Day Trading Terminology

Day Trading Terminology Every Trader MUST Understand

Day trading terminology is something every trader will need to understand. We’re going to start with basic terms that most day traders will already be familiar with. Then we’ll jump into the more advanced terms that you may still have questions about.

Remember, to quickly search for a term you can search this page using the Control + F button! If you have any questions as you are reading these definitions please don’t hesitate to reach out by contacting us today. Remember, as part of our Day Trading Courses I will explain each of these terms & how I use them in my day-to-day career as a trader.

Basic Day Trading Terminology

Day Trading

Day Trading is defined as the simple act of buying shares of a stock with the intention of selling them on the same day.

Professional Day Trader

A professional day trader can informally be considered somebody who day trades for a living, but from a regulatory perspective, it refers to a trader who is licensed with either their Series 6, 7, 63, 65, or 66. Traders who are licensed pay higher fees for market data. That’s why when you open an account you have to tell them if you are a professional (licensed) trader. Day traders are not required to be licensed if they are trading their own money.

Bull or Bullish

This term refers to a strong market of stocks moving up. This can even be used to reference a specific position the trader is taking. If they are bullish, they expect the stock to go up.

Bear or Bearish

This term refers to a weak market. This means traders think the price of stocks or a specific stock will be going down. If they are bearish, they may sell their bullish positions or even take short positions.

Initial Public Offering (IPO)

When a company does an IPO, they sell a fixed number of shares onto the open market to raise money. This could be, for example, 10 million shares. If those shares are priced at $10/share, they will raise $100 million from the IPO. This money gets invested into the company for future growth (building factories, strategic investments, etc).

After Hours Trading

After hours trading is done through electronic communication networks (ECNs) that are programmed to match buyers and sellers automatically and is done outside of normal market hours (930AM -4PM EST)

Day Trade

When a trader places an opening and closing trade on the same stock, on the same day, they are making a day trade and are subject to special rules.

Beta

Beta is a numeric value that is used to measure the fluctuation of a stock against changes happening in the stock market

Crossed Market

A crossed market refers to a temporary situation where bid prices associated with a particular asset or security is higher than the asking price.

Leading Indicator

Leading Indicator refers to measurable factors of economic performance that shifts ahead of the economic cycle before it begins to follow a specific pattern.

Profit/Loss Ratio

A profit/loss ratio is a measure of the ability of a particular trading system to generate profit instead of loss and is based on a percentage basis.

Return on Investment (ROI)

Return on investment (ROI) refers to a metric that measures profit or loss generated by an investment in relation to the invested funds.

Day Trading Terminology – Account Types

Cash Account

When you trade in cash account, the amount of money in the account is exactly the same as how much you deposited. When you take a trade, you have to wait T+2 (Transaction + 2 days to settle). Stocks take 2 days for transactions to settle. It’s like waiting for a check to clear. There is nothing you can do while you wait. Options trades are T+1 and take only 1 day to settle, which means you can trade with the cash the next day.


Margin Accounts

A margin account requires a margin agreement. With a margin account trades still take T+2, but instead of requiring you to wait 2 days before you can trade with that money, the broker gives you credit to trade with the money as soon as the trade has been completed. This is what allows day traders to take 10+ trades in a single morning. We can trade the same cash 1000x times a day if we’d like. All we need is a margin account.


Margin

When a trader opens a broker account they are given Margin. In addition to allow you to trade on borrowed money, they also extend a line of credit to your account for trading. Brokers in the US will always give you 4x Leverage which which means if you deposit $100k, you will have $400k in total buying power with $300k Margin being borrowed money from the broker. There are no fees for trading on Margin during the day, but holding with margin overnight is subject to interest rate fees. This is called the Margin Rate.


Margin Accounts

A margin account requires a margin agreement. With a margin account trades still take T+2, but instead of requiring you to wait 2 days before you can trade with that money, the broker gives you credit to trade with the money as soon as the trade has been completed. This is what allows day traders to take 10+ trades in a single morning. We can trade the same cash 1000x times a day if we’d like. All we need is a margin account.





Overnight Leverage

Most brokers reduce overnight leverage to only 2x cash balance.

Buying Power

Your buying power is your cash balance plus your margin. In the case of 4x leverage with a $100k cash balance, you have $400k in buying power. If you take a trade for $250k, you will have $150k in remaining buying power

Roth IRA

A Roth IRA is a retirement account funded by a taxpayer using his or her post tax-income and features tax free gains even when you withdraw



Margin Rate

The percentage a trader has to pay their broker in exchange for borrowing money.

Margin Call

Traders who are issued a margin call are in debt to their broker. The broker will require you to repay the debt and can force you to sell other assets to come up with the money.

Joint Account

A Joint Account is a type of brokerage account shared between two or more people who include relatives, business partners and couples.



Day Trading Terminology – Placing Orders

 

Market Orders

 

A market orders tells the broker to get you shares at current market prices. If you send the order to buy 1,000 shares at 5.00, the broker will get you 1,000 shares, but since you haven’t said the most you are willing to pay, they may give you shares at a higher price. If you accidentally type in 100,000 shares, you may get filled at 5.50 or higher.

 

 

Slippage

 

Slippage is the difference between the price you thought you would trade at, and the price the trade actually went through. This is the result of fast moving markets, volatile stocks, and spreads.

 

 

Limit Orders

 

A limit order is when you ask your broker to buy you shares and state the most you are willing to pay. A limit order of 1,000 at 5.05 will not fill higher than that price. That means

 if the price moves quickly, you may not get 1,000 shares.

 

 

Stop Orders

 

Stop orders are a versatile order that can be great for getting in and out of trades. When you place a stop order you are saying that you want to get in or out of a trade when prices hit your stop price and once they do, it turns into a market order and will execute at the next available price. Stop orders are mainly used for protecting long or short positions once you get into a trade.

 

 

Stop Limit Order

 

A stop limit order refers to an order placed with a broker and combines the features of both stop and limit orders making a more technical order.

 

 

Time In Force

 

Time In Force refers to a special directive implemented by traders or investors when placing a trade and is submitted when entering a trade.