Financial jargon made easy
Have you been thinking why business news on the BBC, CNN or the Bloomberg doesn't have much meaning for you? What are they talking about? Is there something that is beyond me to understand? Are they speaking any other language or are they totally from a different planet?
No it is just that those who make money in financial markets have their own jargon and are not willing to teach anyone how to talk that language. Why? Would you teach others how you are making money? Probably not, because it can create competition. It is quite understanding.
We do because more trades mean more income for us.
Let us teach you the meaning of the words that cover more than 80% of your need with this regard. It is less than 20 words.
A standardized, exchange-traded contract to give or take delivery of a specific type and grade of a commodity, shares, currency... at an agreed upon place and time in the future. Futures contracts are transferable and the price of the underlying asset is fixed at the time when the contract is traded. Buying or selling a commodity futures contract is same as buying or selling the underlying asset of that particular commodity. It can be gold, steel, sugar or any other product.
Refers to that commodity which is delivered by the seller of that futures contract on the delivery date.It can be a commodity such as crude oil, or wheat, a currency such as British Pound or Euro, shares of a company or orange juice concentrate.
As mentioned, a futures contract is standardized by quality and quantity. The word "Lot" refers to this standard quantity of underlying asset of any futures contract. Please note that the lot size of a futures contract on the same underlying asset may differ from an exchange to another.
You can always buy/sell one (but not less then one) or any multiple correct numbers of lots (subject to by-laws of each exchange).
Let us take an example of gold lot in DGCX. The size of the gold lot is 32 troy ounce (equal to 1 Kilo gram) that means while trading in gold futures of DGCX you can buy or sell correct multiple numbers of the contract and each contract is 32 troy ounce equal to 1 Kg. You can buy/sell 1 lot (one futures contract), two lots or up to 200 lots at each trade but not 201 lots as the DGCX has restricted the ticket size of gold to 200 lots on each trade.
Is an order to buy/sell a futures contract with any number of lots within the acceptable quantity by that exchange.
The profits you earn when you trade futures contracts are all yours. You pay only a small commission to your broker when you trade. It is obvious that in case of loss, the broker shall not bear part of it. That is why prior to having permission to buy or sell a futures contract, you are required to deposit a certain amount of money with your broker. It is called margin deposit or simply margin. The amount of the margin your broker requires for each lot you wish to trade differs, depending on the exchange, the contract and your risk appetite.
This amount is your money that you can withdraw immediately anytime that you wish. As you trade successfully, your profits are added to your money (to the margin) real time. In case of a loss, it is deducted from this amount.
The margin is required by the exchange as a security that guarantees the profits of successful traders. We are obliged to keep this money in a segregated bank account that is controlled by the exchange, called the clearing account.
Bulls & Bears:
In financial jargon when prices are rising or are expected to rise, the term "bullish market" is most often used.
Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue and prices will sore high in upcoming periods. Of course, no bull market can last forever, and sooner or later a bear market (in which prices fall) will be on the way. Bullish and bearish moods are also called market trends and it is possible to predict when the trends in the market are about to change.
A bull natured investor expects prices to rise and, on this assumption, buys a security or commodity in hopes of reselling it higher later on. Investors who trade futures contracts first buy the contract as they expect that the price will go up and they will sell the contract at a higher price late on.
When a trader is bearish about the price of an underlying asset, he sells the contract first because he wants to buy it at a lower price later on when it is lower. He bought lower and sold higher. The difference is his profit.
The minimum price movement is known as a tick. Those who trade currencies call it a pip. Futures markets have specific tick sizes for each contract.
A market's tick size is the minimum amount that the price of that contract can change. For example, the GOLD futures in DGCX, has a tick size of 10 cents that means the smallest increment/decrement the price can move from $802.70 would be up to $802.80 or down to $ 802.60. The tick size is also known as the minimum price change.
Financial market's tick value is the cash value of one tick (one minimum price movement). For example, the GOLD futures has a tick size of $ 0.10 an the lot size is 32 troy ounce and the price quoted is per troy ounce which means that for every $.10 that the price moves up or down, the profit or loss of a trade will increase or decrease by $3.2. The tick value is also known as the minimum price value minimum price change.
This is one of the most exciting and attractive features of trading futures contracts also known as gearing. Both your capital and profit & loss are usually leveraged when you trade futures contract.
Profit & loss leverage:
Is the ratio of tick value over tick. As just explained above, this is equal to 32 when you trade DGCX gold futures contract. A 1$ movement of the price in the direction you expected translates into 32$ profit. This enables you to enjoy large profits generated from small movements in the prices. Of course you have to be aware that the same thing happens about loss when the prices move against you. Having a good trading strategy and sticking to it with discipline usually results in more number of winning trades then losing ones. This is how successful traders make money in financial markets as the P&L leverage is applied to profits more than losses.
Is the ratio of the contract value over the margin deposits. This is the amount you need to invest in order to trade the underlying asset. It is much less than the real value of the underlying asset. Suppose crude oil is at 120$ per barrel. Since the contract size of crude oil futures contract in the DGCX is 1000 barrels, the value of this contract will be 120,000$. If the margin to trade this contract was 6000$, it means that with the 6000 dollar capital you buy or sell a 120000$ of crude oil without any storage facility required. Your capital is leveraged as much as 20 times. Just make sure that you end up with more numbers of winning trades compared to the ones that end in loss and enjoy huge profits with your P&L and capital leverage. All you need to reach this goal is good strategy and discipline. You will learn this right here, right now.
When you buy a futures contract with a commodity, stocks or a currency as the underlying asset, you are holding a long position.Generally a trader enters in a long position when he expects the prices to go up. That means he is expecting a bullish mode in the prices. The word long was perhaps applied to this as opposite of short.
When a trader sells a futures contract with a commodity, stocks or a currency as the underlying asset, he is holding a short position.Generally a trader enters in a short position when he is bearish and expects the prices to go down since you did not buy this contract before selling it, so you are in short of that underlying asset.
When you buy one lot of a futures contract you are holding one long open position. The same way, when you sell one lot of a futures contract, again you have one open position that is short. Open positions are exposed to profit and loss due to movements of the price. Taking a second position opposite to the one that opened them in the same contract can close open positions. It means if you have one long position on DGCX gold futures contract December 08 delivery, you have to sell (go short) one lot of the DGCX gold futures contract delivery December 08 to close your position. Similarly if you have five short open positions on the DGCX Euro futures contract delivery march 09, you can close it by buying five lots of the DGCX Euro futures contract delivery march 09.When you don`t have any open positions no changes can happen to your deposit with us.
In financial markets the term squaring off is referred to those trades that are executed in order to close an open position.
It is quiet understanding that the buyers always want to buy cheaper and the sellers prefer to sell at a higher price. This can be observed in market and on the monitor of the trading platform with a small difference between the price that the buyers are bidding and the price that the sellers are asking. This difference is called the price spread or simply the spread. A trade happens when a seller and a buyer agree on a certain price and at that moment the spread is zero.
The spread always changes due to the buyers and sellers changing their bids and offers but you can observe that on some contracts the spread is tighter and in some cases it is wider. For example around 9 AM when still many market participants have not yet entered the market, the spread on the DGCX Gold futures contract may be a Dollar but in the evening when traders are fully engaged with their trades it can tighten to maximum that is 10 cents or one tick.
In financial language liquidity translates in to cash or the ability of a non-cash asset to be turned into cash. In this sense a property (land or building) is an asset with very poor liquidity, as it requires considerable amount of time to be sold and turned into cash at the price that the seller wishes to sell his asset. Futures contracts are highly liquid assets as far as you can see buyers and sellers on that particular contract. Prior to trading a contract we must pay attention to its liquidity as well. For example on a futures contract with an industrial underlying asset such as steel bars for construction of buildings that is launched on the DGCX for the first time in the world, you may find times when you have to wait until buyers and sellers show up in the market whereas in case of Gold it is almost always guaranteed that at any time you are able to buy or sell the contract and turn your asset into cash.
A Brokerage Firm is member of a financial market. Brokerage of financial markets is providing the service of giving access to those markets thus, brokerage firm are marketing arms of the financial markets. A broker doesn't buy or sell anything, we provide you with the privilege to have access to the best prices you can buy or sell a commodity, currency, or stocks for a small fee called the brokerage fee. This brokerage fee is our only source of income On top of that we provide you with the necessary knowledge and information you require to enjoy a handsome profit from your successful trades because of the nature of our business. In a futures market, when one looses some one else has made money. Your profit is paid by some other trader who is most probably some other broker's client. If you loose money you may be discouraged to trade financial markets or you may decide to trade less frequently. That means less or no brokerage fee for us. We are not satisfied with anything less than all our clients satisfied with their profits. When you make more money, you will trade more and our income grows too. So always remember that by our nature we are on your side. We complete all necessary legal paperwork, obtain the appropriate signatures and help you execute your successful trades.
We will play a very important role for you in financial market by providing you with our professional services and help you to understand how you can enjoy the privilege of having access and trading financial markets.
Brokers apply for the membership certificate of financial markets and after a thorough investigation about their financial and legal backgrounds, they can be granted the license they applied for by that market. Brokerage firms are regulated by the regulatory authority of their country on that market.
As mentioned above brokerage fee is the only source of income for a brokerage firm. It is a very small amount compared to the value of the contract you trade (normally around 0.02% to 0.05%) and the profit you can generate on each trade can be easily hundreds of time more then the brokerage fee you trade. The brokerage fees may differ by the market, contracts and the volume of your trade. It is usually agreed upon per each lot traded. Goes without saying that when the volume of your trades grows, you will enjoy our services at discounted rate.
Direct market access (DMA) :
Direct market access (DMA) is a term used in financial markets to describe electronic trading facilities that give investors wishing to trade in financial instruments a way to interact with the order book of an exchange. Normally, trading on the order book is restricted to broker-dealers and market making firms that are members of the exchange. Using DMA, investment companies (also known as buy side firms) and other private traders utilize the information technology infrastructure of sell side firms such as investment banks and the market access that those firms have, but control the way a trading transaction is managed themselves rather than passing the order over to the broker's own in-house traders for execution. Today, DMA is often combined with algorithmic trading giving access to many different trading strategies.
Straight Through Processing (STP) means full integration between all market participants, from liquidity providers to investors and the trading platform. In its purest form, an STP broker aggregate prices in real time from liquidity providers and passes client orders onto them.
Electronic Communication Network (ECN)
ECN brokers can be called: “give it as it is” brokers. The price quotes seen by their traders are the same as those processed by the banks on the interbank foreign exchange market. There is no dealing desk interference with the price quote structure and that is why ECN pricing represents the most transparent system of delivery of price quotes to Forex brokers. This service comes at a cost, as most ECN brokers will either charge commissions on trades (in addition to spreads), or require that the trader maintains a large account balance, or both.
Order An order for which you specify criteria that (is met) trigger the order to be submitted or canceled. For example, a Conditional Order enables you to configure both a Limit Order and a Stop Order. When one order is fulfilled, then the other is automatically cancelled. Thus, OCO Orders enable you to customize an order to meet your specific needs. Conditional Orders are also known as One Cancels Other Orders.
If Done Order:
An order that has two legs. If the conditions of the first leg have been satisfied, then the second leg executes. The first leg can be either a Stop Order or a Limit Order. The second leg of an If Done Order can be a Stop Order, a Take Profit, or both. When the price of the Limit or Stop Order has been met, the second order becomes active and is executed. Viking FX Trader interface enables you to easily add a add a Stop or Take Profit (or both) to any Limit or Stop Orders you submit.
An order to buy or sell a currency pair at a price you specify. A buy limit order will only be executed at the specified price or lower, and a sell limit order will only be executed at the specified price or higher. When you place a market order, it will be fulfilled based on the current Market, which you cannot control. Thus, to be able to know what price a currency pair order will be fulfilled at, use a limit order rather than a market order. However, remember that the market may never match the terms you define in a Limit Order, because the market price may quickly pass the limit before your order can be filled. Also, Limit Orders can protect you from buying a currency pair at too high a price.
An order to buy or sell a stock at the current market price. When you execute a Market Order, that order is released to the marketplace. It is then fulfilled at the best available price. A Market Order is almost always fulfilled (as long as there are willing buyers and sellers). However, because filling a
Market Order can take some time, the price paid at fulfillment may not always be the price you displayed. Position A currently open trade: the amount of a currency that you either own (known as a long position) or have borrowed (known as a short position).
Adding a Take Profit and/or a Stop to an open position, to enable the position to exit with a profit and/or without excess losses.
A Stop Order is an order to buy or sell a currency pair when the market price reaches the price you have defined for the currency pair. When that price is reached, the Stop Order becomes a Market Order. The price set in a Stop Order is called the Stop Price. A Buy Stop Order can be used to limit loss or protect profit on short sales. Simply set the Stop Price above the current market price before executing the order. A Sell Stop Order mitigates losses or protects profit when the price of a currency pair continues to drop. Always place a Sell Stop Order below the current market price. While you don't have to monitor how a currency pair with a Stop Order is performing on a daily basis, short-term price fluctuations can activate the pair’s Stop price. Finally, when that price is reached, the Stop Order becomes a Market Order, which means that the final price may be very different than the stop price. Placing a Stop-Limit Order enables you to avoid the risk of a stop order not providing a specific price.
An order that will be fulfilled at a price you specify (or better) after a Stop Price (that you also specify) has been reached. When a Stop-Limit Order’s Stop Price is reached, it then becomes a Limit Order that is executed at Limit Price or better. Thus, a Stop-Limit Order combines the features of a Stop Order with a Limit Order. Stop-Limit Orders can give you more control over when your order should be fulfilled. However, either if the Stop Price or the Limit Price is not reached, the order may not be fulfilled.
A type of limit order that you can use to try to capture profits and exit a position.
Trailing Stop Order:
A Trailing Stop Order is a Stop Order with a Stop Price that you set at a percentage level below the market price and that adjusts as the market price fluctuates. Thus, a Trailing Stop Order adjusts itself as the currency price moves up or down, which enables you to protect profits without having to monitor the market. You to configure a Trailing Stop Order by specifying the distance in pips you would like the Stop to follow the Market Price.
This type of order does not show the real quantity of you limit order to the market but instead it shows the quantity that you want the market to see. It is called Iceberg as the visible part of an Iceberg is only 10% of it above the sea level and the rest is not visible. Some platforms support this type of order. I the DGCX's official platform the EOS this type of order is supported with a minimum visible order quantity of 2 lots and the maximum order lot size is limited to the maximum order lot size in the market i.e. 200 lots.