Key Terms & Acronyms – Trading Dictionary
- Price Action (PA) – Price action is the movement of a certain asset over time. Price action is important for technical analysis traders. It provides the ability to see trends and make decisions.
- Hedge | Hedging – A trade or position to lower the risk of another position, asset, or trade. For example, imagine you own one bitcoin but are worried the price is going to go down. In this case, the trader wants a hedge to lower their downside risk. There are many methods of hedging but generally the hedge position is opposite to your main position.
- Unhedged –
- +EV –
- Liquidation – When the markets price hits the liquidation price of a position, the positions will be sold automatically by the exchange and the position will be ‘liquidated’.
- Candle Stick Chart – A certain style to show price action on the chart. Each candle shows a high, low open and close.
- Depth Chart –
- Mark Price – On ByBit, Mark Price is calculated by taking reference to a global spot Index Price plus Basis Rate. OKEx defines Mark Price as “a reference price of a derivative that is calculated from underlying index, often calculated as a weighted index spot price of an asset across multiple exchanges, so as to avoid price manipulation of a single exchange.” Furthermore, OKEx notes, “Mark price can protect your positions from being forced-liquidated as it is generally in traders’ flavour, it is more independent than the last traded price.”
- Fair Price – BitMEX eploys a system called Fair Price Marking. For Perps, the Fair Price is equal to the underlying Index Price plus a decaying Funding basis rate.
- Last Price (Last Traded Price (LTP)) –
- Index Price – The Index Price, used by Derivative exchanges, is a composite of prices reported by spot exchanges. Calculating an accurate composite Index price is complex and requires a good deal of math. Exchanges’ formulas are adjusted over time and can differ significantly from one another by data sources, weights, and methodology. For an example, compare BitMEX to ByBit.
- Basis Rate – ByBit defines Basis Rate as, “10-min Moving Average of [(Impact Mid Price – Index Price) / Index Price].”
- Long –
- Short –
- Swing long –
- Swing short –
- Scalping –
Leverage and Margin
- Leverage – When you are using leverage, you are borrowing capital in order to increase the potential returns of a trade. When you are over leveraged, you borrow more capital than you actually should. This can be very risky when your trade goes the wrong way.
- Margin –
- Isolated margin – When you use Isolated margin for a position, you only risk the amount you allocate to that trade. Let’s say you have a balance of 1000 and you open a position with isolated margin. You allocate 100 of your balance to that isolated margin position. When your isolated position hits the liquidation price, you only lose the 100. The rest of your balance won’t be affected. Isolated margin is a way to protect yourself from losing the total balance of your account. You can add money to the position in case your position is close to being liquidated. Isolated margin is especially recommended for traders who just started to prevent losing their entire balance in one trade.
- Cross margin – When you use cross margin for a position, you risk the entire balance of your cross margin account. Let’s say you have a balance of 1000 and you open 3 different positions with cross margin. As soon as one of those 3 positions hits the liquidation price, you don’t just lose the capital allocated to that position, but you lose the entire balance of the cross margin account.
- Maintenance Margin –
- Cross vs. Isolated Leverage video
Exchange terms and Order types
- Makers – When it comes to determining whether or not an order is considered a “maker” or “taker”, the key lies in the immediacy of orders filled. Market Orders are always executed as taker orders but Limit Orders may be executed as maker or taker orders. This is not to say that Limit Orders are inherently special. They are simply the only order type that doesn’t trigger an immediate buy or sell; a Market Order is immediate.
- Takers –
- Market buy / market sell –
- Stop loss –
- Stop limit –
- Take Profit –
- Short Squeeze – At any given time there are a number of traders with short positions. Traders place short positions for multiple reasons like when they believe the price is going to go down or they want to protect their downside risk on a long position. A short squeeze happens when the price starts to rise and traders begin closing their short positions to limit their losses. If the price rises rapidly then the short positions might get liquidated which forces the exchange to buy, further increasing the upward momentum.
- Long Squeeze – A long squeeze can be thought of as the opposite of a short squeeze at least for price direction. If the price begins to fall dramatically then traders will close (sell) their long positions to minimize losses or ensure breakeven/profit depending on their entry. This selling adds momentum to the falling price.
- Post-Only order –
- Reduce – A reduce order, long or short, will only subtract from the current position. It can help traders close part or all of a position without accidentally going over into a new direction with a new position. For example, imagine a trader has an open $10,000 long position on BTC in profit and wants to quickly close. If the trader submits a sell/short reduce order of $11,000 will close the $10,000 position without opening a $1,000 short.
- PnL – Profit and Loss.
- Unrl PNL – Unrealized Profit and Loss. If you have an open position, the exchange will likely show the current profit or loss if you closed immediately. The figure is usually calculated by the Last Trade Price but can vary by exchange.
- Real PNL – This term refers to the realized P&L of a position upon exit. It’s a total sum of the profit/loss from price difference and also transaction and funding fees. Closed P&L is the actual number credited to or deducted from wallet balance.
- Inverse vs. Linear
- Fixed Expiry Futures
- Open interest – (video) –
- Liquidation Engine
- Maintenance Margin
- Position Margin
- ADL – Auto Deleveraging (ADL) is like a proactive clawback. Winning positions are closed to provide liquidity to allow counterparties to have their positions closed above bankruptcy price. Typically, traders are allowed to reenter positions freely after ADL occurs.
- Clawback – When winning traders are forced to return some of their profits to cover the negative balance accrued by their counter party’s inability to liquidate positions above bankruptcy price.
- Insurance Fund – Many exchanges use an insurance fund to protect against claw backs or ADL when there is not enough liquidity to close liquidated positions above the bankruptcy price. It is usually funded by the remaining margin on liquidated positions during normal market conditions when there is liquidity to close above bankruptcy price. Instead of returning remaining margin to the account, it is sent to the insurance fund.
- FOMO – fear of missing out. E.g., buying a coin after it went 500% in a week.
- Maxi – Maxis or maximalists are crypto enthusiasts who believe strongly in one coin and often call everything else ‘shitcoins.’
- FUD – Fear. Uncertainty. Doubt. A common acronym used to described negative information is questionable authenticity.
- Chop – The price action or movement is not trending in a clear direction. ‘Chop’ price action is generally unfavorable trading conditions.
- Crab / Crabbing –
- Scam wicks –
- Bulls – Someone who is optimistic and/or confident the price will increase
- Bullish –
- Bears / Bearish – These terms suggest a price will go down. It is a sentiment often used to describe trends or traders and future expectations.
- Alpha – Valuable information for investing or trading.
- Tilt / Trading on Tilt – This means the trader is making decisions based on their emotions and often negative ones like anger, frustration, and fear. Trading on tilt can lead to a trader making more and more bad decisions in a desperate attempt to earn back their losses leading to an even greater loss.
- Revenge trading –
- Diamond hands – If someone says they have diamond hands it means they will not close their position even at a loss. Generally, it implies they are waiting for a price trend to change direction.
- Paper hands – The antonym or opposite of Diamond Hands. A trader with paper hands will close a position quickly rather than wait.
- Punt – A punt is an attempt to make fast profits from an investment regardless of its underlying fundamentals. This means that a punt carries higher risks than most investments, but may see very high returns very quickly. Example – “I’m punting a btc long here but I’ll close quick if we don’t bounce.”
- Stinky bids – Stink bids are usually limit orders placed far below the current price in the case there is a major drawdown. Some traders will set stink bids before they go to sleep.
- Ponzi – A type of scam where investors are promised large returns. Payments to investors who wish to cash out is simply the money invested by later investors. Search for Bernie Madoff for an example of a famous ponzi scheme.
Abbreviations and acronyms
- TA – Technical Analysis.
- SBF – Sam Bankman-Fried, the founder and CEO of FTX exchange.
- CZ – Changpeng Zhao, the founder and CEO of Binance exchange.
- HFT – High frequency trading
- OTC – Over The Counter.
- BTFD – Buy The F*cking Dip
- SFP – Swing Failure Pattern