Stock Trading Terms Every Beginner Should Know

There is a lot of jargon thrown around in the trading community, so in this video, I’m going to explain the most common terms that you should know when starting out.

So for the purposes of this video, I will use simplified definitions as they most commonly relate to trading. It should give you a basic idea of what people are talking about when you see these acronyms or hear these terms. If you want to learn more about the technical definitions, Google is your friend. Here we go.

BASICS

Equities refer to stocks. If someone is trading equities, they are usually referring to shares of a stock like Apple or Tesla or whatever.

Stock Options are derivative, tradeable contracts. It’s called a derivative, because its value is derived from an underlying asset. So if you bought an Apple stock option, Apple, is the underlying asset. Each contract represents 100 shares of the underlying. To keep things really simple, when you see the word underlying, you can replace it with the word “stock.”

Futures are also a derivative contract. The underlying assets here can be physical commodities like oil or oranges, or financial instruments like the S&P 500 or Nasdaq indices. Indice is just the plural of index, by the way.

A tick is the smallest price movement a trading instrument can make. So most stocks trade in one-cent tick increments. In index futures like ES, the S&P 500 futures contract, the tick size is 0.25, so there are 4 ticks per dollar increment.

In Forex trading, the equivalent is a pip. It’s the smallest price move that a currency pair will make.

ETH or electronic trading hours include after-hours and pre-market trading, also known as extended trading hours. The volume in extended hours is lower.

Being Long usually refers to a Bullish position and means you bought something to open the trade.

Being Short is usually a bearish position, meaning you sold something to open the trade.

A Stop or Stop-Loss is where you will exit a trade. A Hard Stop is an actual order that you place ahead of time and will execute automatically and a Mental Stop is a manual stop that you will execute yourself. Most commonly, people use mental stops with Stock Options because the pricing of the contracts can fluctuate a lot and you may prefer to exit when the underlying hits a specific price as opposed to the contract hitting a specific price.

Next, Scalping. Scalping refers to short-term intraday trades. This could be a minute to 30 minutes to an hour… this is used loosely, but generally describes trades taken on smaller time frames.

Swinging is when you hold a trade at least overnight. You could swing it a day, a week, a month… but the point is it’s not a day trade and you’re probably looking to catch a bigger move.

RTH or Regular Trading Hours just refers to the normal open hours of the US stock market. For the S&P 500 futures contract, RTH is 9:30am to 4:15pm New York time.

Risk/Reward is a ratio that shows how much you’re risking compared to how much you stand to gain on a trade. If you have a 1:3 risk to reward, means you’d risk $1 to win $3. Or $50 to win $150. Or $69 to win $207. Or $420 to win--- [bars & tone]

Your Cost Basis is the price you paid for a stock.

Averaging Down is when you lower the cost basis of a trade by adding to a position at a lower price. So if you bought 1 share at $10 and one share at $9, your cost basis would be $9.50.

TECHNICAL ANALYSIS

Candlesticks are the most common way to represent price on a chart. A candlestick will show you the highest value price reached, where price opened, where price closed, and the lowest value price reached.

There are a lot of Candlestick Patterns which some traders use as part of their trading strategy. I recommend looking up the most common ones in a graphic like this and study them.

The most common are probably Bull Flags and Bear Flags, but it’s worth being familiar with as many as you can, even if you think it’s just nonsense.

Heiken Ashi is a technique used with candlestick charts, but calculates them in a different way. Every bar opens at the halfway point of the previous candle’s body. This creates smoother looking charts that can be easier to identify trends with.

The Footprint Chart is another type of candlestick chart that shows the interaction between buyers and sellers at each price. It’s a bit more advanced.

Tick Charts, unlike a standard time-based chart, prints new bars after a certain amount of trades are complete. So a 1,000 tick chart will print new bars after every 1,000 transactions.

MTF or Multi-Time Frames is exactly what it sounds like. Traders analyze charts on several different time frames. The 1 minute chart will look a whole lot different than the daily chart, as the one-minute is just showing all of the movement that happened inside larger time frames. It’s important to know that most indicators will look different depending on the time frame of your chart.

PMH are Pre-Market Highs, or the highest value price reached in pre-market trading. Pretty simple. PML are Pre-Market Lows, so the lowest value price reached in pre-market.

ATH is the All-Time High price of a stock.

HOD means High of Day, referring to the stock price. NHOD means a New High of Day was just made. LOD and NLOD are the same for the lows.

Lower Highs (LH), Lower Lows (LL), Higher Highs (HH), and Higher Lows (HL) are ways to analyze the trend and overall price action. It’s pretty simple, but make sure you have a firm understanding of this.

INDICATORS

Let’s talk about indicators.

Volume displays the amount of trading volume per bar.

Volume Profile displays the amount of trading volume by price. So it is shown as a vertical histogram on your chart.

Moving Averages calculate the price from previous periods and averages it out. A Simple Moving Average or SMA just takes the mathematical mean of the previous periods, whereas an Exponential Moving Average or EMA is weighted to give greater importance to the more recent periods, making it more responsive. Remember, this will look different on every time frame.

VWAP is Volume Weighted Average Price and it has some similarities to a moving average, but it takes into account the volume when averaging the price. It also starts calculating at the beginning of a trading session. This is most commonly used by intraday traders and it will look the same on all intraday time frames.

RSI or the Relative Strength Index is a momentum oscillator that looks to identify when a stock is oversold or overbought and potentially primed to pull-back or reverse direction. The downside is when a stock is trending, RSI can stay in the overbought or oversold region for quite a while.

MacD is Moving Average Convergence / Divergence and is another momentum indicator that shows the relationship between two exponential moving averages. The default is a 26 EMA and a 12-period EMA, with a horizontal 9EMA as a signal line. This can help you get an idea of the stock’s cycles and help you identify when a stock may be overbought or oversold.

Pivot Points use the prior day’s high, low, and close prices to estimate future support and resistance levels.

There are a million other indicators, but I find that they only add confusion and distractions to my charts, so I don’t use them. But generally, they all use some combination of price, volume, and time.

Stock Options

Let’s move on to some options-specific terms. If you want to learn more in-depth, this link is an options for beginners video.

Calls are options contracts where you want the price of the stock to increase.

Puts are options contracts where you want the price of the stock to decrease.

The Expiration or Expiry is the date when your options contract expire.

Strike Price is the price at which the options contract could be exercised. It’s worth mentioning most day traders do not exercise their options. They merely sell them when their price targets are hit and pocket the profit.

If you are Long Calls, that is a bullish stock options position.

If you are a Long Puts that is a bearish stock options position

Now if you literally “short puts”, that means you sold or wrote a put contract to open a trade, and that would actually be a bullish position, so that is why there needs to be some distinction. But most commonly, people will say they are shorting an equity with puts, which is a bearish position.

OTM, ATM and ITM all refer to the strike price of an options contract. OTM means the option is out-of-the-money, meaning it’s farther away from the current price of the stock. ATM is at-the-money, meaning the strike is about the same as the current price. And ITM is in-the-money, meaning the stock has already surpassed the strike price and that contract has some intrinsic value.

The Greeks refer to the factors that contribute to an option’s contract value.

Delta measures the change in price resulting in the change to the underlying asset – usually a stock. Gamma measures Delta’s rate of a change over time and the rate of change in the underlying asset. Theta refers to the rate of decline in the value of a contract over time. If nothing else changes, an option will lose value as it gets closer to expiration. You can think of Vega as a measure of volatility. Generally, the more volatile a stock moves, the more expensive its options contracts will be.

IV Crush refers to the Implied Volatility decreasing quickly, crushing the value of your options contracts. This usually happens after an important event, like earnings announcements. If you buy calls on Tesla thinking they will have great earnings and the stock will go up… maybe you’re right, but because leading up to the earnings, Implied Volatility was high, your options contract had an inflated price. Now that the unknown of earnings is known, Implied Volatility goes down and brings down the value of the options contract, even if the stock increases in price. It can take a rather large price increase in order to counter-act IV crush, which is one of the reasons holding an options contract through earnings can be risky.

Options Spreads are strategies where you simultaneously buy and sell options on the same stock but with different strike prices or expiration dates to change the risk profile of the trade.

Final Thoughts

Okay, that was a lot, but I just wanted to scratch the surface to introduce and define some of the most common terms you’ll probably come across, even though I’m sure there are a bunch that I forgot about. Again, if you want to know more about anything, search Investopedia.com or Google or ask ChatGPT or something. I will link some videos below this one for you to check out as well.

Thanks for watching, I’ll see you in the next one.