Swaps and Candles: Get Familiar With Main Trading Terms

Grand Capital continues a series of articles for novice traders. We know investment might seem scary at the start. That’s why we decided to gather as much useful data as possible — and give it to you as proof of our care and support. Read it carefully and don’t hesitate to apply it to your trading strategy!

Main Question: why Bearish and Bullish?

The first explanation of the terms bearish and bullish is the way how these animals attack. A bull thrusts its horns upwards while bears swipe down. These actions could be metaphorically applied to market tendencies. If the movement is descendant, it is called a bearish trend, and ascendant is called bullish.

There is a second historical explanation from bear skins sales. The middlemen in this ancient industry would sell skins they had yet to receive, hoping the trapper would drop some in the future. The middlemen gained profit from a price difference. They became known as bears, short for bearskin jobbers, and later the term stuck for describing market downturns.

The word bullish has much more positive intent than the bear, so bullish speculation then referred to a purchase made with an expectation of market rise.

The third explanation has at least partial origin from the bloody sports of bull and bear-baiting. People would gather and place vast bets on contest outcomes, featuring a bull or a bear. It is easy to see the relationship with modern stock market speculation!

Explanation of Points

When you hear some stock has lost or gained X number of points, it means its value has changed by X dollars. So, in the stock market, one point equals one dollar. It is most commonly used to describe short-term results, daily or weekly.

The percentage value of one point can differ for various companies — points refer only to the number of dollars a share cost changes. So, when two companies lose the same number of points, they lose different shares in percentages. Investors also use points to describe short-term shifts in equity indexes. For instance, “the Dow Jones Industrial Average gained 20 points today”. Points in indexes still represent dollars, but the ratio is not 1:1. In this case, points are whole numbers in index values. Thus, to understand the price of one point, you need to know the current value of a stock index.

Spread

In general, the spread is the difference between the sell and buy prices. In more detail, spread is a gap between a bid and an ask price of a security or an asset, also known as the bid-ask spread.

A spread can also refer to the difference in a trading position — the gap between a short position (selling) in one futures contract or currency and a long position (buying) in another. That is known as a spread trade.

Swap

Swap is an interest fee paid by a trader for keeping forex positions overnight. Also called an overnight interest or a rollover rate.

Swaps are just what it sounds like: it is charged to open trades aimed at buying/selling foreign currency. Swap applies only to those traders who engage in middle-term and long-term trading.

Japanese Candle

Japanese candlestick is a technical analysis tool used to analyze the price movement of securities. The concept of candlesticks was developed by Munehisa Homma, a Japanese rice trader. During routine trading, Homma discovered that the emotions of traders, as well as demand and supply, influence rice prices.

Homma then developed the candlestick graph describing price movements shown by different colors. A red-colored candle identifies market decline, and green-colored means the opposite. The upper and bottom sides of candlesticks stand for price levels at the start and end of a trading session. The external lines (not colored) show a price range of the trading session — they may not be seen on the graph if the trading range doesn’t exceed the start or end price of a trading session.

Support and Resistance

When the price fluctuates, the highest point reached before a downgrade becomes a resistance level. It indicates a point where a surplus of sellers begins.

On the other side, a support level indicates the surplus of buyers. When the price rebounds up again, the lowest point becomes a support line.

In this way, resistance and support form continuously when the price moves up and down over time.

Targets

A price target is a projection of an asset’s future price. Targets may pertain to all types of securities, from complex investment products to stocks and bonds. Investors use price targets to determine the value of an asset in 12 or 18 months. Ultimately, price targets depend on the valuation of the company that's issuing the stock.

Analysts publish their price targets in research reports on specific companies, along with their investing recommendations for the company’s stock.

Stop-loss Order

It is an order placed with a broker to buy or sell a specific asset once the price reaches a certain level. A stop-loss prevents an investor from losing too much. For example, you can set a stop-loss for 10% below the buy price, so you won’t lose more than 10% in the worst case.

The most important benefit of a stop-loss order is that it costs nothing to implement. Considered as somewhat of free insurance, it takes only a regular commission if the limit is reached.

Leverage — Multiply Your Profit

There is a way to increase your profit using borrowed capital (debt). In trading, leverage allows you to buy assets with some multiplier. In case your investment strategy pans out, your income multiplies. The bad news is that it works otherwise — in a negative scenario, your losses increase accordingly.

Let’s say you have $99 on your trading account and the security you want to buy costs $50. With no leverage you may purchase one share for that price — you lack only a dollar to buy two. However, with leverage of 1:2, you can buy two shares for $100, borrowing the additional $50 to your existing account. If the stock goes up, with 1:2 leverage you will get twice as much profit. If it decreases by a dramatic 99%, you will lose your $99, and the position will be closed automatically — the broker will take money from your account as long as your asset goes down until you run out of your capital. Try your luck!

Risk Management — Consider Your Chance

Both experienced and novice investors need to manage their risks. In trading, the rule of the thumb is: your risk is the same as the chance of profit. That sounds reasonable and elementary, while real risk management strategies are way more complex. We will explain some cases as simply as possible.

How Much Should I Invest? The 1% Rule

Wise traders avoid taking risks worth more than 1-2% of their overall deposit. For instance, if you have $10000 in your account, investing a safe sum should be around $100-200. In case the asset of your choice goes in an undesired direction, you won’t lose too much. Divide the rest of your deposit into several small parts and invest it in different assets that you feel promising. A simple way to protect from risks is to invest in different spheres, not simply in different securities. For example, when you invest in both pharmaceutical corporations and IT companies, you would expect they will not plummet simultaneously since they are barely connected. On the other hand, an investor holding a portfolio full of major hardware producers would be very upset because of something like a semiconductor crisis. The same is related to traders who only made their portfolios with Russian stocks. Political and military tensions in this country have turned their capital into dust.

Does it Prevent Me From Losing Money?

Not always. For sure, diversifying your portfolio makes trading safer. However, you shouldn’t count solely on this advice. Always consider using the stop-loss order we mentioned above. Set it either so you won’t lose more than you can afford or just at the support level. A tool quite similar to stop-loss is take-profit order. The difference is that a stop-loss is dedicated to limiting losses, while take-profit closes the deal when the price reaches a positive target before it starts to decline again. Indeed, you can use these two orders together.

Risk/Reward Ratio: Stop-Loss and Take-Profit Combined

Make risk/reward a key part of your trading plan. Even if your investment strategy has a 50% of success rate — meaning that you “win” half of your trades — it does not necessarily mean you gain profit. If you make 100 deals with such a success rate where 50 of your positions make $100 loss, and the other 50 make $99 profit, you still end up with a $50 loss — all of that because you close your positive deals too early. Risk/reward strategy helps to fix that.

Imagine you make a deal where you decide to aim at a $100 reward and limit your risk by the same $100. That means that your risk/reward ratio is 1:1. If you set your take-profit at $200 and leave stop-loss unchanged, risk/reward shifts to 1:2. Notice that the risk part of this ratio should always be 1. It can’t be 0.5:1 in the case mentioned. However, if you set take-profit at $75, the ratio would be 1:0.75.

Let’s get back to the case with a 50% success rate. If you preserve such conditions and implement a 1:1.5 risk/reward ratio — your profit would be $2500.

These simple strategies will save money for you at the start. No matter what trading manner you prefer: careful and leisured investment or dynamic and risk-taking speculation. Be sure that your chance to succeed is close to a minimum without proper knowledge. The good news is that Grand Capital will continue to lead you through the market with professional analysis articles and guide materials like this one. Stay in touch and let your trading make profits!