7 basic stock trading concepts you need to know before you start

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Trading stocks for the first time can be a bit overwhelming if you don’t know exactly what you are doing.

These days, stockbrokers have made available to retail investors the kind of tools that were once only available to professionals, and while that’s a good thing to some extent, it can also give the impression beginners that this activity is too much for them. .

In this article, we will explain some basic trading concepts to enhance our readers’ understanding of what they might see in the reports, news, and trading platforms they now have access to.

Some of these concepts may already be familiar to you, while others you may have never heard of, such as what is a model day trader.

Technical analysis

Technical analysis is one of the cornerstones of trading. This practice involves evaluating the price action and volumes of the various stocks available in the market to identify potential opportunities.

Some of the techniques used to analyze stocks include charting, which involves identifying price and volume patterns. Other more advanced methodologies involve the use of popular indicators such as the Relative Strength Index (RSI) and simple or exponential moving averages.

Finally, more sophisticated traders can take things to the next level by creating proprietary indicators that trigger buy and sell signals that they can use to trade.

Long and short position

A long position is opened when a certain asset is purchased. Traders who take a long position believe that the price of the asset will rise in the future. Meanwhile, a short position involves shorting an asset.

In this process, the trader borrows a certain stock from his broker and sells it in the hope of buying it back at a lower price in the future. Therefore, the working thesis for a short position is that the price of the asset will go down in the future.

Stop-loss order

A stop loss order is a type of trade order that is executed once the asset reaches the stop price. The purpose of this order is to limit the losses a trader can incur on an individual position.

Setting a stop-loss order for every open trade is considered a fundamental risk management strategy for traders.

profit level

The take profit level is a target price at which a sell order (for long positions) is executed. Most traders have a predefined entry and exit price for each trade. This allows them to remain objective and achieve the desired success rate and reward/risk ratio.

bullish and bearish

The word bullish means that all available data indicates an upcoming increase in the price of the financial asset being analyzed. Meanwhile, the bearish term indicates that the same valuation indicates an upcoming decline in the price.

Analysts and the media tend to use these words to refer to the general attitude of market participants towards an asset, market, sector or asset class.

Model Day Trader

A Pattern Day Trader (PDT) is a designation given to traders who execute four or more trades within 5 business days using the same brokerage account. This designation was created by the U.S. Financial Industry Regulatory Authority (FINRA) and is intended to increase oversight of high frequency traders (HFT).

If a trader is classified as a PDT, there will be a mandatory minimum account balance of $25,000. If the net worth of the account falls below this threshold at any time, the account holder will not be able to make transactions until a deposit is made or the value of the assets held in the account reaches this level.

propagated

A spread is the difference between the bid price and the ask price for a given financial asset. The most liquid stocks tend to trade at narrow bid/ask spreads.

Some brokerage firms make money through spreads. This means that they charge the trader a premium above the bid price when buying and reduce the ask price by a certain percentage when selling.

At the end of the line

The trading of financial assets has been facilitated by the introduction of user-friendly interfaces. However, understanding the terminology used by brokerage firms to conduct this business is not necessarily as easy as it seems.

The concepts described in this article are the most frequently used to describe the operations of a trader and knowing them will make you feel more comfortable when taking advantage of the services of your favorite brokerage company.

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