33 Day Trading Terms: What They Mean and How To Understand Them

The world has gone through a major change in the last year…

The (still) on-going pandemic has taken a toll on economies all around the world. This hit came as a global shock that no one could have predicted. The simultaneous disruption of supply and demand has left everyone feeling powerless!

And as more people continue to lose their jobs, see no light at the end of the tunnel, or simply question what they want to do with their career and lives, the more people are looking for an alternative, reliable source of income.

One of these has been Day Trading, which has seen A LOT of new people get involved over the last year. These newbies have flooded the market, creating chaos as well as opportunities for everyone else.

With the right knowledge, you can take advantage of these changes.

But if you don’t know what you’re doing… well, good luck to you.

With so many new people in the markets (maybe you are one of them), there’s a lot of people confused by the various terms, phrases, and words we use.

That’s what this article is about, to shed some light on what it all means…

Simply put, Day Trading is a form of trading where the trader purchases and sells stocks within the same trading day. Thanks to the rise of the internet and online trading houses, day trading has become possible for an individual sitting at home with their computer and an internet connection.

These days it is so convenient that with the right knowledge and tools, anyone willing to put in the work can make an adequate amount of money through day trading.

If the day trading concept seems appealing to you, this article will familiarize you with some commonly known day trading phrases. Also, you may like to check out the previous articles I’ve written for my Investing for Beginners series.

The current financial situation around the world is enough to make anyone feel powerless. But there is a way to overcome this, and the simple answer is to have multiple sources of income that are reliable, consistent, and independent of a power figure.

This also gives you the freedom to start making your own financial decisions, which will eventually allow you to claim back control of your own money.

This freedom brings with it an opportunity for you to live life without the forever impending fear of not being able to pay your bills.

Getting educated about the concept of day trading and some of its basic terminology has changed many lives for the better. Almost everyone who first decides to engage in day trading comes from a place of being tired.

A worldwide poll conducted by Gallup revealed 85% of people are unhappy in their jobs.

This percentage of people unhappy with their work is staggering!

All of these concerns are more universal than we may realize. Almost everyone is struggling in their own way and no one’s struggle is less important than anyone else’s. But the goal here is to find ways to take back control of your money by making smart financial decisions.

This article which lists day trading phrases is a step towards that. It’ll help anyone wanting to understand the basics of day trading and take the first step towards being a day trader.

While there are a lot of terms that you may come across when trying to comprehend the day trading concept, what we mention below are some of the major ones that will help you get by during the initial stages of your day trading career.

Trading that takes place outside the normal market hours is after-hours trading. So trading done after 4 p.m. is called after-hours trading and it happens till around 8 p.m. After that, the volume thins out so no trading occurs.

After-hours trading is done through ECNs or Electronic Communication Networks. These networks are programmed to automatically match buyers and sellers.

Bear is what we call a market that’s experiencing drops in prices and a negative sentiment overall. When market prices drop by more than 20% from recent highs, over a period of time, it leads to a sustained decline in the value of stocks.

The Securities and Exchange Commission (SEC) defines a bear market as a broad market index decline of 20% or more over at least a two-month period.

A bear market usually happens when there is a recession and during economic catastrophes (like a pandemic). When investors lose confidence in the stocks, demand reduces, leading to a fall in prices and therefore a bear market.

An example of a bear market happened in March 2020, when most of the world went into lockdown, affecting the economy negatively. It’s a time I’m sure you remember well, and it had a huge impact on the global markets.

The numeric value which is used to measure the frequent altering of a stock against the changes that happen in the stock market is known as Beta.

But it can also be defined as the systemic risk measure of security when compared to the market.

A market becomes Bullish when the conditions of the economy are good and prices are increasing. It’s a market on the rise, and when prices rise 20% over the bottom level.

This kind of market occurs when the economy is going strong and employment increases month on month.

In a bull market, investors are optimistic and are investing to make profits (which strengthens the economy further).

An example of bull market conditions came before the dot-com bust of 2000, whereas another example is the market before just March 2020, a time when everything was going well until everything changed and turned a bull market into a bear one practically overnight.

Capital in a day trader’s life can be compared to inventory in a store.

It is how much money you have to invest, and is an essential ingredient toward how much you have—and how you handle it—your overall income.

Day trading is defined as the buying and selling of a stock within the same trading day.

It can also involve buying and selling multiple times within the same day.

The goal is to make little profits every day that add up over time. Stocks can change in price throughout the day so the objective of day trading is to capitalize on these changes.

Day trading can be very profitable if traders take it seriously and put in the work. It takes practice and knowledge, and lots of patience, so before you start to trade with actual money it’s advised that you take advantage of paper trading (this allows you to practice without any risk).

Divergence is a trading concept in day trading where the patterns on your trading bar chart and results from the price action of security are moving in completely different directions.

Hence the use of the word divergence.

In simple terms, it means that your price action and indicator are not in sync. It is a sign that something unexpected is happening on your bar chart.

An example of divergence is the image below. It indicates that the price has made a new high but not the indicator. Therefore, the indicator shows a divergence.

Money that is paid out to the shareholders of a company as a way of sharing the company’s success is referred to as a dividend. The quantity of the dividend and whether it will be paid or not is in the hands of the company. Put in a different way, the dividend is the payout that comes off the top of the profits the company in question has made in the last year.

EPS or earnings per share is the portion of a company’s profits that has been allocated to a person’s share of the stock. Additionally, it is also the market prospect ratio which is used to measure the new income that is earned per share of stock outstanding.

Therefore, EPS becomes an indicator of how profitable a company has become especially on the basis of shareholders.

Float is the number of shares a company has made available to the public for investing in, essentially making these the number of shares that traders can actually trade.

Shares are released when a company initially releases IPO. This number of shares is called float.

It indicates to us traders how many shares of the company we can practically buy and sell. For example, if a company decides to authorize 500,000 shares to trade in the market, out of which 50,000 are held by employees and internal stakeholders. Then the leftover 450,000 shares are referred to as the float.

The moment when an investor purchases a security but ends up selling it before completely settling the original purchase means freeriding.

This is why often it is also referred to as a “good faith violation” and there is the chance of the trader’s account getting frozen.

This trading strategy takes advantage of arbitrage opportunities that might last just a fraction of seconds.

Simply put, arbitrage is the difference in the price of a financial instrument in a different market.

The goal is obviously to buy low and sell high. For example, it takes exactly 0.5 seconds for the New York market to match its prices in London. For this half a second, euros will sell for more in New York than they do in London.

When it’s said that a company does IPO, it means that they will sell a set number of shares in an open market. The goal with IPO is to raise capital for the company’s future growth and the investors receive equity in the company.

A lagging indicator is basically an economic statistical indicator that is known to shift after some macroeconomic conditions shift.

These economic conditions vary, including aspects such as unemployment rate, interest rate, consumer price index, corporate profits, labor cost per unit, and so on.

It can also be considered a measurable indicator that has the tendency to change after there is a major shift in the economy itself and a major trend is being played out.

A leading indicator is used to measure the economic performance that shifts ahead of the economic cycle before a basic pattern is followed (and often used to predict upcoming shifts in economic activities).

But it is important to note here that these leading indicators are not always completely accurate and should be taken with a pinch of salt.

Some examples of some leading indicators include the supply of money, bond yields, new business start-ups, consumer confidence, and managers purchasing index.

Market Capitalization, or the more frequently used term Market Cap, is a measurement that is used to classify the size of a company.

The calculation is quite straightforward: you take the stock price and multiply it by the number of outstanding shares.

Knowing the market cap of a company is important because it’s a way of telling you how big or small a company is compared to its competitors.

The market cap number categorizes a company under small-cap, mid-cap, or large-cap.

In general, large-cap and mid-cap companies tend to grow slower than small-cap companies.

The price movements with mid-cap to large stocks typically are only 1-2% a day.

Market trend, as the name suggests, is the general direction in a market over a given period of time. This time period can be a few days, months, or even years.

It is a perceived tendency of financial markets to move in a certain direction over a period of time.

A deal that unites two separate companies into a single new entity is called a merger. There are multiple ways companies go about a merger and the reasons behind it can also vary.

Most of the time they are done to expand the reach of a company, expand its scope in the market, or increase its market share.

At the end of the day, all of this is done to increase shareholder value while trying to achieve other executive goals.

This is a strategy where the trader seizes trading opportunities from increased volatility because of news events. Economic news announcements are usually released at the same time every month.

They include details such as retail sales, inflation reports, interest rate announcements, and so on.

Based on these announcements, traders make the decision of buying or selling whatever financial instrument they are trading in.

The PDT rule or Pattern Day Trader rule states that if a trader takes 3 or more trades in a 5 day period, they’re considered a day trader and therefore required to maintain a minimum account balance of $25,000 USD.

Those who are unable to do that will usually trade at a prop firm.

Paper Trading is a simulation of actual day trading. Paper trading allows you to buy and sell stocks — just like you would in day trading — without risking your money.

As a beginner, you should start with paper trading first and practice (A LOT!!) to better understand how to trade, figure out your risk management, and how to create your own strategies and find profitable patterns.

The advantage of paper trading is that it does not require any money and yet gives you access to the market to trade. So it is an important tool in every beginner’s arsenal to practice before investing actual money.

As per the SEC, any kind of stock trading which is done below $5 per share is called a penny stock. It can be listed as security or trade over the counter in pink sheet markets.

They are also referred to as microcap or even nanocap in some situations.

These are usually newer or smaller companies that have limited resources that are ultimately just trying to look for capital through the open markets just like bigger companies.

The projected price of a financial instrument that’s provided by an analyst is called the price target. Analysts try to determine the worth of a stock and what it will be in a year or more. These predictions get published in research papers along with their recommendations on what positions to take on stocks. It is very helpful in determining undervalued and overvalued stocks.

The price target, however, can vary based on the analyst.

Price targets are mainly analyzed using a stock’s projected future demand and supply.

Simply put, anyone who does day trade for a living is considered to be a professional day trader. Legally, it means a trader who is licensed with either their series 6, 7, 63, 65, or 66.

These traders with a license are required to pay a higher fee for market data. Although if you are a day trader that trades your own money, you don’t need to be licensed in order to trade.

Put simply, the profit/loss ratio is the measure of the capability of a certain trading system to generate profit instead of a loss. It is shown on a percentage basis. It is calculated by first taking average profit from all winning trades and dividing it by average losses on all losing trades over a certain period of time.

So basically, profit divided by loss depicted as a ratio is the Profit/Loss ratio.

As an example: if your expected profit is $500 and your expected loss is $100 for a particular trade, your profit/loss ratio is 5:1.

Return on Investment

ROI or Return on Investment is the metric that measures profit or loss that has been generated by an investment, in relation to the invested funds.

It is expressed as a percentage and is an essential metric of how your trading strategies are performing relative to the invested money.

It is often confused with profit but is obviously different from it and is a better indicator of the success of an investment.

If you have invested $3,000 from your account, and let us assume you made a $1,000 profit, then the return on investment for this trading for you would be $1,000/$3,000 = 0.33 or 33%.

This day trading strategy is usually recommended to traders with more experience than a newbie trader.

Here the trader attempts to make several small profits on small price changes that happen throughout the day.

Since this particular strategy involves a lot of small trades happening, it’s suggested that only someone that understands the markets (and has vast experience) should attempt it.

A share buyback program refers to a program where a company buys back shares that were sold during IPO. This ultimately results in the value of shares that are being held by someone to increase in value since now the number of shares available to trade has been reduced.

In short selling, a trader sells a stock first at a high price and then buys it once the price falls.

Short selling works on the assumption that certain stocks will fall in price eventually, and it capitalizes on this price change.

The difference between the two prices will be the profit for the trader.

This is different from traditional trading (going “long”) where you buy the stock first, and then sell when the price increases, hence making a profit.

As the name suggests, the hours when the market is open are referred to as Stock Market Hours. The timings are from 9:30 am to 4 pm EST from Monday to Friday.

Holidays are an exception as on those days the market closes at 1 pm.

Although pre-market and after-hours trading is also available, usually there aren’t a lot of buyers or sellers at this point since liquidity is very low.

A stock split can change the price of a stock. Essentially, when a company declares a stock split, their number of shares you own increases, but with it, the market cap does, too.

For obvious reasons, as the number of shares increases, the price per share goes down.

Stop-loss is an advance order to automatically sell an asset or any financial instrument once it reaches a particular point. It is used to limit the loss or gain in a trade and can be quite helpful in saving you some money.

It is a risk management strategy.

Basically, by placing a stop-loss, the investor is instructing their broker to sell their asset once it reaches a pre-set price limit.

For example, if you have bought a stock at $5 and it rises to $7, you may place a stop-loss now to ensure your $2 profit before the price starts falling again.

Swing trading is a style of trading that tries to capture short to medium-term gains in a stock or any financial instrument for that matter, over a period of few days to several weeks. Traders who do swing trading majorly use technical analysis in search of trading opportunities.

“The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless.” – Jack Schwager, Market Wizards

The days of burnout from your 9 to 5 paired with the feeling of life being at a standstill are numbered. It might seem like every single day is the same and the monotony might get to you, but this should only be a reminder to you that only one person can take control of your life, and that person is… YOU.

You are the one who has to be proactive at all times while standing up for what you deserve in life. It might seem like a daunting task at first but as soon as you start making small changes, things begin to change gradually.

The initial step is very straightforward. Know your money. Know how it moves and how you can multiply it over time.

Next, consume information about the kind of trading you want to do. What style of day trading suits you the most?

Once you have that figured out, get to the bottom of it. Learn all its terms and what they mean.

Move onto making actual trades once you feel you have a good grip on day trading concepts.

You can start by making small trades at first, the ones that come with minimal risk, and eventually move onto bigger trades. As time passes by and you have more experience under your belt, making bigger trades more frequently will start to become the norm.

It may be hard to imagine, but in just six months’ time, your life could look VERY different.

I’ve experienced this myself and seen many of my students experience this, too.

Like EA, who you can read about here.

(and how he made $400,000 in his first year of day trading)

Essentially what we want to convey here is that once you understand how to make money work for yourself, you can achieve not only financial freedom but also the freedom to live your life on your own terms.

Control over your financial situation gives you independence and confidence like nothing else does. Fortunately, day trading is one way to achieve this goal.

To learn more about the workings of day trading, I recommend checking out my YouTube Channel and signing up for my Day Trading 101 Newsletter.

Also, check my flagship program ‘The Freedom Challenge’ which teaches enthusiastic traders practical day trading techniques that help you level-up and attain true financial freedom.

It is a must for anyone who plans to consider day trading as a viable option for their career.

Next steps.

It’s time you stop wasting time, missing opportunities, and losing money due to platforms that only give you access to part of the process. The mechanism is simple, effective and fast.

Speed and efficiency are two of the main things we focused on while building StockCraft. To make the most of watchlists and choose the best stocks possible, join the StockCraft family and get access to our powerful watchlists (and many other amazing features). Get access to our sophisticated screening software so you can track and follow the right stocks. Also, create your own Watchlists and get access to some of the ones we personally use. The time to make a mark in trading is NOW so the sooner you get started, the better. All you have to do is follow this link and choose the plan best for you and your trades.

And if you’re keen to learn more day trading tips, check out this Investing for Beginners series. I’m devoted to mentoring beginners in order to make day trading your primary source of income. I also invite you to take a few further steps with me:

Join The Freedom Challenge. This is my flagship program for traders who want to level-up and turn Day Trading into their primary income stream.

Subscribe To My Youtube Channel. This is where I share practical day trading tips and training on how to trade, as well as behind-the-scenes insights into the trades I make.

Join My Newsletter. I write these emails for people who want to learn the basic Day Trading Tips and the practical steps they should take to get started.

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