have two types of pricing structures, one for online trading at the discount rate, and one for broker-assisted trades, at a higher, full-service rate.
Commodity
Any raw materials that are fully interchangeable and uniform and used in the manufacture of processed goods.
Commodity currencies
Currencies of commodity-producing economies.
Deep-discount firms
These brokerages will offer a discount on the price if you exceed a certain amount of trades, usually above fifty in a monthly period.
Defensive cash account
The mindset that your cash account is the source of your paycheck and the source of a day trading business's self sufficiency. You should get to the point that your day trading business is completely self-sufficient and in no way harms your total picture of economic well-being.
Depreciation expense
A deduction allowed by the IRS that spreads the cost of fixed assets over an assigned lifespan of three, five, or seven years depending on the classification of the equipment or fixed asset.
Discount firm
Discount firms offer the same back office, order entry, and market access as a full-service firm. The only difference is that you will not have a representative to speak with, and most likely the discount firm will not offer its own research, but will rely on outside sources for this critical information instead.
Dollar cost averaging
Buying at regular intervals, at high points of the market and at low points of the market.
Dow Theory
A method used to plot the future movement of a security using the Dow Jones industrial 30 average and the Dow Jones transportation averages as base lines.
Earnings per share (EPS)
Found by taking the net earnings and dividing it by the total number of shares outstanding. The relative value of the market as a whole, measured by comparing the ratio of the S&P 500 average earnings per share to the percentage yield of a ninety-day U.S. government T-bill.
Earnings season
During earnings season, companies can exceed or miss what the market expected their profits to be, and this can lead to exaggerated and unpredictable price movements in a stock's price.
Elliott Wave Theory
Employs past information of a security movement to predict the securities future direction. The basis is that securities in the market have five distinct steps, and these steps form three separate waves. The theory is that once all of the five of the different parts of the wave have worked their way through, a top (or bottom) is in play. When a top or bottom is reached, this also marks the beginning of a fresh trend.
E-mini futures contracts
Futures contracts that are structured much like the full-sized contracts, except the they have much smaller lot sizes. Because they have smaller lot sizes, they are easier to manage, and it is easier to have multiple positions in your account at any one time.
Endowments
Often referred to as “institutional investors” or “institutional money.” These funds are associated with colleges, nonprofit groups, and other asset holders that have set aside assets that are to be separate from the day to day activities of the group, and are held to be professionally and actively managed for stability and gain.
Entry points
The point at which you make your initial purchase of a stock, commodity, or currency.
Equity
The part of a company that is owned, as opposed to debt.
Euro
The name of the common currency of the European Union. It is also known as EUR or €.
Exchange traded funds (ETFs)
A security that trades intraday much like a stock, but holds a basket of underlying securities that influences its price and movement.
Floating rate system
Meaning that exchange rates are not set; however, they might have a target amount set by the central bank of the country or economic entity that issues them.
Foreign exchange trading
The act of going into the electronic or interbank market to trade the money of other nations by selling one currency and using the proceeds to buy another currency. Profit is made when the prices of the two currencies move in a favorable direction in relation to the opening trade.
Forwards
Much like a future — a contract is signed to buy a financial asset in the future at a set price, but in the case of forwards, the contract is custom made between the parties and is not freely tradable on an exchange.
Full-service brokerage firm
Firms that offer overall market technical analysis, sector and industry specific analysis, and information regarding the trading potential of the S&P 500, ETFs, commodities, and currencies as to where to place enter and exit points during your trading day.
Full-service firm
Opening an account with a full-service firm will give you access to a licensed representative who is trained in securities selection and the setting up of trades. Most full-service firms allow you to trade almost all classes of securities from equities to futures to foreign exchange, and can also offer competitive interest rates on the unused cash portion of your portfolio.
Futures contract
A derivative financial instrument whose value is tied to the expected price of an underlying asset at a set time in the future.
FX account
A brokerage account that allows the holder to trade in the foreign exchange markets, buying and selling the world's currencies.
Going long
A term used to state you have a trade that is set up to make money when the security or sector is moving upward.
Going public
The efforts involved and the act of raising capital for a company for the first time in the capital markets through the issue of an initial public offering or IPO.
Going short
A trade that is structured to produce a profit when the underlying security loses value.
Hard assets
See raw materials.
Hedging
The act of using multiple strategies or multiple positions to reduce the overall risk in an investment or trading portfolio.
Hedge fund
An investment company that uses multiple positions and high degrees of leverage to achieve high levels of returns while minimizing risk.
Hot market
The secret of getting into a security before a bubble collapses.
Income statement
Found within an annual report. Shows sales, expenses, and net income; this is shown over a twelve-month period.
Independent investor
An independent investor usually has a buy and hold strategy of selecting securities and holding them for the long term.
Independent trader
Independent traders are the group of people who day trade in their privately held accounts with their private money. They are the only ones to share in the profits derived from day trading.
Initial public offering
Usually the first attempt by a successful privately held company to raise cash for expansion by selling shares of itself to institutional investors and the public.
Intervening in the markets
When governments or central banks attempt to regulate the value of their currencies. This is done by the government or central bank buying or selling its own currency in the inter-bank market in an attempt to force a change in value of that currency.
Investment banker
Someone who analyzes a company, performs all background checks, and prepares a company for an IPO.
Investment banks
A financial services company or partnership that offers corporate finance advice, financing, brokerage accounts, and IPO services as its main line of business.
In play
A stock (or other investment) is in play when some news has come out on the company, and the news has caused other traders to take notice. When other traders take notice, a stock will go up or down, depending on whether the news is perceived to be good or bad for the company.
Japanese candlestick charts
Charts that read much like bar charts — the main difference is what is reported on the chart. The high and low for the day, and the opening and closing price of the day are shown. Also, there is a difference in the charts for when the end of the day price is lower than the beginning of the day price, and vice versa.
Letter to shareholders
Found within an annual report; tells the nature of the business operation.
Letter to stockholders
Found within an annual report. Tells you how the company has been doing and where they would like to go in the future.
Leverage
The use of credit as a multiplier for the purchase of a security. Also known as gearing.
Liabilities
The short-term and long-term debts of a company.
Long-only trades
A trade where the stock or ETF gains in value when the price of the stock or ETF goes up in value.
Long-term perspectives
Day trading timeframes of three to six months that rely heavily upon fundamental analysis as well as technical chart evaluations.
Margin
The amount of the credit balance that a client has in his brokerage account.
Margin accounts
Where you put in a certain amount of cash and the brokerage firm supplies you with a credit card — like balance that is able to give you additional buying power — some margin amounts are limited by regulation, such as stocks and futures.
Margin call
This could happen if you used the margin in your account like a credit card to purchase the ETF and the value of the position fell far enough to require you to either close out the position and pay back the margin you borrowed, or have the option of depositing more money in your account to be above the required amount. Margin calls are looked upon as unfavorable and can be very disruptive to trading.
Market cap
The number of shares outstanding in the market times the price of the share.
Market chatter
Short-term news reports.
Market regulators
Regulators that are in control as to what amount of margin is able to be used in stock, ETF, and futures accounts.
Market reports
Sources that offer a logical view of the market. They are often based on mathematics, past market activity, market fundamentals, and technical indicators.
McClellan Overbought/Oversold Oscillator
Measures the velocity of the money moving in to and out of the markets, and is calculated for the NYSE and the NASDAQ.
Modern Portfolio Theory
The concept of limiting risk and enhancing reward, first introduced by Harry Markowitz. In 1952, Markowitz mathematically proved that risk could be reduced by the movement away from single securities and toward the inclusion of non-correlated securities into the portfolio.
Momentum
The measure of a security's rate of movement.
Money supply indicator
Calculated by starting with 100 and adding the percent change in M2, and subtracting the percent change in the Consumer Price Index.
Moving average deviation
Calculated by dividing the security's last price by its ten-week moving average.
Multiple-sector account
Brokerage accounts that usually have a higher minimum then the pure FX accounts, as the “lot size” in the other sectors might require a higher minimum to trade effectively.
Mutual funds
An investment vehicle that is comprised of a basket of securities and offers the diversification benefits of an ETF, but has its price calculated only once a day, at the close of the markets.
Net long
Over time, an average of more long positions than short positions.
Net profit on a trade
The amount realized from a transaction, minus the transaction fees, minus the price of entry, leaving the overall profit on the trade.
Offensive cash account
A philosophy of entering and exiting trades with the thought of increasing net worth, no matter how small the gain might be.
Offshore brokers
International investment firms. One can invest in foreign stocks, foreign indexes, and the indexes of developing parts of the world.
Options' trading
Often considered the most risky form of trading due to the time element of the options. This time element means that as the days progress toward the expiration date of an options contract, they are worth less and less, to the point of having zero time value, only intrinsic value.
Order entry
The method that an online trading terminal uses to actually purchase or sell a security.
Pension funds
See Endowments.
P/E ratio
A fundamental analysis tool; its formula is share price/earnings per share.
Perfect hedge
A position that is hedged to the point that the risk has been eliminated. In theory, a perfect hedge eliminates all risk, but at the same time eliminates the possibility of any return.
Philosophy of buy and hold
A passive investment technique of buying carefully selected securities, buying them and holding them for the long term, usually to reap long-term capital gains at a tax-advantaged rate.
PIPs
In an FX account, basis points commissions.
Pivot point
When a security travels past its support or resistance point with a lot of volume, it is thought to be a good breakout. The point of the breakout is called a pivot point, and is often followed by a test of the breakout, a time when the market rethinks the breakout, and the security falls in price.
Position
Your position is when you make a case for the trade and start building it.
Position trading
A method of building up more and more inventory of a security over time, often a month or longer, with a clear selling price point in mind.
Price discovery
Going into the open market to find the going rate for the price of a security.
Price setting
Finding out the going rate of an item that is to be transacted.
Priced in
When the market builds the expected positive or negative news into the value of their trades and positions.
Primary market
A place where companies can come to market and raise money for their businesses.
Profit taking
When traders sell off a security after it reaches a psychologically important level.
Proprietary trading
The term referring to when a firm trades its own company-owned money inhouse for their own profit, and not for a client's account.
Purchasing power parity (PPP)
A measurement of the misevaluation of the same goods from country to country as measured in a base currency, such as the U.S. dollar.
Pyramiding (the pyramid method)
Pyramiding is entering and exiting trades with three equal dollar amounts in order to smooth your average position cost and selling price. This buying and selling method is a form of safe position management.
Quantitative easing
When banks can intervene in the currency markets to force the adjustment of their currency.
Raw materials
Any one of the asset classes that are based on a physical asset such as oil, copper, corn, and lumber.
Read the fundamentals
The process of knowing the economic or financial statements of a country, market, sector, or security.
Resistance level
A psychologically important level in a security's or index's chart, often very resistant to breach due to the world's traders all making the same assumption of the securities price.
Risk-free rate
The benchmark interest rate number of a totally liquid and risk-free security, commonly measured by the ninety-day U.S. T-bill rate.
Risk management
A method of using mathematics and hedging to build a model and implementing methods of limiting risk while maximizing the potential for returns in a trading portfolio.
Scalping
Trading using a five to ten minute timeframe.
Secondary market
Once a stock is sold for the first time, it then enters this market.
Security-selection approach
An analysis when you are looking at the big picture and using fundamentals.
Security-timing approach
Relying on the timing and price level of a security to determine the proper entry and exit point of a trade.
Shorting
A term used to state you have a trade that is set up to make money when the security or sector is moving downward.
Short interest indicator
A report that shows the amount of shares that are held on the short sale side of investors and traders, representing the number of traders who think the market will go down from its current level.
Short-term perspective
The time it takes to evaluate the day's market conditions and news, look for setups, and commit to a trade.
Statement of cash flows
Shows how money flowed in, out, and through a company during the same year as the income statement.
Stochastic
The measurement in percentage terms of the price velocity of an individual security or market index as compared to a range set by a technician.
Stockholder's equity
A representation of the difference between what the company owns and what it owes.
Stocks
An ownership share of a company.
Stop
Where the trading platform will automatically sell when it reaches a certain point.
Stop-loss order
When you precalculate the maximum loss you would take in the trade before your trading platform places an automated closing out of the trade, thereby placing a limit on the percentage and dollar amount of the potential loss of the trade.
Support and resistance of the security
When you draw a line at the average bottom price and top price, you find the support and resistance of a security.
Swaps
A custom made contract is entered into with the obligation of both parties to trade securities (usually FX) at the beginning of the contract and return like securities back to the original owners at the end of the term by “re-swapping” the exact or like securities.
Synergy of the business
How a business's customers are better served by the company operating as a whole unit, as well as the value of their repeat customers.
Take-profit order
When you enter in beforehand the amount of profit in percentage or dollar amount that you would like to make on the trade. When the security meets the price level that is required to meet your preset profit amount, your trading platform will automatically close out the position, and lock in your gains.
Tax planning
The art of arranging your gains and expenses to arrive at a lower net income.
Technical analysis
A system of reading charts off a computer screen. Looks at the supply and demand data as presented by indicators.
The time in the trade
The length that you, as the trader, are holding the stock, exchange traded funds (ETF), or commodity.
Top-down approach
The process of starting with the big picture, looking at a country's economy, a particular sector, a security, and then switching to technical analysis to make the final decision as to a possible entry and exit point.
Total return strategy
The returns of your account are the combined interest accrual, and the added boost of trading gains is the true measure of your accounts performance. This combined number is often called a total return strategy.
Trading platform
Trading software.
Tranches
Large orders to be placed with institutional investors. Tranches are often bundled together to have the same financial characteristics, and are often sold in units of $1 million or more per order.
Trusted sources
Sources that will tell you the direction in which the market is likely to be going in the future. These are usually the longer timeframe reports and market summaries that are published by your broker.
Uncorrelated diversification
In your day trading portfolio, when you have different positions spread across many securities, industries, and markets, so that when one trade turns bad, it is supported by many others that are not related or affected by that trading/ market event or news.
Unrealized gains
The profits are still “on paper” and not yet in the day trader's account, as the trade has not been closed out yet.
Unrealized profit or loss
The profit or loss that you would make on a trade if you closed the trade at that exact moment.
VIX Index
See CBOE Volatility Index.
Wash sale
The sale of a security at a loss thirty days before or after the purchase of the same security. Any losses from a wash sale are disallowed according to IRS regulations.
Weekly average profit
A measure of your profits that smoothes out the natural daily ups and downs of the trading week. Gains are netted with losses, giving a weekly net gain or loss.
Weighted average cost of capital (WACC)
The formula used to find the balance between debt and equity on a company's balance sheet. The WACC varies upon the cost of debt and the tax bracket of the corporation.
WST ratio
An indicator that uses information derived from options traders.
Zero-based
A term referring to the settling of profits and losses between accounts at the end of each trading day; used in the futures markets to prevent account holders from getting too deeply in the negative with their individual trades.