Basic Terminologies

Bid Price: The maximum price a buyer is willing to pay. When you "hit the bid", you are selling to a buyer in the market.

Ask(Offer) Price: The minimum price a seller is willing to accept. When you "lift the offer", you are buying from a seller in the market.

Spread: The distance between the bid price and the offer price. Brokers usually add their own premiums to the underlying market spreads.

Long: Opening a position with a Buy trade with the expectation of a rise in price.

Short: Opening a position with a Sell trade with the expectation of a fall in price.

Close: When you enter into a trade this is commonly referred to as “opening” a position or trade. When the trade is exited, whether that be by direct action from you, the triggering of an order attached to it, or simply by being liquidated due to insufficient funds, this is referred to as “closing” the position or trade.

Leverage: A Leveraged trade can be defined as the use of capital to gain larger market exposure, with your broker lending you the remaining balance. i.e. 2:1 leverage = 50% margin, so a £500 margin would allow you to obtain a trade size of £1,000.

Margin or Initial Margin: This is the name for the amount of capital required by your broker, as a percentage, to enter a leveraged trade. It is calculated as a percentage of the full trade size. Your broker will lend you the remaining balance to make up the total trade value.

Maintenance Margin: The minimum amount of capital needed in your account to keep your positions open. If your capital falls below this level, you will receive a Margin Call.

Margin Call: This is a warning that your trades have moved against you and your funds could become insufficient to cover your unrealised losses. This typically occurs when your account value drops below the required margin. The warning means that you need to fund your account or exit some trades to avoid your positions being stopped out, should your account value continue to drop.

Stop Out: This occurs when your account value drops below 50% of the required margin. At this stage, positions on the account will be forcibly closed.

‍Volatility: Volatility is how much and how quickly prices move over a period of time. This often reflects investor fear or uncertainty.

Slippage: When the price at which an order is filled is different to the price at which it was requested, due to "gaps" in a market. This happens when a market gaps higher or lower and can be applied in the forms of either a positive slippage or a negative slippage.

Order types

Take Profit and Stop Loss:

Take Profit and Stop Loss orders are used to protect profits and to limit losses. They allow the trader to set a pre-defined exit price on a position. If the price moves in a favourable direction and reaches the Take Profit price, the position is closed, keeping the profit. If the price moves in an unfavourable direction and reaches the Stop Loss price, the position is closed, preventing the loss from growing further.

Take Profit and Stop Loss are stored and processed on the trade server. Thus, positions remain protected even when the trader is away from the computer. Stop levels can also be added for a pending order. Once the order triggers, the relevant levels will be copied to the new or modified position. Please note that Take Profit and Stop Loss are processed similarly to stop orders, and thus slippage can be applied to them. If the level has triggered, but the price has changed, the position will be closed anyway.

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Buy Limit: A trade order to buy at the Ask/Offer price equal to or less than the one specified in the order. The current price level is higher than the value specified in the order. Usually, this order is placed in anticipation that the security price will fall to a certain level and then will start growing.

Buy Stop: A trade order to buy at the Ask/Offer price equal to or greater than the one specified in the order. The current price level is lower than the value specified in the order. Usually, this order is placed in anticipation that the security price will reach a certain level and will keep increasing.

Sell Limit: A trade order to sell at the Bid price equal to or greater than the one specified in the order. The current price level is lower than the value specified in the order. Usually, this order is placed in anticipation that the security price will increase to a certain level and then will start falling.

Sell Stop: A trade order to sell at the Bid price equal to or less than the one specified in the order. The current price level is greater than the value specified in the order. Usually, this type of order is placed in the anticipation that the price will reach a certain level and will continue to fall

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Risk Management

What is risk management?

Every trader opens their trade with the goal of making a profit, but no one can get it right every time. However, successful traders are good at limiting their potential losses while maximising their profits with risk management skills. Markets can go up or down due to various reasons, risks therefore vary.

Risk types

Market Risk: Market Risk is the risk of losing money as a result of unfavourable or harmful changes in asset prices. A variety of factors such as changes in interest rates, economic indicators, and overall market sentiment create movements in price. Market risk impacts all assets.

Liquidity Risk: Liquidity Risk is the risk of being unable to buy or sell an asset due to insufficient trading volume being available in the underlying market. Illiquid assets often have wider bid-ask spreads and higher transaction costs, meaning trades may not be executed at desired prices.

Event Risk: Event Risk is when unexpected events or developments significantly impact financial markets, such as natural disasters, terrorist attacks, geopolitical events, or corporate scandals. These events can cause increased market volatility.

Concentration Risk: Concentration Risk occurs when a significant portion of trading capital is invested in a single asset, sector or market. Without diversification there is an increase in vulnerability to adverse price movements in those assets, sectors or markets.

Currency Risk: When trading CFDs, you are effectively trading in the currency of the underlying product. So if you have a GBP account, and trade a US share, your profit and loss will be in USD. This means you are subject to currency risk on your profit or loss when this is converted back from USD to your base currency of GBP

How to manage Risk

Effective risk management is essential for traders. It will protect your capital and hopefully achieve profits. Things to take into consideration are;

Position size and diversification: Are you allocating too much of your capital to an individual share or market sector? It can be practical to spread your risk across a number of equities in different sectors. Always keep in mind the amount of margin you are using. Volatile markets could see you receive either a margin-call or be stopped out.

Stop Loss orders: Have you protected your trade sensibly with Stop Loss orders? This could significantly protect you against adverse market moves.

Risk - Reward: Are you being sensible with the amount you are willing to lose versus what you are hoping to win? Be aware how much you are willing to lose and consider adjusting your risk level accordingly.

Emotions: This means being consistent with position size, diversification, stop loss orders and risk reward. If you can separate the emotion from the trades and stick to your plan you can avoid losses that may occur from emotional decisions.

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