Trading Glossary: Leverage, Liquidity, CFD, EBITDA, Yield & More

Acquisition: When one company buys control of another, paying cash, shares or both. Share prices of takeover targets usually jump when a deal is announced.
Arbitrage: Profiting from price differences for the same asset in different markets, e.g. a share trading at different prices in Johannesburg and London. True arbitrage opportunities are rare and disappear quickly.
Bearish / bullish: Bullish means expecting prices to rise; bearish means expecting them to fall. A bull market is a sustained rise, a bear market a fall of 20% or more from the peak.
Break of structure (BOS): In price-action trading, when price breaks a previous swing high (in an uptrend) or swing low (in a downtrend), confirming the trend continues.
Buy limit / buy stop: A buy limit is an order to buy below the current price (expecting a bounce); a buy stop is an order to buy above the current price (expecting a breakout).
CFD (contract for difference): A derivative that pays the difference between the opening and closing price of an asset, without owning it. Most retail forex, index and gold trading is done through leveraged CFDs.
Consolidation: A period when price moves sideways in a range, often before a breakout.
COT report: The weekly Commitments of Traders report from the US CFTC, showing how commercial hedgers and speculators are positioned in futures, including currency futures. Released Fridays.
Debentures: Unsecured bonds backed only by the issuer's creditworthiness rather than specific assets.
Depreciation: In accounting, spreading the cost of an asset over its useful life. In forex, a fall in a currency's value (e.g. rand depreciation).
Drawdown: The decline in account equity from a peak to a trough, usually expressed as a percentage. A 50% drawdown needs a 100% gain to recover.
EBITDA: Earnings before interest, taxes, depreciation and amortisation: a measure of operating profitability that ignores financing and accounting choices.
Equity: In trading, your balance plus or minus open profit or loss. In companies, shareholders' ownership (assets minus liabilities).
ETF (exchange-traded fund): A fund that tracks an index, commodity or basket of assets and trades on an exchange like a share. JSE ETFs let you buy the Top 40 or S&P 500 in rand.
Fair value gap (FVG): A three-candle price-action pattern where the middle candle moves so fast that the wicks of the first and third candles do not overlap, leaving a "gap" traders expect price to revisit.
FX: Short for foreign exchange (forex).
GAAP: Generally Accepted Accounting Principles, the US accounting standard. South African listed companies use IFRS.
Hedging: Taking a position to reduce the risk of another, e.g. an exporter selling USD/ZAR forward to lock in a rate. In MT4/MT5, holding a buy and a sell on the same pair.
IPO (initial public offering): When a company first sells shares to the public and lists on a stock exchange.
Leverage: Using borrowed exposure to control a larger position than your deposit. 1:100 leverage means R1,000 controls R100,000. It magnifies profits and losses equally.
Liabilities: What a company owes: loans, bonds, supplier payments, leases. Assets minus liabilities equals equity.
Liquidity: How easily an asset can be bought or sold without moving its price. EUR/USD is extremely liquid; exotic pairs like USD/ZAR less so, which is why their spreads are wider. In forex, "liquidity" also refers to clusters of stop orders above highs and below lows.
Lot: The unit of trade size: a standard lot is 100,000 units of the base currency; mini 10,000; micro 1,000.
Margin: The deposit needed to open a leveraged position. See the margin calculator.
Market structure: The pattern of swing highs and lows: higher highs and higher lows (uptrend), lower highs and lower lows (downtrend), or a range.
Net income: A company's profit after all expenses, interest and taxes, the "bottom line". Divided by shares in issue it gives earnings per share.
Pip: The standard price increment in forex: 0.0001 for most pairs, 0.01 for JPY pairs. See the pip calculator.
Portfolio: The collection of investments you own, such as shares, bonds, ETFs, property and cash.
Purchasing power parity (PPP): The theory that exchange rates should adjust so that identical goods cost the same in different countries. The Big Mac index is a popular informal PPP gauge; by PPP measures the rand often looks undervalued.
RSI (Relative Strength Index): A momentum oscillator from 0 to 100. Readings above 70 are often called overbought and below 30 oversold.
Scalping: A very short-term trading style that aims to capture a few pips per trade, holding for seconds to minutes. Costs (spread, commission) matter enormously.
Sell limit / sell stop: A sell limit is an order to sell above the current price; a sell stop is an order to sell below it (often used as a stop-loss or for breakdowns).
Spread: The difference between the bid (sell) and ask (buy) price: the main cost of a forex trade.
Stock option: A contract giving the right, but not the obligation, to buy (call) or sell (put) a share at a set price before a set date. Employee share options are a form of pay.
Support and resistance: Price levels where buying (support) or selling (resistance) has repeatedly stopped a move.
Supply and demand zones: Price areas where a strong move started, which traders expect to act as support (demand) or resistance (supply) when revisited.
Swap (rollover): The overnight interest credited or charged for holding a forex position past the daily rollover, based on the interest-rate difference between the two currencies.
Swing trading: Holding trades for days to weeks to capture a "swing" in price, usually using 4-hour and daily charts.
Synergy: The extra value expected when two companies combine, through cost savings or higher sales, the usual justification for mergers.
Volatility: How much and how quickly prices move. High volatility means bigger potential profits and losses. The VIX measures expected US stock-market volatility.
Yield: The income return on an investment: a bond's interest relative to its price, or a share's dividend as a percentage of its price.

Frequently asked questions

What does leverage mean in forex?

Leverage lets you control a large position with a small deposit. At 1:100, R1,000 controls R100,000 of currency. It increases both profits and losses.

What is liquidity in forex?

How easily a currency pair can be traded without moving the price. Major pairs are highly liquid; exotics like USD/ZAR are less so.

What is a CFD in forex?

A contract for difference: you speculate on the price change of a currency pair without owning the currencies.

Trading and investing glossary

Frequently asked questions