Stock Market Trading Terms Language
Those new to the business of stock trading often encounter terms foreign to them. However, these terms are a standard aspect of the business, and you should understand their meaning. When you communicate with brokers, speak to other traders or read and listen to financial news media, these words arise frequently. A solid understanding of the vocabulary of the stock market industry may help you trade more effectively.
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Order Types
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The different types of stock market orders often are confusing to new traders. But it is essential to your trading that you understand the three main order mechanisms in the market. If you intend to buy or sell a stock with a guarantee of filling your order immediately, you place a "market order." Your order executes at the best available price. To restrict the price of your order's transaction, you place a "limit order." This prevents you from buying stock at a higher price than you intend, but it does not guarantee a fill. As a result, you may not get your stock at all. After you own a stock, it is common to place a "stop order." This order sits dormant until prices fall to its level, at which point it is automatically triggered to exit your position. Traders often call this a "protective stop," because it stops your losses by liquidating the stock holding.
Support and Resistance
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Analyzing stock charts, called "technical analysis," is at the core of stock trading. Few traders enter a stock position without careful scrutiny of past price action on a chart. Two of the most common terms that traders use when looking at charts are "support" and "resistance." These appear clearly on a chart. Support is a specific price point above which stocks have historically had trouble moving. You will see numerous peaks on the chart at that level. Resistance is the opposite; it is a floor to price action from which stocks have historically bounced up. Traders often buy at resistance levels and sell at support levels, but the strategies can become much more complex than this.
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Moving Average
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A moving average is a "technical indicator" that you superimpose on a price chart. Indicators analyze past price action using formulas that can be quite complex. Traders consider the graphs that depict the results of these formulas when making trading decisions. There are hundreds of common indicators, but the moving average is the simplest and most well-known. A moving average simply averages the closing prices of the past several bars on a chart and plots that average as a point. Each new bar recalculates this average, and then these points are connected with a line. It reduces volatility to a simple signal that moves up when prices are gradually moving higher. Moving average trading strategies are innumerable, and nearly all traders look at them.
Trends
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Professional traders never lose sight of a "trend." You can identify a trend in different ways. If you can draw a straight positively-sloped line connecting all the low points on a chart, then the stock is said to be in an up trend. If you can draw a negatively-sloped line connecting the high points, the stock is down trending. Also mentioned often is the phrase "higher highs and higher lows." This refers to one of the first trend analysis techniques called "Dow Theory." If each high is higher than the previous high, and the lows of each high are higher than the previous lows, this is the most basic definition of a trend. Trends tend to continue indefinitely, and they often indicate a good opportunity to buy.
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