The Power of Price Action Indicators: Your Guide to Enhanced Trading Insights
Razvan Ardelean
April 3, 2024
- info@prop-quant.com
Arbitrage describes the practice of buying and selling an asset in order to profit from a difference in the asset’s price between markets. It is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets.
Arbitrage trading occurs when a security is purchased in one market and simultaneously sold in another market at a higher price. Most jurisdictions allow traders to conduct arbitrage as it provides a mechanism to ensure prices do not deviate substantially from an asset’s fair value for long periods of time. Advancements in technology have made it hard for traders to benefit from pricing errors in the market.
23:00 – 08:00 GMT.
The ask price in trading represents the amount a seller is willing to accept for a financial instrument. It is the opposite of the bid price and establishes the cost at which buyers can purchase the asset immediately from the market.
The difference between the bid and ask prices is known as the spread. Traders looking to buy an asset are always offered the going ask price, whereas those looking to sell are offered the bid price.
The base rate, or base interest rate, is the interest rate that a central bank – like the Bank of England or Federal Reserve – will charge to lend money to commercial banks. Adjusting the base rate helps a central bank regulate the economy by encouraging or discouraging spending as required.
A bear market is any market that experiences a fall of around 20% or more from its recent high. Most commonly applied to stock markets, the term can also be used for anything that is traded, including currencies and commodities. A bear market is the opposite of a bull market.
The term ‘bearish’ is used to describe any market experiencing prolonged declining prices amid general pessimism and negative sentiment. Often accompanied by an economic downturn, such as a recession, bear markets can last from a few weeks to several years. Bearish conditions often discourage investors from buying into markets although some will try to ‘buy the dip’ when they believe the market has reached the bottom. ‘Bears’ are traders who believe that a market is headed on a downward trajectory. They may look to benefit from depressed markets by selling stock or opening short positions through CFDs or other derivative trading. These traders are often described as bearish.
Bid price, or simply bid, describes what a buyer is willing to pay for a security. It is contrasted with the ask price, the amount a seller is willing to sell a security for. The difference between the two is known as the ‘spread’, which is the cost traders pay to open and close positions.
The bid-ask spread is the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept. An individual trader looking to sell will receive the bid price while one looking to buy will pay the ask price.
Bitcoin is a decentralized digital currency, a form of cryptocurrency, created and held electronically. Operating on a peer-to-peer network, it allows direct transactions without the need for intermediaries. Bitcoin is known for its limited supply and blockchain technology, ensuring secure and transparent transactions.
A financial broker is a third-party coordinating the sale of financial securities between parties selling securities and those purchasing them. Brokers are individuals or firms acting as intermediaries between investors and trading exchanges.
Exchanges only accept orders from their members, either individuals or firms. Therefore, traders and investors require exchange members’ services to make financial transactions. Brokers get compensated for their services in several ways; commissions, fees, or paid directly by the exchange.
A broker account is a financial account provided by a brokerage firm, allowing investors to buy and sell various financial instruments. It serves as a gateway for traders to access the financial markets, execute trades, and manage their investment portfolios.
A bull market describes any market in which prices are rising or are expected to rise imminently. Typically applied to stock markets, the term can also be used for anything that is traded, including currencies and commodities. A bull market is the opposite of a bear market.
A “bullish” market is one characterised by optimism and investor confidence amid expectations that a future long-term rise in prices will follow, lasting weeks or even months. Bullish sentiment tends to be driven by strong results. The term “bulls” can be used to describe investors keen to buy into markets believing bullish conditions are likely to continue. Traders taking advantage of bull markets are said to be taking ‘long’ positions. There is no specific metric used to identify a bull market, with analysts relying on a range of tools to predict bullishness in an individual market.
A choppy market is when an asset’s price shows no clear trend but instead experiences many smaller fluctuations.
A period of range-bound activity after an extended price move.
A contract for difference (CFD) is a financial contract in which you agree to exchange the difference in the settlement price between the open and closing trades on a particular asset. CFDs enable traders and investors to speculate on whether a market will go up or down, and profit from the price movement without owning the underlying asset.
The second listed currency in a currency pair.
CPI stands for Consumer Price Index. It is the most popular reference for day-to-day inflation. CPI gets calculated as a measurement of price change using a weighted average basket of consumer goods and services purchased by households.
A currency pair is a price quote of the exchange rate for two different currencies traded in FX markets: They are known as the base currency and the quote currency. The exchange rate of a currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.
Crypto, short for cryptocurrency, is a digital or virtual form of currency that uses cryptography for security. Decentralized and based on blockchain technology, cryptocurrencies operate independently of traditional banking systems, providing secure and transparent peer-to-peer transactions. Bitcoin and Ethereum are prominent examples.
Day trading takes advantage of small, short-term changes in the market to buy and sell a financial instrument multiple times within one trading day. Day trading typically has a lower success rate than other methods of trading, but it can pay off for well-educated, well-funded traders.
A deal refers to the execution of a buy or sell transaction involving a financial instrument. It represents the action of entering or exiting a position, with details including the asset, quantity, price, and timing of the trade.
A dealer is a financial institution working with their country’s regulatory body to trade foreign currencies. Most dealers are banks who trade securities on their own behalf and in such large amounts that they help maintain liquidity in the market and regulate bid and ask quotes.
A dealer facilitates transactions by executing trades from their own inventory, profiting from the bid-ask spread. A broker, on the other hand, connects buyers and sellers without taking ownership, earning a commission or fee for facilitating the trade.
FOMC minutes are a detailed record of the Federal Open Market Committee (FOMC) meetings and are released three weeks after every meeting. The minutes offer more concise insights on the monetary policy stances of all members of the committee and how individual members see the value of the USD and other securities.
Forex, also known as foreign exchange or FX, is the conversion of one country’s currency into another. It forms the basis of forex trading, one of the world’s most-traded asset classes.
Gapping describes when the price action of a security jumps to a new price not directly adjacent to the previous price, creating a gap between ticks on a price chart. Gapping can occur during a trading day, often when there is low liquidity and the asset price is heavily affected by a lower level of trading.
GMT stands for Greenwich Mean Time. Due to its maritime connection, back in 1884, the village of Greenwich, London, England, was chosen as the reference point for all time on Earth.
Together with coordinated universal time (UTC), GMT is regarded as the standard time globally. Earth has been divided into twenty-four equal time zones, making it simple to convert GMT to local time.
Hedging is an investment technique to offset potential investment losses by purchasing correlated investments that are expected to move in the opposite market direction.
Hedging techniques are popular methods for investors to protect themselves from risky positions; they hedge their bets. It’s like having investment insurance. If a sudden price reversal occurs, the damage gets limited due to the hedge position.
Leverage is a trading tool that enables you to control a large amount of capital without paying for the full value of your position upfront. Several financial products make use of leverage, including futures, options, and forex trades.
Instead of paying for the total value of a leveraged trade, you put down a smaller amount known as your margin. When buying $10,000 of EUR/USD, for example, you might only have to put down 5% of your position’s value as margin ($500).
Your profit or loss would still be based on the $10,000, however. It’s important to remember that leverage will magnify both your profits and your losses.
A limit order is an instruction to your trading provider or broker that tells them to execute a trade at a more favorable price than the current market price. You can use a limit order to enter or exit a position. The opposite of a limit order is a stop. These execute a trade at a price that is worse than its current level and are a crucial part of risk management.
Liquidity means the ease with which a market can be traded without affecting its price. A market with lots of buyers and sellers at any given time is said to be highly liquid because you’d be able to find a counterparty to buy or sell it easily. If there are very few people interested in an asset, then it is illiquid. In this case, you might find it tricky to trade.
A long position is a trade that earns a profit if the underlying market moves up in price. You open a long position by buying a financial asset. If the asset then increases in value, you can sell it for a profit. If it falls in value, you may have to sell it for a loss. Going short is the opposite of opening a long position.
A lot is the typical unit amount of currency traded in forex and equals 100,000 units of whichever specific currency is quoted. Lot sizes are so large in order to magnify the changes in currency values, which usually occur in a matter of only a few pips.
Margin call is the term for when you no longer have sufficient funds in your account to keep a leveraged position open. If you are placed on margin call then your positions are at risk of being closed automatically.
When you trade using leverage, you need to maintain a certain balance in your account as margin. If your losses from a trade mean that you no longer have the required margin in your account, you’ll be placed on margin call.
A market order is a trading instruction to buy or sell a financial instrument immediately at the current market price. It ensures execution but doesn’t guarantee a specific price, subject to prevailing market conditions and available liquidity.
The New York session, a crucial period in forex trading, spans from 8:00 AM to 5:00 PM Eastern Time. It significantly influences market liquidity, as it overlaps with the London session, fostering increased trading activity and price movements.
NFT, or Non-Fungible Token, is a unique digital asset verified using blockchain technology, certifying ownership and authenticity. NFTs are often used to represent digital art, collectibles, or other digital content, providing a way to buy, sell, and trade unique digital items securely.
An order in trading is an instruction to buy or sell a financial instrument in the market. It specifies details like the asset, quantity, price, and type of trade. Orders can be executed immediately (market orders) or at a specific price (limit orders).
An open position in trading refers to an active trade that has been executed but not yet closed. Traders hold open positions until they decide to sell (close a long position) or buy (close a short position) the asset, realizing profits or losses based on market movements.
A pullback in trading refers to a temporary reversal of the prevailing trend, where the price of a financial instrument retraces against the trend before resuming its original direction. Traders may interpret pullbacks as potential buying opportunities within a broader trend.
Quarterly CFDs (Contracts for Difference) are financial derivatives that track the price movements of an underlying asset over a quarter (three-month) period. Traders can speculate on price changes without owning the asset, aiming to profit from market fluctuations during the quarter
A quote in trading refers to the current market prices of a financial instrument. It includes both the bid price (what buyers are willing to pay) and the ask price (what sellers are asking for), providing key information for traders to make informed decisions.
In trading, a range refers to the difference between the highest and lowest prices of a financial instrument within a specific period. Traders analyze price ranges to identify support and resistance levels, aiding decision-making and strategy development.
Realized profit/loss in trading represents the actual gains or losses when a position is closed. It is calculated by subtracting the total cost of acquiring an asset from the total revenue generated upon selling it, providing a measure of a trader’s actual financial outcome.
Unrealized profit/loss represents the paper gain or loss on an open position. It is the difference between the current market price and the price at which the asset was acquired. This profit/loss is only realized upon closing the position.
A resistance level is a price point at which a financial instrument historically struggles to move above. It signifies a potential barrier where selling interest may be significant, often prompting technical traders to anticipate a reversal or slowdown in upward price movement.
A retail investor is an individual investor who engages in the financial markets with relatively smaller amounts of capital. Retail investors typically trade in smaller quantities compared to institutional investors and may use online platforms to access various financial instruments.
Retail sales in trading refer to the total sales of goods and services by retail establishments in a specific period. It is a key economic indicator that reflects consumer spending patterns, influencing market sentiment and helping traders assess economic health and potential market trends.
Risk refers to the potential for financial loss. It arises from market uncertainties, price fluctuations, and unexpected events. Traders employ risk management strategies to mitigate potential losses and protect their capital while navigating the dynamic and unpredictable nature of financial markets.
Risk management is a set of strategies and techniques aimed at minimizing potential losses. It involves assessing and controlling risks by setting stop-loss orders, diversifying portfolios, and employing position sizing to protect capital and enhance the overall stability of a trading strategy.
The SEC (U.S. Securities and Exchange Commission) is a regulatory agency overseeing the securities industry. It enforces securities laws, ensures fair markets, and protects investors, promoting transparency and integrity in financial markets within the United States.
A short position in trading involves selling an asset with the expectation that its price will decrease. Traders borrow the asset, sell it at the current market price, and aim to buy it back later at a lower price, profiting from the price decline.
Traders have several options when it comes to protecting short positions. Stop-loss orders are the most common option and are often placed above the security’s current price. This protects you from outsized losses if the price turns bullish and runs against your short position.
A short squeeze occurs when a heavily shorted stock experiences a rapid price increase. Traders holding short positions rush to cover their positions, buying shares to limit losses, further driving the price up due to increased demand, creating a feedback loop.
Slippage refers to the difference between the expected price of a trade and the actual executed price. It can occur during volatile market conditions or when executing large orders, resulting in a slight discrepancy between the intended and actual transaction prices.
The spot market refers to the marketplace where financial instruments are bought or sold for immediate delivery and settlement. Transactions on the spot market involve the current market price, and settlement typically occurs within a short timeframe, often within two business days.
The spot price refers to the current market price at which a financial instrument is bought or sold for immediate delivery. It reflects the real-time value of the asset and is influenced by supply and demand dynamics in the market.
A spot trade in trading refers to the purchase or sale of a financial instrument for immediate delivery and settlement, usually within two business days. Spot transactions involve the current market price and are executed on-the-spot, distinguishing them from future or forward contracts.
Spread is the difference between the bid (buying) and ask (selling) prices of a financial instrument. It represents the cost of executing a trade and contributes to a broker’s revenue. A lower spread often indicates greater market liquidity.
A stock exchange is a centralized marketplace where buyers and sellers trade financial instruments such as stocks, bonds, and derivatives. It provides a regulated platform, ensuring transparent and efficient transactions while facilitating price discovery and liquidity in the financial markets.
A stock is a statistical measure reflecting the performance of a specific group of stocks in a market. It provides a snapshot of overall market trends, representing the aggregate value of the included stocks and serving as a benchmark for investors.
A stop-loss order is an order type that triggers a buy or sell trade when the asset hits a specific price. Stop-loss orders are commonly set by traders to protect positions, by setting a stop-loss below their current trader, you can protect against outsized losses.
However, stop-losses do come with danger. If the price of an asset jumps over the price specified in the stop-loss order, the order will instead be triggered at a price below your stop-loss order, putting you at risk of even greater loss.
Support in trading refers to a price level at which a financial instrument historically encounters buying interest, preventing the price from falling further. Traders often view support as a key level for potential entry points or to set stop-loss orders.
Support levels are price levels at which a financial instrument historically experiences buying interest, preventing the price from falling further. Traders often view these levels as potential areas for price reversal, making them key for technical analysis and decision-making.
In trading, a swap refers to the interest rate differential between two currencies in a forex trade. Traders pay or receive swaps based on the interest rate differential when holding positions overnight, reflecting the cost or gain associated with keeping a position open beyond the trading day.
Take profit (T/P) is a predefined price level set by a trader at which an open position is automatically closed to secure profits. It allows traders to lock in gains and avoid potential reversals that might erode profits.
Technical analysis involves studying historical price charts and market statistics to forecast future price movements. It relies on chart patterns, indicators, and other statistical measures to identify trends and potential entry or exit points for trades.
A thin market in trading refers to a situation with low liquidity, characterized by limited trading activity and a smaller number of buyers and sellers. Thin markets can experience higher volatility, wider bid-ask spreads, and increased susceptibility to price manipulation due to reduced participant numbers.
The Tokyo session in trading, lasting from 7:00 PM to 4:00 AM GMT, is a key period in the forex market. It represents the Asian market, and its overlap with the London session enhances liquidity and trading activity, influencing currency prices.
Trade balance refers to the difference between the value of a country’s exports and imports. A positive balance (exports > imports) contributes to a trade surplus, while a negative balance (imports > exports) results in a trade deficit, impacting a nation’s economic health.
A trade confirmation in trading is a document sent to an investor after executing a trade. It includes details such as the asset traded, quantity, price, and trade date. Investors use confirmations to verify and reconcile their trades.
Trade Size refers to the quantity of a financial instrument involved in a single transaction. It signifies the volume of shares, contracts, or units bought or sold, impacting a trader’s overall exposure and potential profit or loss for a trader.
In trading, a trading level refers to the authorization level assigned to an investor by a brokerage, determining the types of financial instruments they can trade and the strategies they can employ. Different levels often correspond to various risk and experience thresholds.
Trading range refers to the price boundaries within which a financial instrument fluctuates over a specific period. Traders identify these ranges to assess potential entry and exit points, helping to make informed decisions based on market dynamics.
A trailing stop is a dynamic order set at a specific percentage or price distance away from the current market price. As the market moves in favor of the trade, the stop level adjusts, aiming to lock in profits and limit potential losses.
Transaction cost refers to the expenses incurred when buying or selling financial instruments. It includes brokerage fees, commissions, and spreads. Minimizing transaction costs is crucial for traders to enhance overall profitability and manage investment expenses effectively.
A trend refers to the general direction in which the prices of a financial instrument are moving. Trends can be upward (bullish), downward (bearish), or sideways. Traders analyze trends to make informed decisions about entering or exiting positions.
The actual asset on which a derivative or financial instrument is based. For example, in options trading, the underlying asset could be a stock, index, commodity, or currency, influencing the derivative’s value.
The unemployment rate in trading is a key economic indicator that measures the percentage of the labor force without employment but actively seeking jobs. It serves as a crucial metric influencing market sentiment and policy decisions, reflecting economic health and potential impacts on various assets.
Variation margin is additional funds required by a broker to cover potential losses in a trader’s account due to adverse price movements. It ensures that the account maintains sufficient equity to support open positions, helping manage risk.
Volatility measures the degree of variation in the price of a financial instrument over time. High volatility indicates larger price fluctuations, reflecting increased market uncertainty, while low volatility suggests more stable price movements. Traders often assess volatility to gauge potential risks and opportunities.
Whipsaw is a slang term used by traders to describe the condition where an asset’s price rapidly changes direction, triggering false signals. Traders may experience losses as the market reverses shortly after initiating a position, akin to being “whipped” back and forth in unpredictable movements.
An interactive broker is an online trading broker and provider who allows its clients to open and close positions using a digital platform.
They are brokerage firms that people visit online, rather than in physical offices. Online brokers offer lower fees. They also provide clients with facilities to engage in do-it-yourself investment trading.
Day traders approaching trading as a full-time job, not merely a hobby. They require brokerage platforms that allow them to buy and sell in quick succession while they use leverage to capitalize on small, short-term movements.
Yield refers to the income generated by an investment, typically expressed as a percentage of its market price or face value. It encompasses dividends, interest, or other periodic returns, providing insight into the profitability of the investment.
YOY stands for “Year Over Year.” It is a financial metric comparing data for a specific period to the same period in the previous year. YOY analysis is commonly used to assess the annual performance and growth of financial indicators.
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