Hardforking.com – Trading Terminology
We’ve put together a list of some trading terminology that you will encounter in the world of markets. We hope it will give anyone new to this, additions to your vocabulary that will help you navigate exchanges, news articles and investment in general. All of the terminologies below can be expanded upon, understood and used in more complex ways. But of course, keep it simple, collate the basics and build on that.
Spot: A spot trade or position is simply buying something to own it as BTC bought with USD.
Leverage: A leveraged position is using the capital in your account as collateral to open a position with a loan (Exchanges offer anywhere between 2.5-1 and 100-1 on your capital in Cryptocurrency markets). In Margin trading and Futures trading, leverage is used to increase the buying and selling power of an account above its capital value. Unlike a spot position, you do not own what you’ve bought or sold. If you have $1000 of usable collateral on an exchange that offers leverage of 10-1. This means you may open a position up to a maximum value of $10,000. The exchange takes care of the loan, fees, interest and settlements, so all you have to do is open and close positions (it’s a little more complicated than all of that, but that’s the basic principle). With Leveraged trading, you can profit in both Bull and Bear markets with Long and Short trades.
Long: ‘Going Long’ in the BTCUSD market is, buying BTC with USD, so you can sell at a higher price for a profit in USD. In a successful, ‘leveraged’ long trade, what you have done is taken a loan of USD and used that to buy BTC, the price has gone up, you sell the BTC for more USD than you started with, pay back the USD loan + interest and fees, and the remaining USD is yours. If the trade fails and you make a loss, then the loss will be deducted from your account.
Short: ‘Going Short’ in the BTCUSD market is, selling BTC for USD, so you can buy back BTC at a lower price. In a successful ‘leveraged’ short trade, what you have done is taken a loan of BTC and sold it for USD. The price of BTCUSD goes down, you buy back the BTC for less USD, pay back the BTC loan + interest and fees, and the USD profit is added to your capital. As above, losses will be deducted from your capital.
Orderbook: An orderbook or order-depth on an exchange, is the list of orders that customers and market makers have placed to buy and sell in that market. Orderbooks generally show 3 things. (1) Individual limit orders that are live on the exchange (2) the amount and corresponding value of each order (3) the aggregate of all the orders and values in the orderbook. An orderbook can be shown in two simple ways, (1) in a spreadsheet-style, with orders from the buy-side in one list and orders from the sell-side in another. And (2) as a graphic like the one below.
Spread: The spread of any given market is the price gap between the highest buy order and the lowest sell order.
Liquidity: Liquidity is the density of order value in a particular market’s or exchange’s orderbook. An illiquid market can’t support large movements of capital and can have volatile swings in price as capital moves in and out.
Risk and risk-to-reward ratio: In markets, describing and calculating risk is something that can be done with extensive detail. But, any market participant should be able to say what their risk/reward is for each trade they make.
Your risk would be, the difference in price between your entry and where you decide you are wrong and need to close the trade. Your reward is the difference in price between your entry and your expected target price. A common standard for leveraged day-traders is to risk 1-2% of capital per trade, looking for rewards of 2-3 times the risk value.
Hedging: A hedge, is a second investment correlated to an investment or market one is already exposed to. E.g. a theme-park is in the market of selling tickets to enter their park. Weather futures make it possible to open a position to say that if it rains and few people buy tickets, it pays returns on expiry which replace losses in ticket sales. This stabilises (hedges) their profit to the risk of adverse weather. The purpose of hedging is to reduce risk.
Market Maker: A market maker is an entity which, by agency to or as part of an exchanges internal operations, holds an amount of supply which can provide liquidity to a market. In the form of a trading algorithm, this entity supports supply and demand. The regulations surrounding market-making in financial markets vary from sector to sector.
Unrealised profit and loss: Unrealised profit is the profit that an open position has accrued as the trade develops. But since the position is still open, profit has not yet been ‘taken off the table’ and therefore may increase or decrease. Unrealised loss is the same, but in terms of losses accrued.
Realised profit and loss: Realised profits and losses are what they sound like. You closed a position and made a profit or a loss. Realised is what you really want to be talking about when you’re bragging to your buddies, not unrealised.
Hodl, hodling: This is an internet slang term for ‘holding’ a position in a market. The use of the word usually pertains to having ‘strong hands’. Commonly, it has been the cry of the rekt as they hold their positions all the way down to the ground.
Rekt: A slang term for the word wrecked, originally from multi-player online gaming, used to describe a player or team who has been destroyed by their opposition. Used in trading to describe someone who has made one or a series of bad trades generally ending with their account value at zero.
Wash Trading: Wash trading allows exchanges to fake the amount of trading happening on their exchanges thus attracting you to use them with high liquidity. Getting your orders through could be a problem and at worst the exchange could get shut down or they simply shut down and disappear with your money. Read more about wash trading here.
Types of orders you can place on an exchange
Limit order: A limit order is an order to buy or sell an investment at a specific price. For a limit order to fill, someone must either buy from or sell to it at the price you have decided.
Market order: As opposed to a limit order, where you are looking for someone to buy or sell to you at your price. A market-order buys or sells to and from limit-orders. In the case of a market-buy, your order fills whatever capital you decide to put towards the order but the price at which your buy executes depends on the size of the order and how liquid the orderbook is. Market orders can experience ‘slippage’ which is when your order executes over a range of prices rather than at a specific one.
Stop-order: Stops are orders that trigger automatically on a condition, used to open/increase or close/decrease positions. A stop-order is a market-order that will execute if a certain price is reached. E.g. I’m holding a long position in BTCUSD from $11,600, if the price goes up I have limit-orders set to take profit at higher prices but, if the price goes against me and reaches $11,500, a stop-order to sell at market will exit the position ($11,500 is where I consider my analysis to be wrong, therefore must close the trade and take the loss – which is why this would be called a ‘stoploss’, because it closes the position and stops loses outside of your planned risk). To open a position with a stop, take the following example: (I have no position open and the current price is $11,600) I have a stop-order to buy at market if the price reaches $11,800 which will open a long position. If the price is not reached, then the order won’t fire.
Stop-limit-order: A stop-limit is an order that will trigger at a specific price but, instead of triggering a market-order it will place a limit-order. E.g. Current price is $11,600, I have a stop-limit set to trigger at $11,800 which, if reached, will automatically place a limit order which I’ve decided to place at $11,750. One advantage of this order type is no slippage. A disadvantage is that the price may continue to rise above $11,800 and not come back to your limit at $11,750, meaning you missed the move.
These are the four main order types. There are many variations on top of these standard orders that are used for more complex ways of dealing with price movements. Get to know these basics, try them out and see how they function within your game-plan.
OTC Over The Counter: This is a purchase that is not made on an exchange. These are often very large purchase of Bitcoin ranging from 100K to over One Billion dollars. These type of purchases are becoming more common in the current market as Hedge funds and big institutions enter the market. Read this article to get more details on what is happening in the OTC market.
We’ll keep adding to this list and let us know in the comments below if there’s a term you’d like to see here and sign up for our newsletter to get the latest updates right into your inbox.
If you are a beginner in the crypto markets we hope that we could help you with this trading terminology page. For further information visit our beginners’ section.
For a glossary of stock market terms visit this page.
