The intraday market is one in which traders buy and sell their stocks, currencies, derivatives and other market securities within the same trading day. The trades are conducted during regular trading hours, and the traders essentially close their open positions before the market closes. This type of trading is different from regular share trading, wherein investors buy shares and hold on to them indefinitely. Instead, in the intraday market, traders try to benefit from market volatility to book profits within the same day. As such, volatility is a crucial aspect of intraday trading. Indeed, the rules governing intra-day trading are vastly different from regular day trading, and so are the jargons and terminologies used by traders in this market. So let’s try to break down the A to Z of intraday trading terms.
Ask price is the most common day trading terminology you will come across. It is defined as the lowest or minimum price that a prospective seller may be willing to accept while trading or exchanging a given security.
The bid price is an intraday trading term that is often used in connection to the asking price. It is the highest or maximum price that a prospective buyer may be willing to pay while trading or exchanging a specific security.
In the intraday trading market, the highest bid and the lowest ask is usually quoted on most of the major exchanges be it stocks, derivatives, commodities, and currencies, and so on. This difference between the highest bid and the lowest ask is defined as the bid-ask spread.
A bull market is defined as the condition of financial markets wherein the prices of securities being traded are either rising or are expected to rise. Since the prices of the traded securities tend to rise and fall continuously in day trading, this intraday trading terminology is essentially used to indicate extended periods, wherein large portions of security prices are on the rise. A bull market may last for a few months or even a few years.
The bear market is the exact opposite of a bull market. In this market, the prices of securities decline for prolonged periods. In a bear market, the prices of securities usually fall by 20 per cent or more, from the recent highs due to widespread pessimism and negative investor sentiment. Bear markets are also associated with an overall sluggishness in market indices. A bear market typically lasts for two months or more and may accompany a general economic downturn; recession, for instance.
Trading Hours and After Hours
In the intraday trading market, trading is permitted for specific hours – specifically from 9:30 in the morning to 4:00 in the noon. Also, the market is open only on weekdays, i.e., Monday through Friday. Markets are usually closed on holidays, and if they are open for trade on such days, (in case of exceptions), trading halts by 1:00 pm. As a trader, you can trade in the pre, and after trading hours as well, however, you will find extremely low liquidity in those hours, since most buyers and sellers don’t tend to trade in the after-hours.
The 52-week high/low is another common intraday trading terminology you will hear or read in the context of day trading. It is the highest or lowest price at which a security is traded during a period which equates 52 weeks or one year, and is usually seen as a technical indicator. The 52-Week high/low is generally based on the daily closing price of each individual security trading on the markets. While the 52-week high represents the level of resistance, the 52-week low indicates the support level used by traders to trigger their trading decisions.
A breakout is defined as the point when an asset’s price moves above its resistance area, or below its support area. A breakout essentially signifies the potential for a security’s price to start trending, typically in the direction of the breakout. For instance, if you notice a breakout on the upside on your technical chart pattern; it could indicate that the price of the security will potentially start trending higher.
In the day trading terminology mentioned above, we used the terms resistance and support. Let’s understand the meanings of these terms individually. Resistance level, often referred to as resistance, is defined as the price at which an asset meets pressure while it is on its way up. The pressure is felt due to several sellers who hope to sell their securities at a specific price. A resistance level can be seen on technical indicators by drawing a line alongside the highest highs, for a given time. Resistance levels could be short-lived in the light of new information, which can potentially change the overall attitude of traders towards an asset. It could just as quickly be long-lasting.
Often used in connection with resistance, support is another crucial intraday trading term. Support level, or, support, is defined as the price level below which an asset or security does not fall, for some time. The support level of an investment or security is created by market-entering buyers whenever the asset or security dips to a lower price. As a trader, you can see the support levels with the help of various technical indicators or merely by drawing a line that connects the lowest lows for a given period.
In the trading world, a market order is a term used about the request placed by an investor to buy or sell a stock at the best price available in the current market. This request is typically made through an online brokerage platform or by informing the brokerage service provider. A market order is widely deemed as the most reliable and fastest way to enter a trade and subsequently exit it. It gives traders access to the most probable course of getting in or out of trades rapidly.
As is apparent from most of the intraday trading terms mentioned above, most terms are used in conjunction with others. The same is true of limit orders; in that, they are used in conjunction with market orders. A limit order is defined as the type of order to buy or sell a given security at a specific price, or a better price. When you place a buy limit order, it will be executed only at your preferred limit price, or a price lower. On the other hand, sell limit orders are only executed at the limit price or a higher price. As such, the limit order provision allows you to control better the prices at which you place your trades. When you use a buy limit order, you are guaranteed to pay that price or a less price. That said, the filling of the order is not guaranteed, and your limit order may not be executed unless the price of the security meets the order qualifications. As such, if the asset being traded fails to reach the specified price, then the order may not be filled, and you may miss a trading opportunity. Like with market orders, limit orders may also be placed directly through the online trading system provided by your brokerage firm.
The intraday trading terminology long position helps describe what investors have purchased when they buy a given security or derivative. At the same time, they expect the value of the traded security to rise. As an investor, you can establish securities like stocks, currencies or mutual funds, or even derivatives like futures and options. This technical term is usually used in the context of buying options contracts wherein traders hold a long put or long call option, based on the underlying asset’s option contract output.
The opposite of the long position, the short position, also known as shorting, occurs when a trader first sells a security, but intends to repurchase it or cover it later, typically at a lower price. Traders generally choose to short a security when they believe that the price of that specific security may likely decrease, sometime in the near future. Short positions are of two types – naked and covered. In the former, traders sell their security without having them in their possession. In the latter, traders borrow shares from their brokers (by paying a margin amount) by paying interest or borrow-rate for the period that they hold the short position.
Margin and buying on margin
Margin is another common intraday trading terminology which refers to the money traders can borrow from their brokerage firm to buy shares or other securities. It signifies the difference between the total value of securities present in an investor’s account and amount of money borrowed as a loan from the broker. Buying on margin signifies the act of borrowing funds to invest in securities. In this practice, the buyer pays only a percentage of the value of the assets, borrowing the remaining amount from the broker. The broker, in turn, uses the securities in the traders account as collateral.
Short interest is a day trading terminology that refers to the number of shares which have been sold short, but those that haven’t yet been closed out or covered. Short interest is typically expressed as a percentage or number and also serves as a market sentiment indicator. An extremely high short interest indicates that investors are highly pessimistic, indeed over-pessimistic. When traders are very cynical, it could sometimes lead to a very sharp price rise. Furthermore, massive changes in short interest may also indicate warning signs as it signifies that traders may be turning more bullish or bearish on a stock.
High-Frequency Trading or HFT is a trading method that utilises robust computer programs to conduct transactions of a large number of orders. No matter how high the volume, the transaction occurs within a fraction of a second. The computer program leverages complex algorithms to analyse the multiple markets, and execute orders based on current market conditions. Essentially, traders with the most rapid execution speeds can place their trades much faster and book better profits than traders who have a slower execution speed. Apart from the high order speeds, high-frequency trading is also distinguished by high turnover rates as well as high order-to-order ratios.
Scale-in refers to the trading strategy in which traders buy shares as their price decreases. When traders scale in, it essentially means that they are setting a target price and that they will invest in volumes when the price of the stock falls below the target price. Traders continue to buy the shares until the price stops falling or until they reach the intended trade size. Note that scaling in may lower the average purchase price since traders end up paying less money every time the price of the shares drops. On the other hand, if the stock fails to return to the target price, the trader may end up purchasing a stock that is essentially losing.
The day trading terminology scale-out refers to the process of selling off one or more portions of the total shares you hold, while the price of the shares increases. To scale out means to get out of or exit a position (known as selling the shares), in increments as the price of the share climbs. Scaling is a type of intraday trading strategy which enables investors to book profits while the price of the shares is increasing, as opposed to trying to time the share’s peak price. If the actual value of the stock continues increasing, the investor may end up selling a winning stock way too early.
A short squeeze is said to occur when a share or any other traded asset jumps sharply higher. This phenomena, in turn, forces traders who had placed bets that the price of the security would fall, to purchase it so that they can forestall any further, more significant losses. As traders scramble to buy more shares, the chaos only adds upward pressure on the price of the stock.
Final note: The above article on intraday trading terminology for beginners can serve as a helpful guide. If you are new to intraday trading, it is better to start with some of the most basic terms. Some of these terms include the ask and bid price, bull and bear markets, and trading hours. Once you know these, then you can move on to more complicated terminology such as support and resistance levels, scaling in and out, and limit and market prices, among others. While it is essential to know these terms and their meanings, you also need to acquaint yourself with various types of intraday chart patterns and trading strategies for an all-round understanding of day-trading. Consider these aspects as a crash course in intra-day trading and even consider using online intraday trading simulators before you proceed with active intraday trading.