CFDs Trading Glossary
What is Ask Price?
The Ask price is the quoted price at which the CFD provider is willing to sell and the CFD trader is able to buy a contract. The opposite price is the Bid price.
What is Back-testing?
Back-testing is the process of testing a trading strategy or a trading system against historical prices. That means you may know if a certain strategy/system has proved profitable in the past.
What is the Benchmark Rate (or Base Rate)?
A Benchmark Rate is the reference rate of interest charged on borrowing.
What is Beta?
This is a statistical tool that measures the volatility of individual security against the whole market or an index. If beta = 1 that means that the price behavior of the individual security imitates ideally the price behavior of the whole market. If beta is 1.20 that means that the individual security is 20% more volatile than the market itself. If beta is 0.80 that means that the individual security is 20% less volatile than the market itself.
What is Bid Price?
Bid is the quoted price at which the CFD provider is willing to buy and the CFD trader is able to sell. The opposite price is the Ask price.
What is Bid/Ask Spread?
Measures the difference between the bid and the asking price. The more liquid an asset the smaller is the spread between asking and bid.
What is the Breakout Strategy?
This is a very popular trading strategy that is based on entering long/short trades when the price of an asset breaks through a strong support or resistance level.
What is Carry Trade?
A trading practice involves selling an asset offering a low yield and at the same time buying an asset offering a higher yield. Usually, carry traders sell the Japanese Yen to buy high-yielding currencies such as the New Zeeland Dollar and the Australian Dollar.
What is the Contract for difference (CFD)?
A CFD is a financial instrument that can be used for trading any financial asset on margin and has the same price behavior as the underlying asset itself. The CFD is a contract whereby you will make a profit if the price of the underlying asset moves in your favor and you will make a loss if the price moves against your prediction.
What is a Contract Note?
This is a document sent by the CFD broker to the CFD trader that confirms orders, executed trades, and open positions.
What is Credit Allocation?
The maximum credit level to which a CFD client can trade on his account.
What is Data Release?
It refers to the release of important economic news usually by government bodies such as a central bank. These releases follow a predetermined calendar schedule.
What is Delta Ratio?
The Delta measures the rate of change (%) in the price of a derivative product compared to the change in the price of the underlying asset. If Delta is 1 then for every $1 change in the price of the underlying asset the derivative price changes also $1. Delta=1 is a common phenomenon in CFD trading.
What is a Derivative Product?
A derivative product is a financial product whose price is formed according to the price of an underlying asset such as a currency, a commodity, a share, etc..
What is Direct Market Access (DMA)?
DMA Brokers offer their clients direct access to the relevant exchange. DMA brokers do not act as market makers.
What is the Diversification of Portfolio?
Anyone familiar with investment knows the importance of portfolio diversification. Diversification means dividing your investment capital into many different trading positions. Diversification must focus on many different aspects for example investing in different asset classes, different markets, and different currencies.
What are Economic Drivers?
The Economic Drivers are key changes in the real economy that had led in the past the price of certain financial assets to change accordingly (assets such as commodities, currencies, shares, property or else).
What is Fiscal Policy?
This refers to the government’s fiscal policy. Basically it includes taxation, government spending, borrowing, and investment. The fiscal policy affects any domestic financial market including the stock market and the domestic currency.
What is the Fixed Percentage Model?
This refers to a risk management practice according to which no investment position must exceed a certain percentage of the total portfolio value. For example, the maximum fixed percentage can be 5% or 2%.
What are Hedge Funds?
This refers to an investment fund that is open only to investors who can place a high amount of money.
What is Hedged Exposure?
Practice according to which a trader opens a position in the opposite direction of an existing position. For example, if you are Long on IBM stock you open a Short position on the Dow Jones Industrial. This practice is useful when a certain financial asset is particularly overbought or oversold compared to the general market.
What is Hedging?
Hedging as a practice aims to reduce the risk of an investment portfolio using derivative products.
What is an Index Fund?
An investment fund that creates a portfolio by imitating the structure of a particular index. Each individual asset is weighted according to the underlying index.
What is the Initial Margin?
The amount of free cash a trader must have available in his account in order to open a new CFD position. For example, a CFD broker requires a $150 initial margin for 1 position of Dow Jones Industrial, $350 initial margin for 1 position of Gold and a $75 initial margin for 1 position of Crude Oil.
What is the Intra-Day Trading?
Or else Day-Trading means opening and closing multiple positions on the same day. Day-traders do not keep positions overnight.
What is Leverage of Capital?
Capital leverage means trading more capital than you really own in a trading account. That feature which is common in all derivative products has an impact on both the profit and loss potential.
What is LIBID
Stands for London Interbank Bid Rate.
What is LIBOR
What is Stands for London Interbank Offer Rate? This is actually the overnight lending rate between international banks.
What are Limit Orders?
An order to buy or to sell an asset but with an upper price limit if you buy it and a lower price limit if you sell it.
What are Long Positions?
Trading positions that profit from a rising market. The opposite condition refers to Short Positions.
What is Margin?
The amount of cash needed to open and to hold a position when trading a CFD contract.
What are Market Makers?
Market Makers or Agents are brokerage firms that create a market within a market. They allow their clients to buy and to sell different assets while the Market Maker trade on the exact opposite side. They make profits by charging a spread between ask and bid.
What is Monetary Policy?
Imposed and implemented by central banks, monetary policies aim to control the money supply in an economy by balancing inflation, growth, unemployment and interest rates.
What are Net-Tangible Assets (NTA)?
Refer to physical assets, such as property, machinery, etc.
What are Pairs in CFD Trading?
A CFD transaction that involves two orders. A CFD trader buys one contract and simultaneously sells another similar contract.
What is Paper Loss?
Refers to a capital loss that has not yet been realized.
What is Paper Trading?
Trading without real money. Traders record the prices where they would have bought or sold particular assets and then evaluate their performance according to actual prices.
What is Pip?
The smallest amount by which the quote of a financial asset can change.
What is the Price–Earnings Ratio (P/E)?
A very popular financial ratio that is able to evaluate the price of a share or of an entire market. P/E is calculated by dividing the current price of a share (P) by the company’s earnings per share (E).
What is Pyramiding?
According to this trading practice, traders buy more on a position that the price moves in their favor. That means to increase the exposure in profitable trades.
What is Requote?
Requotes on prices occur when the market is moving in extreme volatility. For example, this is happening when important news is released.
What is a Rolling Contract?
A Rolling Contract is a type of contract that stays open from one day to the next.
What is Rollover?
Rollover refers to overnight charges that are applied to some CFD positions. Note that CFDs on Futures are not the subject of rollovers.
What is the Settlement?
When a position is closed manually or automatically on expiry, settlement refers to the final profit or loss.
What is Slippage?
Slippage occurs on trading orders that cannot be executed at the stipulated price. That is happening for example during important news releases.
What is Spot Price?
The price quoted for immediate settlement. Delivery varies from market to market. For example on Forex markets delivery is T + 2.
What is Spread
Spread is simply the difference between the best buyer (bid) and the best seller (ask).
What is Spread Betting?
Spread betting is a financial instrument designed to trade the world financial markets. Spread betting is very popular practice in the United Kingdom.
What is a Stop-Loss Order?
This is an order aiming to limit the loss potential of any trade.
What is Straight-Through Processing?
This is a brokerage practice. STP brokers guarantee that asks and bids prices will match the actual market prices.
What is a Tick?
Tick is the minimum price change of a particular CFD contract.
What is Time-Stop?
Time-stop means closing a position if a certain time period has elapsed.
What are Treasury CFDs?
These contracts refer to CFD contracts that have treasuries as their underlying instruments.
What is Volatility?
Volatility measures the price movement of a financial market in a particular period of time.
What is the Wiggle Room?
The term refers to the practice for avoiding trading false breakouts. Traders use price breakouts as a day-trading strategy but many times these breakouts are proving false. Therefore traders allow the price to move a small way below support or above resistance before opening a position.
■ CFD Trading Glossary
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