Some vocabulary you will need to know for Day Trading
What is Account Balance
In the context of day trading, an account balance is the amount of money that is available in a trading account to be used for trades. This balance is made up of the funds that have been deposited into the account, as well as any profits or losses that have been incurred through trading.
The account balance is an important consideration for day traders, as it determines how much capital is available to place trades. It is important for day traders to manage their account balance carefully, as it can affect the size and frequency of trades that they are able to make.
In addition to the account balance, day traders should also be aware of other factors that can affect their trading, such as margin requirements and fees associated with their trades. These factors can impact the overall return on investment for a trader and should be carefully considered when making trading decisions.
Unrealized profit and loss (P&L) is the profit or loss that would result if all open positions were closed at the current market price. In other words, it is the potential profit or loss that could be realized if all trades were settled at the current market price, without actually executing the trades.
Unrealized P&L is often used by traders to assess the performance of their open positions and to make decisions about whether to hold or close those positions. It is important to note that unrealized P&L is not realized until the positions are actually closed, at which point it becomes realized P&L.
Unrealized P&L can be calculated for individual positions or for an entire portfolio of positions. It is an important metric for traders to understand, as it helps them to assess the potential risk and reward of their open positions and to make informed trading decisions.
A loss limit is a predetermined amount of money that you are willing to lose in a single day of trading. It's a way to protect yourself from making too many costly mistakes or taking on too much risk.
Here's an example of how loss limits work:
Let's say you're day trading stocks, and you've set a loss limit of $100 for the day. That means that if you lose more than $100 in a single day, you will stop trading for the day and not take on any more risk. This can help you avoid making rash or emotional decisions that could lead to even larger losses.
It's important to note that loss limits are not a guarantee against losses, and you may still lose money even if you have a loss limit in place. However, setting a loss limit can help you manage your risk and make more disciplined, thoughtful trading decisions.
When working with Leeloo Trading all you will need to watch is your loss limit. But, once you are ready to open your own account, you will need to fully educate yourself on the following…
What is Margin
In the context of trading, margin refers to the amount of money that a trader must have in their account as collateral in order to open and maintain a position. When a trader opens a position on margin, they are essentially borrowing money from their broker to finance the trade. The amount of margin required for a trade will depend on the broker and the specific terms of the trade, such as the size of the position and the level of leverage being used.
Traders use margin to increase their buying power, which allows them to trade larger positions than they would be able to afford with the capital in their account alone. However, margin also carries risk, as it can amplify both profits and losses. If the value of the position moves against the trader, they may be required to deposit additional funds (also known as a margin call) in order to maintain their position. If the trader is unable to meet the margin call, their position may be liquidated to cover the shortfall.
It is important for traders to carefully manage their use of margin, as it can have a significant impact on their trading results.
What is used margin
Used margin is the amount of money in a trader's account that is being used as collateral to hold a particular position. In other words, it is the amount of margin that is being "used" to open and maintain a particular trade.
When a trader opens a position on margin, they must have a certain amount of money in their account to act as collateral. The amount of margin required for a trade will depend on the broker and the specific terms of the trade, such as the size of the position and the level of leverage being used. The amount of margin required to open a position is known as the initial margin.
Used margin is calculated as the difference between the initial margin and any unused margin that is still available in the trader's account. For example, if a trader has an account balance of $10,000 and they open a position that requires an initial margin of $2,000, the used margin for that position would be $2,000. If the trader has additional unused margin available in their account, the used margin would be less than the initial margin.
It is important for traders to manage their used margin carefully, as it can affect their ability to open and maintain positions, as well as their risk exposure. If the value of a position moves against the trader and the used margin exceeds the available unused margin in the account, the trader may be required to deposit additional funds (also known as a margin call) in order to maintain the position. If the trader is unable to meet the margin call, their position may be liquidated to cover the shortfall.
What is a margin call
A margin call is a demand for more collateral from a borrower who is using borrowed money (also known as margin) to invest in securities. This can happen if the value of the securities in the borrower's margin account falls below a certain level, known as the maintenance margin. When this happens, the lender will issue a margin call, requiring the borrower to either deposit more money or sell some of the securities in the account in order to bring the account value back up to the required level. If the borrower is unable to meet the margin call, the lender may sell the securities in the account to cover the shortfall, potentially resulting in a loss for the borrower. Margin calls can be a significant risk for investors who are using borrowed money to make investments, as they may be required to come up with additional funds or sell securities at a time when they do not want to.
What is margin and leverage
Margin and leverage are closely related in the context of investing and borrowing. Leverage refers to the use of borrowed money, such as a margin loan, to make investments. The amount of leverage that an investor is using is determined by the ratio of borrowed money to the investor's own money, known as the debt-to-equity ratio. When an investor uses margin to make investments, the amount of leverage is equal to the amount of the margin loan divided by the investor's own cash and securities in the account. For example, if an investor has $100,000 of cash and securities in a margin account and borrows $100,000 from a lender, the investor is using 2:1 leverage. Leverage allows an investor to increase the size of their investment position and potentially increase their potential returns, but it also increases the risk of loss if the value of the investments declines.
What is a stop out level
In day trading, a stop out level is the minimum margin balance required to maintain an open position. If the margin balance falls below the stop out level, the broker may close the position in order to bring the account back up to the required level of margin. The stop out level is sometimes also referred to as the maintenance margin. It is important for day traders to understand and monitor their stop out levels, as a margin call can result in their positions being closed out at unfavorable prices if they do not have sufficient margin to meet the required level. Day traders should also be aware of the risks of using leverage, as a large price movement against an open position can quickly result in a margin balance that falls below the stop out level.
Steps to Avoid a margin call
There are a few steps that you can take to avoid a margin call:
Monitor your margin balance: Keep track of your margin balance and make sure that it stays above the minimum required level (also known as the maintenance margin or stop out level).
Use stop loss orders: A stop loss order is an order to sell a security when it reaches a certain price. Using stop loss orders can help you to minimize potential losses and prevent your margin balance from falling too low.
Manage your risk: Consider the potential risks of each trade and use appropriate position sizes. Don't overleverage your account by taking on too much risk.
Use a margin calculator: A margin calculator can help you to determine the required margin for a trade and ensure that you have sufficient funds in your account to meet the margin requirement.
Deposit more funds: If you are in danger of receiving a margin call, you may be able to avoid it by depositing more funds into your account. This will increase your margin balance and help to bring it back up to the required level.
By following these steps, you can help to reduce the risk of receiving a margin call and protect your investment portfolio.
What is Equity
In finance, equity refers to the ownership interest in an asset, such as a company. When you own equity in an asset, you have the right to a share of the asset's value or profits. There are two main types of equity: common equity and preferred equity. Common equity is ownership interest in a company that is held by common shareholders, who have the right to vote at shareholder meetings and receive dividends. Preferred equity is a type of ownership interest that has a higher claim on the company's assets and earnings than common equity, but does not have the same voting rights.
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