Common Terms (Long, Short, Stop Etc.)
We’re covering old ground here, and yes, some of it really is telling you what you already know. As most of you know from being involved in my training courses on Insight, I don’t make assumptions on your knowledge. I treat everyone as though they’ve never traded before, then we are all singing from the same sheet, when we move on to later techniques. It is important that we train this way, as we leave absolutely no room for any confusion. If you are really confident that you know all that follows, read it anyway, and view it as an important refresher.
Before I talk about common terms that we use, please just promise me one thing; READ EVERYTHING! I know there’s a tendency to simply skip through the sections that you’ve covered before in my courses, or read elsewhere, but there’s a good reason why I repeat it. That good reason is because people still skip and skim, and if I say it enough, you may, just may, get to understand what it is I am teaching. Not everyone is like that of course, and you’ve probably read every word I’ve written, in which case, good for you, as this will serve you well. So, don’t skip, read everything, even if you know the subject matter very well.
Buy / Go Long
This refers to entering a CFD trade on the expectation that the price or value of the underlying financial instrument will rise.
More detailed explanation: Going long means that we buy the stock, and want the price to go up. We open the trade by buying stock or a financial instrument that we think will increase in value over time. As we are trading, and not investing, we are looking for a pattern that tells us the price will rise soon, rather than waiting for the inherent value of the company to be realized. All the same, long trades tend to take that little bit longer to make a profit than short trades, as they still have to build up traders’ interest, and they are reliant on the stock or underlying market remaining strong, and the economy too being strong.
When you go long, what you are doing is essentially not that different from an investor who buys the stock and is looking for the stock to rise in value – you just have a shorter time horizon.
Sell / Go Short
This refers to entering a CFD trade on the speculation that the price or value of the underlying financial instrument will decline. With CFDs, selling short is quite easy to do although during extreme market conditions, some restrictions may be imposed.
More detailed explanation: A short trade is a trade we place on a stock that we think is going down in value. The more it goes down from the opening trade value, the more money we make. When we short a stock, we are literally short of the stock, and at some time we have to buy it to complete the deal. The cheaper we can buy it in the future, the more money we can make. The price we buy the stock at is called the buy-to-cover price, and you are ‘covering’ your short position when you buy them, and exit the trade.
Most buy and hold traders, who’ve never experienced trading a leveraged product, seem very surprised that you can make money from a falling trade. The irony is that you make more money faster than you can from a long trade.
Why is this? Simply because of the momentum that falling stocks gain. When a stock is falling, the psychology of traders is defensive, which results in an almost panicked market where things are sold very quickly and the price plummets. This is where ‘fear’ is the overriding emotion – people fear that they are losing every extra second that they hold on, so they bail out at whatever price they can get.
The only problem is, you can’t short a stock on its way down, and you have to wait for an uptick in its price before you can make the trade – this stops everyone jumping in when the stock is plunging. One way around this is to use ETFs – you can buy a short position via an ETF regardless of the direction of the prices.
You may be wondering how you can sell something before you have bought it. This isn’t normal, is it? Well, it is for your broker. Although you don’t have to worry too much about it, what really happens is that the broker sells some shares in the company that he happens to have –whether on his own account, or from one of his other clients. The broker charges you for the cost of the shares, and this trade can only be done with a margin account, which means you pay interest to the broker.
In theory, your losses on this trade are unlimited, as there is no limit to how high the share prices can go. On a long trade, all you can lose is just the value of the stocks. You would be very unlucky to be caught like this, but you should place a stop loss order (see below) in any case, long or short, at the time of your trade to be sure.
A stop loss is an automatic means for us to protect our overall risk in any given trade.
With a Long trade, we place the stop beneath the value of the quote. If the stock price falls to that value, the trade is closed, by the stock being sold.
With a Short trade, we place the stop above the value of the quote, as we’re looking at making a profit from the stock falling. If the stock climbs to that amount, the trade is closed, by the stock being bought to cover.
You should note that a stop loss order may take you out of a trade when you didn’t want to, and when you don’t even think it should from looking at the summary pricing! How can that be? Well, the stock may vary in price quite a bit during the day, and the fluctuations can make you hit the stop and activate the trade. So even if your candle-sticks show that the trade is good at the beginning and end of the day, you can lose out. The way to stop this is to set your stop loss order far enough away from the price, and some people suggest that you look at the normal fluctuations in price and set your stop two or three times as far away to be sure.
It’s worth saying that some traders will tell you never to put your stop in the market. They simply keep a separate note of the value, and check whether it has been reached each day. These are traders who are very suspicious of others’ motives, and feel that the price can be manipulated to ‘snatch’ their holding before moving in the other direction. Unless you watch your prices all day, you could be caught out by doing this, however.
We can of course adjust our stops to keep them ahead of a rising or falling market, to eventually lock in profits.
Lock in Profit
A term used when we can set the stop value to exceed the point where the trade entered into profit. This is a point that we hope all trades will get to, and many will if you follow my training!. This process of locking in a profit results in us making a profit, even if the stock comes back down and hits the stop. Sometimes, you will hear me mention ‘tightening a stop’; what I am referring to, in this instance, is for you to set the stop nearer the current live price of the trade.