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Dictionary

Underlying asset – an asset which underlies an option and which you actually buy and sell. The underlying asset can include a currency, commodity, stock or indices. Prices of the underlying asset and their change serve as a base for settlements between broker and a trader upon option expiry.

Bar – an element on a chart in the form a vertical line with two horizontal stripes. Length of a vertical line marks a difference between a maximum and minimum value of an asset over a certain period of time. Horizontal stripes to the left and to the right of the vertical line mark entry and exit levels over a given period of time.

Binary option – an option which generates a fixed amount of profit upon which expiry you receive a predetermined amount of money or nothing depending on the accurateness of your forecast. When you buy an option its value is deducted from your account. If an option has been successfully exercised you receive a payout.

Broker – an intermediary between a trader and a market. It is just a broker who sends trader’s assets to the market upon his request and makes it possible to earn a profit. A binary options broker is a seller of such options who offer them to buy and allows making a trade in a convenient form.

Currency market – it is the same as the Forex market where currencies are traded and exchanged. If you select one or another currency as an underlying asset then you send a part of your capital to the Forex market.

Volatility – a tendency of one or another underlying asset to change in price. Assets can have volatility at various times – therefore it is a reason to expect more or less significant price fluctuations.

Demo account – a virtual account provided for novice traders by a broker and also to finalize new trading strategies. While using a demo account you trade on the market in the real time but you don’t lose or win real money.

Trader’s deposit – funds owned by a trader which are held in his account opened with a broker. When you buy an option your funds are withdrawn from your deposit. If your option expires (in-the-money) then your payout is credited to your deposit. Funds held on deposit are the only thing which a trader runs a risk of in the course of trading. Skilful deposit management facilitates avoiding unnecessary risk.

Index – a ratio of change in prices for various assets, for example, securities. As far as indexes represent numbers which are also subject to changes then you can use them as underlying assets and buy options with the opinion that the indexes will change in one or another direction in the future.

Indicator – a set of charting elements which is constructed on a price chart or near it and can be used to predict further price changes. The specific feature of indicators is that they can send simple and clear signals (for example, intersection of two lines) which can incline traders to make a trade.

Intraday – a kind of trade which is opened and closed within one trading day. Such trades are typical for binary options traders if options have a short expiry time.

Exercising an option – it is a time predetermined at the moment of opening a trade when it becomes clear if your option expires, in-the-money or out-of-the-money.

Call – an option which allows you to receive a payout if an underlying asset price is higher in the future than its current price.

Line – a straight line connecting several “tops” and “bottoms” on a chart. The more such dots are connected by the line the more likely it is that a price line will go in the opposite direction when approaching the line in the next time.

Maximum payout – amount of money which a trader receives if his option expires, in-the-money. It is specified in advance (at the moment of opening a trade) and makes up an option value plus a trader’s payout.

Maximum loss – amount of money which a trader can lose if his option expires, out-of-the-money. On all occasions maximum loss is equal to a value of the option itself. It allows you to appreciate a risk accurately at the moment of making a trade.

Support – a line or a level below the current price level which acts as a lower barrier. Upon reaching the support level a price goes higher as a rule.

Put – an option which allows you to receive a payout if an underlying asset price is lower in the future than its current price.

Risk – ratio of potential losses and potential payout. To profit from trading in the long-run you need to appreciate the risk and not to invest in one trade an amount which loss is significant for you.

Candle pattern – a combination of several Japanese candles (or bars) which visually illustrates the latest fluctuations of a price on the market and can be used to predict where a price will go further.

Resistance

Resistance – a line or a level above the current price level which acts as an upper barrier. Upon reaching the resistance level a price goes lower as a rule.Value of an option – the sum which is deducted from a trader’s deposit at the moment of buying an option. If an option expires, in-the-money then a trader gets the option’s value back plus its payout. If an option expires, out-of-the-money then the option’s value is not given back.

Technical analysis – a way to predict future price changes based on analysis of a current chart. Since a chart incorporates many trends which are still emerging or have already emerged in the market, one can make an accurate forecast by technical analysis in many cases.

Commodity market – the market where commodities such as oil, grain and gold are sold and bought. By selecting one of these commodities as an underlying asset a trader sends a part of his funds to the commodity market.

Trading strategy – a trader’s code of practice which he follows during trading. A trading strategy incorporates signals by which trades are made and also deposit management rules and many other principles which regulate the trading process. A strategy-based trading system allows you to make your trading process more manageable, logical and profitable.

Trader – a speculator or a merchant who makes trades to profit from them directly. His main principle is to buy cheap and to sell high. A trader who buys binary options hopes to earn a profit on change in a future price against the current price.

Trading – a process of buying options. In a broader sense it is the process itself of trading on any exchange. Trading differs to playing a game of chance by certain rules and principles which, as a whole, we could call a trading strategy.

Trend – a tendency towards a rise or decrease in an underlying asset’s price which prevails in the market now. If there is no determined trend now then it is said that the market is “flat”. There may be different trends at various time frames at the same time. For example there is an uptrend (a global trend) on weekly candle charts and a downtrend on hourly candle charts (a local trend).

Deposit management – a set of rules which regulates a maximum amount of losses which you can incur in one trade. Deposit management is necessary to avoid excessive risk and to increase your deposit in the long-term.

Level – a vertical line above or below the current price. If the line connects several “tops” or “bottoms” on the price chart then there is a high probability that a price line will go in the opposite direction when approaching the level.

Trend continuation pattern – a combination of bars and candles which allows you to predict if a trend continues: for example, a price will continue to rise.

Trend reversal pattern – a combination of bars and candles which allows you to predict if a trend reverses: for example, a price will stop rising and go in the opposite direction.

Stock market – the market where shares are sold and bought. If a trader selects shares as an underlying asset then by doing so he sends a part of his funds to the stock market.

Forex – another name for the currency market.

Fundamental analysis – a method to predict future price changes based on the analysis of various financial, economic and other events in the world. It also works well on long time frames.

Price channel or flat market – a situation characterized by absence of trend in the market. It is expressed in the fact that as a rule a price moves between two levels (resistance and support levels).

Economic event – any event in the world which can affect exchange prices.

Expiration – a period of time when settlements between a broker and a trader are made. Time of expiration is determined in advance. The result depends on the price level at the moment of expiration which can be above or below the initial price level.

Japanese candle – an element on a chart in the form of a rectangle having two vertical lines at the top and at the bottom. The lines – or “shadows” – show a minimum and maximum value of an asset at the present time. If a price is higher at the closing time of the bar than at it was at opening, then the rectangle is filled in white; if lower then it is filled in black. Japanese candles are one of the most visual price charts.