Dictionary

Trading terms, defined

29 terms across positions, options, chart patterns, price action, risk and the costs nobody puts on a contract note. Each one says what the word means and, where traders attach a claim to it, says whose claim it is.

Definitions only. Nothing here tells you what to do with a position, and none of it is financial advice.

Positions and instruments

Derivative: A contract whose value comes from something else: a share, an index, a currency or a commodity.Options, futures, warrants and CFDs are all derivatives. You are trading an agreement about the asset rather than the asset itself, which is why a derivative can expire, be assigned, or require margin while a share simply sits there.See also Option, Leverage, Margin
Long: Owning an asset, so the position gains when the price rises.Almost every holding in an ordinary portfolio is long. The term exists mainly to distinguish it from being short, and a loss on a long position is limited to what you paid, because a price cannot fall below zero.See also Short, Position size
ShortShort sellingGoing short: A position that gains when the price falls, usually created by selling a borrowed asset and buying it back later.The asymmetry matters: a long position can lose what you put in, while a short position loses as the price rises, and there is no ceiling on a price. In Australia, shorting listed shares is usually done through CFDs, instalment products or a broker lending facility rather than directly.See also Long, Derivative

Options

Assignment: The obligation side of exercise: the option seller is required to deliver or take the underlying shares.Assignment ends the option and starts or ends a parcel of the underlying, so the two records have to be kept together.See also Expiry, Covered call
Call option: An option to buy the underlying asset at the strike price.A call buyer benefits if the price rises above the strike before expiry. A call seller who does not own the shares carries uncapped risk if it does.See also Put option, Covered call, Strike price
Covered call: Selling a call over shares you already hold, so delivery on assignment comes from that parcel.The premium is received up front and the holding caps the risk that an uncovered call would carry, at the cost of giving up gains above the strike.See also Call option, Assignment
Expiry: The date an option contract ends.An option not closed or exercised by expiry lapses. An out-of-the-money option expires worthless, which is still a disposal for tax purposes even though no confirmation arrives for it.See also Option, Assignment
In the moneyITMOut of the moneyOTM: An option with intrinsic value: a call whose strike is below the current price, or a put whose strike is above it.See also Strike price, Option
Option: A contract giving the right, but not the obligation, to buy or sell an asset at a set price before a set date.The buyer pays a premium for that right and can lose no more than it. The seller receives the premium and takes on the obligation, which is where the open-ended risk sits.See also Call option, Put option, Premium, Strike price, Expiry
Premium: The price of the option contract itself, paid by the buyer to the seller when the position opens.For Australian tax records the premium is the amount that forms the cost base or the proceeds, and it stays attached to the contract through expiry, exercise or assignment.See also Option, Strike price
Put option: An option to sell the underlying asset at the strike price.A put buyer benefits if the price falls below the strike before expiry, which is why puts are often described as insurance on a holding.See also Call option, Strike price
Strike priceExercise price: The price at which the underlying asset changes hands if the option is exercised.See also Option, In the money

Chart patterns

Double bottomW pattern: Two lows at a similar level separated by a rebound, forming a W shape on the chart.The level between the two lows is usually called the neckline. Traders who use the pattern describe the second low as a test of the first, and treat a move above the neckline as confirmation. Whether that sequence predicts anything is contested; what is certain is that it is only identifiable after both lows have formed.See also Double top, Support and resistance
Double topM pattern: Two highs at a similar level separated by a dip, forming an M shape on the chart.The mirror of a double bottom, read the same way and with the same hindsight problem.See also Double bottom, Support and resistance
Fair value gapFVGImbalance: A three-candle formation where the middle candle moves far enough that the first and third candles do not overlap, leaving an untraded band of price.Traders using this concept treat the untraded band as an area price may return to later, describing it as an imbalance between buyers and sellers. It is a description of what the candles did; the claim that price tends to return to it is a belief held by part of the trading community rather than a measured property of markets.See also Gap, Candlestick
Head and shoulders: Three peaks where the middle one is highest, with the two outer peaks at a similar lower level.The line under the two troughs is the neckline. The inverse pattern, with three troughs and the middle one lowest, is read as its opposite. As with every pattern here, the shape is named after the fact.See also Double top, Support and resistance

Price action

Breakout: Price moving decisively beyond a level it had previously stopped at.Traders distinguish a breakout from a false breakout only in hindsight, which is the central difficulty with the idea: the chart looks identical at the moment of the move.See also Support and resistance, Gap
CandlestickOHLC: A chart mark showing four prices for one period: open, high, low and close.The body spans open to close and the wick spans the full range. A body coloured one way means the close was above the open, the other way means below. Everything in a candlestick chart is those four numbers per period.See also Gap, Fair value gap
Gap: A jump between one session and the next, where trading opens away from the previous close and no price traded in between.Gaps usually follow news released while the market was shut: earnings, guidance, an announcement to the exchange.See also Fair value gap, Breakout
Support and resistance: Price levels where buying or selling has repeatedly appeared before, read from the chart rather than from the company.Support is a level a price has stopped falling at more than once; resistance is one it has stopped rising at. They are observations about past prices, not properties of the asset, and a level only exists until it does not.See also Breakout, Double bottom
Volume: How many units changed hands in a period.Volume is the one input on a price chart that is not a price. It says how much trading produced the move, not who was buying.See also Liquidity, Breakout

Risk and sizing

Drawdown: The fall from a peak value to the lowest point after it, before a new peak is reached.Drawdown is measured on the portfolio, not on a single holding, and it is the number that describes what an investor actually had to sit through.See also Position size, Volatility
Leverage: Controlling a position larger than the money committed to it, usually through borrowing or a derivative.Leverage multiplies both directions equally. A leveraged ETF or a CFD can lose more than the same move would cost an unleveraged holder, and some leveraged products can require more money than was put in.See also Margin, Derivative
Margin: Money a broker requires to be held against a leveraged or obligated position.If the position moves against you the broker can ask for more, and can close the position if it is not provided. That request is a margin call.See also Leverage, Derivative
Position size: How much of a portfolio one holding represents.Position size decides what a given percentage move does to the total. It is the input that is fully within a holder’s control, unlike the price.See also Drawdown, Long
Volatility: How much a price moves around, usually measured as the standard deviation of its returns.High volatility means larger moves in both directions. It describes the size of movement, not its direction.See also Drawdown, Option

Costs and mechanics

Bid-ask spreadBid-offer spread: The gap between the highest price a buyer is offering and the lowest a seller will accept.The spread is a cost paid on entry and again on exit, and it does not appear on a contract note the way brokerage does.See also Liquidity, Slippage
Liquidity: How easily a position can be opened or closed without moving the price.Thin liquidity shows up as a wide spread and as slippage on exit, and it is usually worst exactly when a holder most wants to sell.See also Bid-ask spread, Volume
Slippage: The difference between the price expected when an order is placed and the price it actually fills at.See also Bid-ask spread, Liquidity

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