When investors or traders enter into futures or options contracts, they are essentially betting that the price of the underlying asset will change in the future. The underlying asset is what the contract refers to, and its behavior will determine the outcome of the trade.
Examples of underlying assets may vary depending on the type of contract and market. For example, if we are talking about gold futures, then gold becomes the underlying asset. In the case of stock options, the underlying stock is the underlying asset.
The use of underlying assets in financial instruments allows investors to diversify their portfolios and also provides protection against risks associated with fluctuations in the prices of these assets.
A currency pair is the main instrument in the foreign exchange market (Forex) and is a structural unit that consists of two currencies – the base and the quoted. A currency pair determines the ratio of the value of these two currencies to each other.
Base Currency: This is the first currency in the pair and acts as the basis for trading. The currency pair is always named relative to the base currency. For example, in the EUR/USD pair, the euro (EUR) is the base currency.
Quote Currency: This is the second currency in a pair and is used to express the value of the base currency. In the case of EUR/USD, the US dollar (USD) is the quoted currency. Thus, the price of a currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.
Let’s look at the EUR/USD pair. If the price of this pair is 1.20, it means that to buy one euro you need to pay 1.20 US dollars.
- Direct: Direct currency pairs include the US dollar as the quote currency. For example, EUR/USD.
- Indirect: Inverse currency pairs, on the other hand, have the US dollar as the base currency. For example, USD/JPY.
Traders in the foreign exchange market use currency pairs to carry out purchase and sale transactions. Understanding the dynamics of changes in the value of currency pairs helps them make decisions about trading and investing in the Forex market.
Bulls are traders or investors who take a more optimistic position in the market and expect asset prices to rise. They actively make bull trades, buying assets in the hope of profiting from subsequent price increases. Bullish trading is based on the belief in the long-term strength of the market or a specific asset.
A bull market is a market situation in which asset prices in a general trend increase over an extended period of time. In such conditions, bullish trends become dominant, and many investors expect prices to continue to rise. A bull market can cover various financial markets such as stocks, commodities, currencies, etc.
Often, a bull market is accompanied by increased trading volumes, investor confidence, and general optimism about the economic outlook. Investors may use strategies to purchase assets during a bull market in order to profit from further price increases.
However, it is important to note that bull markets are not permanent and market conditions can change. Periods of bull and bear markets alternate depending on various factors such as economic indicators, political stability, changes in global trade and other events affecting the financial markets.
Bears are traders or investors who take a pessimistic view of the market and expect asset prices to decline. These market participants actively make short trades, selling assets in the hope of profiting from the subsequent fall in prices. Bearish trading is based on the belief that a market or a specific asset will weaken over the long term.
A bear market is a market situation in which asset prices generally decline over an extended period of time. In a bear market, pessimistic sentiment dominates and traders expect prices to continue moving lower. A bear market can involve various financial markets such as stocks, commodities, currencies and others.
In a bear market, investors often take actions to protect their portfolios, such as selling stocks, moving into more conservative investments, or using strategies aimed at profiting from falling prices. Bear market periods can be caused by various factors such as economic downturns, geopolitical instability, deteriorating financial performance, and others.
It is important to note that market conditions are constantly changing and a bear market period may be followed by a bull market period and vice versa. It is important for investors to monitor changes in economic and financial conditions to make informed decisions about their investments.
A bid is one of the two main prices in any trading transaction and denotes the maximum price at which a buyer is willing to purchase a particular asset. This is also called the “ask price”. When a trader or investor is ready to buy an asset, he submits a bid indicating the highest amount he is willing to pay for that asset.
The trading process usually involves two main prices: bid (ask price) and ask (ask price). The bid and ask make up the price spread – the difference between the price at which a buyer is willing to buy and the price at which a seller is willing to sell. It is important to emphasize that the bid will always be below the ask.
Let’s say an asset has a current price of $50. If a trader places a bid to buy this asset at a price of $48, then his bid will be visible on the market as the maximum price at which he is willing to buy this asset. If another trader agrees to sell the asset for $48 or less, the trade can be completed.
It is important to note that the bid may change depending on changes in market conditions and the trader’s strategy. The bid and ask provide information about liquidity and current trends in the market, and they are key elements in determining the price of an asset at a particular point in time.
The ask is one of the two main prices in any trading transaction and denotes the minimum price at which the seller is willing to sell a particular asset. This is also known as the “offer price”. When a trader or investor is ready to sell an asset, he sets an ask, indicating the smallest amount he is willing to accept for his asset.
The trading process usually involves two main prices: bid (ask price) and ask (ask price). The difference between the bid and ask prices is called the price spread. The ask will always be higher than the bid.
Let’s say an asset has a current price of $50. If a trader puts an ask to sell this asset at a price of $52, then his ask will be visible on the market as the minimum price for which he is willing to sell this asset. If another trader agrees to buy the asset for $52 or more, the trade can be completed.
It is important to note that the ask may change depending on changes in market conditions and the seller’s strategy. Ask and bid provide information about liquidity and current trends in the market, and they are key elements in determining the price of an asset at a particular point in time. They also serve as the basis for calculating the price spread, which can be an indicator of volatility and activity in the market.
The spread is the difference between the bid price and the ask price in the market. This is a key indicator of liquidity and the degree of sparseness of market orders. The spread is measured in points, percentages or dollars, depending on the type of asset and trading platform.
Ask price (Bid): The maximum price at which a buyer is willing to buy an asset.
Offer Price (Ask): The minimum price at which a seller is willing to sell an asset.
Spread calculation:
Spread = Offer price (Ask) − Ask price (Bid)
Spread = Offer price (Ask) − Ask price (Bid)
Let’s say an asset has a current bid price of $50 and an ask price of $52. The difference between them (spread) will be equal to 2 dollars.
The spread is an important indicator for traders as it reflects the degree of liquidity and transaction costs in the market. A smaller spread usually indicates a more liquid market, making it easier to execute trades. A larger spread may be due to low liquidity or increased transaction costs.
Traders can use spread information to evaluate current market conditions, determine the optimal time to enter or exit trades, and make trading decisions.
A futures contract is a standardized contract between two parties obliging to buy or sell a certain amount of an asset (for example, a commodity, a financial instrument) at a fixed price at a certain future point in time. This is a financial derivative that allows investors and producers to protect themselves from the risks of price fluctuations, as well as speculate on changes in asset prices.
- Underlying Asset: This is the specific commodity, financial instrument, index or other asset that the contract refers to.
- Price: This is a fixed price at which parties agree to buy or sell an asset. The price is determined at the time the contract is concluded.
- Expiration Date: This is the date on which the futures contract expires and the parties are obligated to fulfill their obligations. On this date, the actual delivery of the asset occurs or the transaction can be closed at the market price.
- Contract Size: This is the amount of an asset that is specified in the contract. For example, an oil futures contract may provide for the delivery of 1,000 barrels of oil.
- Margin: This is the amount of money that a trader must post as collateral when opening a position. Margin ensures fulfillment of obligations under the contract and protects the broker from losses.
- Hedging: Manufacturers and companies use futures contracts to protect against adverse changes in the prices of raw materials or other inputs associated with their business.
- Speculation: Traders can use futures contracts to make money on changes in asset prices without committing to actually buying or selling those assets.
- Arbitrage: Some market participants may use futures contracts to profit from price differences between different markets or contracts.
Futures contracts are traded on organized exchanges, which ensures their standardization and liquidity.
Leverage (or simply “leverage”) in the context of finance and trading is a financial mechanism that allows traders to increase their trading positions by using borrowed funds from a broker. This provides an opportunity to increase potential profits, but also increases the risk of losses.
- Leverage Ratio: Leverage is measured as the ratio between the trader’s equity (the amount the trader contributes to the trade) and the borrowed funds provided by the broker. For example, if a trader has 10:1 leverage, that means he can control a $10 position using just $1 of his own funds.
- Borrowed Capital: These are funds provided by the broker to increase the trader’s position. The trader uses them along with his own funds for trading.
- Margin: This is the percentage of equity that a trader must contribute to a trade. Margin determines how much of the total cost of a trading position must be covered with your own funds.
Let’s say a trader has $1,000 of his own funds and the broker provides 50:1 leverage. Using this leverage, a trader can control a trading position of $50,000 ($1,000 * 50).
- Increasing Profit Potential: Leverage allows traders to increase their investment and therefore potential profits.
- Access to markets: Traders with smaller capital can access markets and make trades that would otherwise be unavailable to them.
- Increasing losses: Like potential profits, losses also increase in proportion to leverage.
- Margin and Margin Call: If losses are too large and exceed available funds, the broker may call for additional margin or even automatically close the trader’s positions.
Traders should use leverage carefully and conscientiously, taking into account their investment objectives, risk profile and financial strength.
Margin is the portion of a market participant’s personal funds that he is required to contribute to open and maintain his trading position. It serves as security and guarantee of fulfillment of the trader’s financial obligations to the broker. Used in trading, especially when using leverage, to manage and control risk.
- Initial Margin: This is the amount of money a trader is required to deposit when opening a new trading position. The initial margin provides financial security for the transaction.
- Maintenance Margin: This is the minimum amount of money that a trader must maintain in his account in order to hold an open position. If the margin level falls below the maintenance margin, the broker may require additional funds (margin call) or automatically close the position.
Let’s say a trader has $1,000 and the broker provides 10:1 leverage. The trader decides to open a position for $10,000. The initial margin could be, for example, $1,000 (10% of $10,000) that he is required to deposit to open this position.
- Enforcement of obligations: Margin ensures that the trader will be able to fulfill his financial obligations on transactions.
- Risk Management: Margin helps control the risks associated with the use of leverage. It prevents market participants from opening positions that exceed their financial capabilities.
- Margin Call: If the margin level falls below the maintenance margin, the broker may call for additional funds or automatically close positions to prevent additional losses.
Margin is an important aspect of trading in financial markets and requires careful management on the part of the trader.
Margin call is a process in which the broker notifies the trader to deposit additional funds into the account in order for the margin level to support open positions. If a trader does not respond to a margin call and does not deposit additional funds, the broker may force close some or all of the open positions to minimize risk.
- Margin Level: This is the ratio between the current account balance and the current used margin. The margin level is measured as a percentage and is calculated as (Current Balance / Current Margin Used) * 100%. When the margin level falls below the level set by the broker (usually the maintenance margin), a margin call occurs.
- Maintenance Margin: This is the minimum level of margin that a trader must maintain in his account in order to hold open positions. If the margin level falls below this level, a margin call occurs.
- Notification: The broker sends a notification to the trader that the margin level is too low and additional funds are required.
- Position Closure: If a trader does not respond to a margin call, the broker can automatically close some or all of the open positions to restore the margin level. Closing occurs at current market prices.
Let’s say a trader has $1,000 in his account and he opened a position using leverage. The maintenance margin is $500. If the margin level drops below $500 (50% of the current balance), the broker can send a margin call.
- Debt prevention: Margin call prevents possible debt obligations of a market participant to the broker.
- Risk Management: This is a tool for managing risks and preventing catastrophic losses for the trader and broker.
- Liquidity Preservation: Margin call helps brokers maintain liquidity in the market, preventing default on financial obligations.
Traders should closely monitor margin levels and ensure they have sufficient funds to hold open positions and avoid margin calls.
A stop loss is a type of protective order that a trader sets to automatically close his trading position when the price of an asset reaches a certain level. This order helps the trader minimize losses by preventing additional losses in the event of unfavorable market movements.
- Target Level: The trader sets the target level at which he wishes to set the stop loss. This level is determined based on his strategy, risk profile and the amount of potential losses he is willing to accept.
- Stop Loss Activation (Trigger Level): When the asset price reaches the level set by the trader, the stop loss is automatically activated.
- Market execution: The stop loss is executed at the market price when the activation occurs. This means that the deal is closed at the best available price on the market.
- Minimizing losses: The main purpose of a stop loss is to minimize losses by preventing them from increasing further if the price moves further in an unfavorable direction.
Let’s say a trader purchased shares at $50. He decides to set his stop loss at $45. If the stock price reaches or falls below $45, the stop loss is activated and the position is automatically closed.
- Risk Management: Stop loss is an important tool for risk management, allowing traders to protect their capital from significant losses.
- Emotional Management: Using a stop loss helps you avoid making emotional decisions under stress such as panic and uncertainty.
- Part of a trading strategy: Stop loss is often included in a trading strategy as an important element to provide discipline and structure to trading operations.
Traders are advised to use stop losses with caution, taking into account market volatility and their own financial goals.
Take Profit is a type of order placed by a trader to automatically lock in profit from a trading position when a certain price level is reached. This order allows the trader to capture positive results and close the trade at a given price before the market moves in an unfavorable direction.
- Target profit level: The trader determines the target profit level at which he sets the take profit. This level can be selected based on an analysis of technical indicators, support and resistance levels, as well as other factors.
- Automatic execution: When the price reaches the specified take profit level, the order is automatically executed at the current market price. The deal is closed and the profit is recorded.
- Profit Protection: Take profit serves as a means of protecting profits by preventing you from missing out on an opportunity to take profits in the event of unfavorable changes in the market.
Let’s say a trader opened a position to buy shares at a price of $100. He decides to set his take profit at $110. When the stock price reaches $110, the take profit order is automatically executed, closing the position and taking profit.
- Trading Planning: Take profit is included in the trading strategy for a more structured and planned approach to managing trades.
- Psychological satisfaction: Closing a trade profitably with a take profit can increase a trader’s psychological satisfaction by reducing stress and emotional fluctuations.
- Optimized risk management: Take profit paired with stop loss allows the trader to more effectively manage risk, ensuring a balance between potential profits and losses.
Take profit is an important tool in a trader’s arsenal that helps manage trading results and follow strategic goals.
A trading terminal is a computer application specifically designed for conducting financial transactions and stock trading. Such terminals provide traders with access to market information, analysis tools, and also allow them to perform trading operations directly from a computer or mobile device.
- Interface and Charts: Trading terminals have an intuitive interface and provide price charts, candlestick charts, volume charts and other tools for market analysis.
- Market Information: Traders gain access to up-to-date data on prices, volumes, changes in asset values, news and other market information.
- Trading Instruments: Trading terminals provide access to various trading instruments such as forex, stocks, options, futures and other financial instruments.
- Orders and Execution: Traders can place different types of orders such as market, pending, stop loss and take profit. The terminal also provides instant execution of transactions.
- Analytics and Research: Trading terminals often include tools for analytics, technical analysis, research and economic reviews.
- Portfolio Management: Traders can manage their portfolio, view current positions, trade history, and estimate the overall value of their portfolio.
- News Feeds: Trading terminals integrate news feeds and economic calendars to provide traders with up-to-date information that may affect the market.
- MetaTrader 4 and MetaTrader 5: Popular trading terminals for Forex and CFD trading.
- Thinkorswim: Provides a wide range of tools and analytics designed for trading stocks, options and futures.
- Bloomberg Terminal: An advanced trading terminal widely used by professional traders and investors.
- E*TRADE: Mobile and web terminal for stocks, options and other financial instruments.
Trading terminals are an integral part of modern financial infrastructure, providing traders and investors with all the necessary tools for successful stock trading.
A trading trend is a stable and long-term direction of price movement in the market in a certain time interval. A trend can be up (bullish), down (bearish) or horizontal (sideways). Trend analysis is a key element of technical analysis and helps traders make more informed decisions about entering and exiting trades.
- Prices are moving up.
- New high points are formed on a regular basis.
- Minimum points also increase most often.
- Prices are moving down.
- New low points are formed on a regular basis.
- Maximum points also tend to decrease.
- Prices fluctuate around a relatively constant level.
- There is no clear direction in price movements.
- The maximum and minimum points can vary within a narrow range.
- Trend Lines: A graphical representation of a trend using lines that connect price highs or lows.
- Moving Averages: An indicator that smoothes price data and creates a trend line.
- Trend Strength Indicators: Measure the strength and stability of a trend.
- Volume Indicators: Analysis of trading volume as a trend indicator.
- Trend is your friend: The strategy is based on the assumption that the current trend will continue.
- Trend Confirmation: Using various tools and indicators to confirm the presence of a trend.
- Entering a trade in the direction of the trend: Opening trades in accordance with the current direction of the trend.
- Risk Protection: Use stop losses and take profits to manage risk and protect profits.
- Monitoring changes in trend: Regular monitoring of the market situation to identify possible changes in trend.
Trend trading can be an effective approach, especially with the proper use of analysis tools and risk management strategies. However, it is important to remember that the market can also periodically go through phases of sideways movement, and traders should be
A correction, also called a pullback, is a short-term price movement in the opposite direction of the current trend. This phenomenon is typical for financial markets and can occur after a prolonged price movement in one direction. Corrections usually represent a temporary reversal of a trend rather than a final reversal.
Duration and Amplitude: Corrections can be short-term or long-lasting, and their amplitude can range from small price changes to large pullbacks.
Causes of Corrections: Corrections can be caused by various factors such as technical support or resistance levels, changes in fundamental data, market news, or simply because traders are interested in taking profits after an extended trend.
- Flat Correction: Correction that moves sideways to form a flat pattern.
- Zigzag Correction: A correction that moves in a zigzag pattern with sudden changes in price direction.
- Triangle Correction: Correction formed in the form of a triangle pattern.
- Energy Recovery: A correction can serve as a temporary rest for a trend, providing an opportunity to recuperate before continuing in the same direction.
- Support and Resistance Formation: Levels formed during a correction can act as future support or resistance levels.
- Potential Entry Points: For traders, a correction may provide an opportunity to enter a trade in the direction of the main trend at a better price.
Let’s say an asset is in an uptrend with the price rising from $50 to $70. A correction then occurs and the price drops to $60 before resuming the uptrend. In this case, $60 represents a retracement level where the trend temporarily reverses direction.
Corrections are a normal part of price movements in financial markets. The ability to recognize and analyze corrections is an important skill for a trader because it allows you to make more informed decisions about entering and exiting trades in the context of the underlying trend.
A flat (or sideways movement) is a situation in financial markets when prices fluctuate within certain limits without a clearly defined trend direction. In such conditions, the market is often in a sideways range, and the price does not continue to move in one direction. A flat is characterized by the absence of a clear upward or downward trend.
- Lack of a clear direction: The main feature of a flat is the absence of a clear upward or downward trend in the market. Prices fluctuate around support and resistance levels.
- Horizontal Levels: Prices form horizontal support and resistance levels between which the market fluctuates.
- Low volatility: During sideways movements, market volatility is typically lower than during trending periods.
- Propensity to change: A market in a flat can change into a trend movement at any moment, so traders carefully monitor signals for changes in market dynamics.
- Range Boundaries: Traders use support and resistance levels to determine range boundaries during sideways movements.
- Oscillator Indicators: Indicators such as RSI (Relative Strength Index), Stochastic Oscillator and others can be used to identify periods of low volatility and possible turning points.
- Trading Volume: Analyzing trading volume can also help identify flat periods.
Let’s say an asset is trading in a range between the $50 support level and the $60 resistance level for several weeks. The price fluctuates within this range without a clear upward or downward trend. In this case, the market is in a flat.
A flat is a special period in the market when there is no clear trend. Traders can use various analysis tools to identify support and resistance levels, as well as watch for signals indicating a possible change in market dynamics. Such periods can be either temporary pauses in price movements or suitable for applying specific trading strategies in sideways market conditions.
A time frame (or time period) in trading is a time interval during which one bar (or one candle) is formed on the price chart. Time frames are used to visualize and analyze price movements in financial markets. Different time frames allow traders to view the market from different perspectives and make decisions according to different trading strategies.
- Timeframe Duration: Timeframe duration can vary from a few seconds to several years, depending on the choice of the trader and the goals of the analysis.
- Graph Type: Timeframe determines how price information is presented on the chart. For example, short-term time frames (such as 1-minute or 5-minute) use candlestick charts to display prices during each time frame.
- Trading Decisions: Different time frames can lead to different trading decisions. For example, short-term traders may prefer shorter time frames to quickly react to price changes, while long-term investors may use daily or weekly time frames.
- Volatility: Time frame can also affect market volatility. Short-term timeframes may be more susceptible to short-term fluctuations, while longer-term timeframes may show more consistent trends.
1-Minute (M1): Each bar represents one minute of price movement.
5-Minute (M5): Each bar represents five minutes of price action.
15-Minute (M15): Each bar represents fifteen minutes of price action.
1-Hour (H1): Each bar represents one hour of price action.
Daily (D1): Each bar represents one day of price action.
Weekly (W1): Each bar represents one week of price action.
Monthly (MN): Each bar represents one month of price movement.
- Trend Confirmation: Analyzing prices on different time frames can help confirm the presence of a trend in the market.
- Find Entry and Exit Points: Time frames can be used to determine optimal entry and exit points for trades depending on the trading strategy.
- Identifying Support and Resistance Levels: Timeframe analysis helps identify support and resistance levels.
- Risk Management: Time frames can influence the level of risk, and traders can tailor their risk management strategies according to the chosen time frame.
The choice of a specific timeframe depends on the individual preferences of the trader, his trading strategy and the degree of preparation for the market. Using multiple time frames in the analysis allows you to get a more complete picture of the current market situation.
Volatility is a measure of price variability in financial markets. This is the price fluctuation, measured as a percentage, and reflects the degree of risk or uncertainty in the market. Volatility can be either positive or negative for traders, depending on their strategies and preferences.
- Rapid Price Movement: During periods of high volatility, prices move quickly and significantly over a wide range.
- Sharp Price Jumps: Price charts may experience sharp ups and downs, presenting risks and opportunities for traders.
- Slow Price Movement: During periods of low volatility, prices move slowly and the market is in a more stable state.
- No Swings: Sharp and significant price movements are less likely, which can be beneficial for more conservative strategies.
- Standard Deviation: Measures the standard deviation of prices from their average.
- Volatility Index (VIX): Measures expected volatility in the US market. Often used to measure investor anxiety.
- True Range (TR): Determines the maximum difference between the following values: the current high price and the current low price, the current high price and the previous closed price, the current low price and the previous closed price.</li >
- Definition of Risk: High volatility can pose risk to traders, but also creates opportunities for profit. Low volatility may be attractive for more conservative strategies.
- Selecting a Strategy: Traders can adapt their strategies depending on the current level of volatility. For example, during periods of high volatility they may prefer short-term strategies, and during periods of low volatility they may prefer long-term strategies.
- Determining Entry and Exit Points: Knowing the volatility level helps traders determine the optimal stop loss and take profit levels.
Imagine that an asset that typically trades in a tight range suddenly experiences external events that cause high volatility. Asset prices can change quickly and significantly, presenting opportunities for both gains and losses.
Volatility plays a key role in trading, providing traders with information about risks and opportunities in the market. Traders can
Support and resistance levels are key concepts in technical analysis used to analyze price movements in financial markets. These levels represent certain price points or zones where a change in price direction is expected. They are a fundamental tool for making trading decisions and identifying possible entry and exit points for trades.
A support level is a price level below which an asset’s prices rarely fall. This is where demand for an asset typically increases, preventing prices from falling further. The level of support can be determined by various factors, such as previous price lows, technical indicators or key levels identified by analysts.
- Preventing Price Falls: A support level serves as a barrier that prevents an asset from falling below a certain level.
- Increased Demand: At the support level there is usually increased interest from buyers, which can be perceived as an opportunity to enter a position.
A resistance level represents a price level above which an asset’s prices rarely rise. This is where the supply of an asset increases, creating resistance to further price increases. The resistance level may be driven by previous price highs, technical indicators, or other key levels highlighted by analysts.
- Preventing Price Rising: A resistance level serves as a barrier that prevents an asset from rising above a certain level.
- Increasing Supply: At a resistance level there is usually increased interest from sellers, which may be perceived as an opportunity to close a position or sell.
- Entry and Exit Points: Support and resistance levels can be used to determine optimal entry and exit points for trades.
- Stop Loss and Take Profit: Determination of stop loss (loss protection) and take profit (profit taking) levels based on support and resistance levels.
- Trend Confirmation: A break through support or resistance levels can serve as an indicator of a change in the current trend.
- Trading System Signals: Some trading systems are based solely on price dynamics relative to support and resistance levels
Support is a price level below which an asset or market instrument rarely falls. This level is created due to the influence of demand, which prevents prices from falling further. When the price approaches the support level, it acts as a kind of “spring” that pushes the price up.
- Spring Effect: When prices reach a support level, demand for the asset increases, and prices, as if bouncing off a “spring,” begin to move upward.
- Multiple Touches: The level of support is usually not static; it can be confirmed by repeated touches, when prices repeatedly fall to this level and push away from it.
- Psychological Levels: Marks ending in round numbers often become support levels due to the psychological perception of traders.
- Previous Lows: Previous lows may become support levels as traders can expect demand for these levels.
- Entry Points: Many traders use support levels to determine the optimal entry points for a trade.
- Stop Loss Levels: The support level can also serve as a stop loss level that prevents losses if the level is broken.
- Trend Confirmation: Prices holding support levels can confirm the current uptrend.
Let’s say an asset has a support level at $50. When prices approach $50, demand for the asset increases and prices begin to move higher. This support level is confirmed by several touches in the past, where prices regularly bounce from this level.
Support is an important element of technical analysis, providing traders with key information about where demand for an asset is expected to increase. This allows traders to make more informed decisions and manage their trading positions effectively.
Resistance is a price level above which an asset or market instrument rarely rises. This level is created due to an increase in supply, which creates a barrier to further price increases. When prices approach a resistance level, it acts as a glass ceiling that prices cannot easily overcome.
- Glass Ceiling: When prices reach a resistance level, growth slows and prices often fail to rise above that level.
- Multiple Touches: A resistance level is confirmed by repeated touches when prices rise to this level several times and fail to overcome it.
- Psychological Levels: Marks ending in round numbers often become resistance levels due to the psychological perception of traders.
- Previous Highs: Previously reached highs may become resistance levels as traders may expect supply to increase at these levels.
- Entry and Exit Points: Traders often use resistance levels to determine optimal entry and exit points for trades.
- Stop Loss Levels: The resistance level can also serve as a stop loss level that prevents losses if the level is broken.
- Trend Confirmation: A break through a resistance level can serve as an indicator of a change in the current downtrend.
Let’s say the asset has a resistance level at $70. As prices approach $70, growth slows and prices fail to break through this level several times. This is confirmed by multiple touches in the past where prices regularly fail to rise above $70.
Resistance is an important element of technical analysis, providing traders with information about where supply for an asset is expected to increase. This helps traders make more informed decisions and manage their trading positions effectively.
An indicator in technical analysis is a mathematical formula processed by a computer application that provides traders with additional information about price movements in financial markets. Indicators help analyze the market, identify trends, entry and exit points for trades, and provide other signals useful for making trading decisions.
- Mathematical Formula: Indicators are created based on mathematical formulas, which may include price data, volume or other market parameters.
- Graphical Representation: The results of indicator calculations are usually displayed on charts in the form of lines, histograms or other graphical elements.
- Signals and Levels: Indicators can generate signals to buy, sell, or when the market may be overbought or oversold.
- Types of Indicators: There are many different types of indicators, such as trend, oscillator, volume and others, each designed to analyze certain aspects of the market.
- SMA (Simple Moving Average): Shows the average price of an asset over a period of time and is used to determine the current trend direction.
- RSI (Relative Strength Index): Evaluates speed and price changes, helping to identify overbought or oversold market conditions.
- MACD (Moving Average Convergence/Divergence): Helps identify trend strength and direction, and provides buy and sell signals.
- Bollinger Bands: Assess market volatility by showing how far prices have diverged from a moving average.
- Entry and Exit Points: Traders use signals from indicators to determine optimal entry and exit points for trades.
- Trend Confirmation: Indicators can be used to confirm an existing trend or identify possible changes in market direction.
- Risk Management: Indicators help traders determine stop loss and take profit levels, as well as assess risks and opportunities.
Indicators are an important tool for technical analysis, providing traders with additional data to make informed decisions in the financial markets. Their use allows traders to more accurately analyze market conditions and predict future price movements.
Long position is a trading strategy in which a trader opens a position with the aim of making money on the expected upward movement in the price of an asset. This strategy is carried out through the purchase of an asset with the hope that its price will increase and the trader will be able to sell the asset at a higher price, making a profit.
- Opening to Buy: A Long position is opened when a trader buys an asset, expecting its price to increase.
- Goal – Price Growth: The goal of a long position is to make money on the upward movement of the asset price.
- Losses on Falling Prices: If the price of an asset begins to decline, the long trader may suffer losses.
- Closing a Position: A Long position is closed when the trader decides to sell the asset, locking in profits or limiting losses.
- Opening a Position: A trader buys 100 shares of Company X at a price of $50 per share, thereby opening a long position.
- Price Increase: Company X’s stock price increases to $60 per share.
- Closing a Position: The trader decides to sell his 100 shares at the current price of $60, taking a profit.
- Trending Markets: Long positions are usually taken when there is an established uptrend in the market.
- Long-Term Investments: Investors may take long positions in assets with the intention of long-term holding.
- Combination with Other Strategies: Traders can combine long positions with other strategies, such as the use of stop losses and take profits.
- Potential Loss: Long traders expose themselves to the risk of losing money if the price of an asset begins to decline.
- Diversity: Long positions can be part of a strategy to diversify an investment portfolio.
- Careful Analysis: Traders should conduct a thorough analysis of the market and fundamental factors before opening a long position.
A long position is one of the main strategies in trading and investing, where traders and investors open a position with the hope of an increase in asset prices and subsequent earnings from this movement.
A short position is a trading strategy in which a trader opens a position with the goal of making money on an expected decline in the price of an asset. This strategy is carried out by selling an asset with the hope that its price will decrease and the trader will be able to profitably close the position by purchasing the asset at a lower price.
- Opening to Sell: A short position is opened when a trader sells an asset, expecting its price to fall.
- Target – Price Fall: The goal of a short position is to make money on a downward movement in the price of an asset.
- Losses when Prices Rise: If the price of an asset begins to rise, the short trader may suffer losses.
- Closing a Position: A short position is closed when the trader decides to buy back the asset, locking in profits or limiting losses.
- Opening a Position: The trader sells 100 shares of Company Y at a price of $70 per share, opening a short position.
- Price Drop: Company Y’s stock price decreases to $60 per share.
- Closing a Position: The trader decides to buy 100 shares at the current price of $60, taking a profit.
- Trending Markets: Short positions are taken when there is an established downtrend in the market.
- Use of Leverage: Traders can use leverage to increase their earning potential on short positions.
- Hedging: Investors can use short positions to hedge their long-term investments.
- Unlimited Losses: The potential losses on short positions can theoretically be unlimited, since the price of the asset can increase indefinitely.
- Forecasting Difficulty: Predicting price declines can be difficult, and traders should be careful when taking short positions.
- Leverage Risk: Using leverage on short positions can increase risk as losses are also magnified.
Shorting is an important strategy in trading and investing, where traders sell an asset with the hope of profiting from an expected drop in prices. This allows traders and investors to effectively participate in a variety of market conditions and utilize a variety of portfolio management strategies.
A gap (from the English “gap”) is a significant difference between the closing prices of the previous period and the opening of a new period on a financial chart. Gaps can occur for a variety of reasons and are often observed after the weekend when the market is closed and there is a jump in prices when trading opens.
- Normal Gaps: Occur due to natural changes in supply and demand in the market. May be due to news, events, company decisions, etc.
- Uptrend and Downtrend Gaps: Gaps can fill (prices return to the closing level of the gap) or remain open, which can indicate the strength of the trend.
- Exotic Gaps: Occur due to various events such as dividend payments, insider information and even geopolitical crises.
- News and Events: Sudden news or events that occur during a temporary lack of trading can cause a gap when the market opens.
- Increased Volatility: During periods of increased volatility, such as as a result of major events, gaps may be larger.
- Gap trading: Some traders actively use gaps for trading, seeking to profit from quick price corrections.
- Gap Fading: Traders can employ a fade strategy by assuming the gap will be filled and trading in the direction of the gap closing.
- Gap Filling: In some cases, a gap may be filled when prices return to the gap’s closing level during subsequent trading sessions.
- Gap Left Open: Sometimes a gap remains open, which can indicate the strength of the trend and lack of reverse price movement.
Let’s say XYZ Company’s stock closed at $50 on Friday. On Monday morning, after the weekend, the market opens with a gap up, and the stock price becomes $55. This will be a gap up where the new opening price of $55 exceeds the closing price of $50.
- Price Jumps: Gaps can be accompanied by price jumps, which can lead to significant changes in asset values.
Cross pairs in currency trading are currency pairs that do not include the US dollar. They are formed by combining two major currencies, not including the dollar. Examples of cross pairs include currency pairs such as EUR/GBP (Euro to British Pound) or AUD/JPY (Australian Dollar to Japanese Yen).
No US Dollar: Cross pairs do not include the US dollar in their composition, which makes them different from major pairs.
Lower Liquidity: Cross pairs may have lower liquidity compared to major pairs since trading volume is typically lower.
Let’s say we have a EUR/JPY pair, where the Euro (EUR) and the Japanese Yen (JPY) form a cross-currency pair. In this case, to determine the value of one currency relative to another, the trader must use a cross rate without the participation of the US dollar.
Major currency pairs are currency pairs in which one of the currencies is the US dollar (USD). These pairs are the most liquid and are widely used in global currency trading. Major currencies typically include the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Australian dollar (AUD) and Canadian dollar (CAD).
Presence of the US Dollar: All major pairs have the US dollar present, acting as the base or quote currency.
High Liquidity: Major pairs have high liquidity and trading volumes, which makes them attractive to many traders.
Stable Trends: Typically, major pairs are characterized by more stable trends and predictable behavior.
EUR/USD (euro to US dollar)
USD/JPY (US dollar to Japanese yen)
GBP/USD (British pound to US dollar)
USD/CHF (US dollar to Swiss franc)
AUD/USD (Australian dollar to US dollar)
USD/CAD (US dollar to Canadian dollar)
Market makers are large participants in financial markets, such as national banks or financial investment companies, who play a key role in ensuring market liquidity and stability. They undertake the purchase and sale of assets, which promotes competitive prices and ensures efficient trading.
- Market makers provide market liquidity, which means traders can easily buy or sell assets without significantly affecting prices.
- They create market orders to buy (bid) and sell (ask), allowing transactions to be executed at any time.
- Market makers set prices for assets by creating a spread (the difference between the purchase price and the sale price).
- This allows them to profit from price differences and provides tighter spreads for traders.
- Market makers can smooth out market fluctuations and prevent excessive price movements through their participation in trading.
- Their active participation in the market helps determine current asset prices and form consensus regarding their value.
- Market makers are actively involved in trading and are willing to buy and sell in large volumes, which helps ensure liquidity.
- National Banks: Central banks of countries can act as market makers for their national currencies.
- Investment Banks: Large investment banks can act as market makers in various financial markets.
- Financial Companies: Some financial companies that specialize in trading are also market makers.
- Conflict of Interest: There may be a conflict of interest, since market makers may have their own positions in the market and make money on price differences.
- Market Manipulation: Some market makers may face charges of market manipulation, including setting artificial prices.
- Concentration of Power: The activities of large market makers can lead to the concentration of power in the hands of a limited number of market participants.
An order in financial markets is an instruction or order sent by a trader to a broker or trading platform to perform a specific action on an exchange. The order defines the parameters of the transaction, such as the type of operation (buy or sell), volume, price and execution conditions.
Market Order: Requires immediate execution at the current market price. Guarantees execution, but does not guarantee a specific execution price.
Pending Order: Placed at a future price. Includes:
- Limit Order: Specifies the maximum price to buy or the minimum price to sell.
- Stop Order: Activated when the price reaches a certain level. Can be a stop-limit (a combination of a stop and a limit order) or a stop-market (becomes a market order when activated).
Determines the amount of assets the trader wishes to buy or sell.
For a market order, the current market price.
For a limit order, a specified price that is the maximum for buying or the minimum for selling.
For a stop order, the activation level of the order.
Determines how long the order will be active. Options include day (valid only during the current trading day) or until canceled (remains active until executed or canceled by the trader).
Traders use various types of orders to implement their strategies, such as protection against losses (stop-loss), taking profit (take-profit), entering the market at a certain price, and others.
Submitting an Order: The trader submits an order through the trading platform or broker.
Condition Check: The system checks whether the current market conditions match the order parameters.
Order Execution: If matched, the order can be executed and the trade is executed on the exchange.