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Trading Concepts
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Trading Concepts
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So how does gnuTrade fit in?
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Introduction

Whichever financial market you decide to trade, it’s important to first understand some of the basic concepts and terminology used.

Individual markets are composed of various financial instruments, examples of which include bonds, stocks, currencies and commodities. Prices move up and down according to supply and demand. Generally, if more people want to buy a particular instrument, its price will go up. When more people want to sell it, the price will go down. Each instrument usually has two different prices: The ‘offer’ or ‘buy’ price, is what you look at if you want to buy it. The ‘bid’ or ‘sell’ price is what you use if you want to sell it.

Some people use middlemen called brokers, who carry out the orders to trade, usually for a fee, or commission. But these days, many people use the internet to trade directly themselves, using prices that are displayed online. When you begin a trade, you are said to ‘open’ a position and when you end a trade you ‘close’ the position and accept your actual profit or loss on the trade.

Orders

Once you have decided to make a trade, there are different types of orders you can place.

For instance, if you place a ‘market order’, you are choosing to buy or sell at the current market price; If you place a ‘limit order’ you choose the price at which you wish to buy or sell. One common type of limit order is a ‘stop order’. This closes a trade at a price that you specify. It is often used to ‘lock in’ gains and limit the amount of money you could lose if the market moves in the opposite way that you had hoped.

Let’s look at an example:

Jacqueline Poopa thinks the price of the FTSE 100 Index is going to go up. She decides to place a market order to buy it at the ‘offer price’ of 5,500. But because she doesn’t want to lose too much money if it’s price goes down she also places a ‘stop order’ at 5,400. If the market goes up she can sell at any time and collect her profits. However, if the market goes against her, the trade automatically closes at 5,400 with a 'sell' order, before the price goes any lower, and this minimises her losses.

If you buy a particular financial instrument and believe its price will go up in the future, you are considered to have a ‘long’ position on that instrument. If you decide to sell an instrument, because you believe its price will go down, you are considered to have a ‘short’ position on that instrument.

Conclusion

Information about the markets is all around us. Price changes and reports about the performance of companies are regularly featured on TV, in newspapers and magazines, and on the internet. A good way to develop your skills and become familiar with trading terminology is to use systems that allow you to practice with play money.