> ## Documentation Index
> Fetch the complete documentation index at: https://docs.openstrat.ai/llms.txt
> Use this file to discover all available pages before exploring further.

# Basic Terminology

> Master the core concepts in trading: long/short, leverage, margin, spread, and more

## Long/Short Concepts

Long and short are fundamental terms used to describe directional market views.

### Going Long (Long)

**Definition**: Buy an asset, expecting to sell later at a higher price for a profit.

**Characteristics**:

* Traditional investing approach
* Theoretical profit is unlimited
* Maximum loss is limited to the invested principal
* Suited for uptrends

**Example**: Buy a stock at 100 and sell at 120, earning a profit of 20.

### Going Short (Short)

**Definition**: Borrow and sell an asset first, expecting to buy it back later at a lower price to return it, profiting from the difference.

**Characteristics**:

* Requires borrowing shares or using derivatives
* Theoretical profit is limited (max 100%)
* Theoretical loss is unlimited
* Suited for downtrends

**Example**: Borrow a stock and sell at 100, buy back at 80 to return it, earning a profit of 20.

## Leverage

Leverage is a mechanism that uses borrowed funds to increase the size of an investment position.

### Leverage Ratio

* **Definition**: The ratio of total investment amount to your own capital
* **Calculation**: Leverage ratio = Total position value ÷ Own capital
* **Example**: Using 10,000 to control a 100,000 position implies 10× leverage

### The Double-Edged Sword Effect of Leverage

| Scenario         | No Leverage (1×)   | 10× Leverage                    |
| ---------------- | ------------------ | ------------------------------- |
| Principal        | 10,000             | 10,000                          |
| Controlled asset | 10,000             | 100,000                         |
| Price rises 10%  | Profit 1,000 (10%) | Profit 10,000 (100%)            |
| Price falls 10%  | Loss 1,000 (10%)   | Loss 10,000 (100%, liquidation) |

### Usage Suggestions

* Beginners should avoid high leverage
* Strictly control position sizing
* Set stop-loss levels
* Maintain sufficient margin

## Margin

Margin is the capital you must post when trading with leverage.

### Types of Margin

**Initial Margin**

* The minimum funds required to open a position
* Usually 5%–20% of contract value
* Requirements vary by instrument

**Maintenance Margin**

* The minimum funds required to keep a position open
* Usually 50%–75% of the initial margin
* Falling below this level triggers a margin call

### Margin Calculation Example

```text theme={null}
Contract value: 100,000
Initial margin rate: 10%
Required initial margin: 10,000
Maintenance margin (75%): 7,500
```

### Margin Call

When account equity falls below the maintenance margin requirement:

1. You receive a margin call notice
2. You must add funds or reduce the position
3. Otherwise, the position may be forcibly liquidated

## Spread

The spread is the difference between the bid price and the ask price.

### Why Spreads Matter

* **Trading cost**: The spread is an implicit transaction cost
* **Liquidity indicator**: Smaller spreads usually mean better liquidity
* **Market efficiency**: Mature markets tend to have smaller spreads

### Typical Spread Characteristics Across Markets

| Market           | Typical spread | Key drivers                |
| ---------------- | -------------- | -------------------------- |
| Major FX pairs   | 0.1–3 pips     | liquidity, trading session |
| Large-cap stocks | 0.01%–0.05%    | volume, volatility         |
| Small-cap stocks | 0.5%–2%        | low liquidity              |
| Crypto           | 0.1%–0.5%      | exchange, asset            |

### Calculating the Spread

**FX market**:

* EUR/USD quote: 1.1000/1.1002
* Spread: 2 pips
* Cost for 1 standard lot (100,000 units): \$20

**Stock market**:

* Bid: 100.00
* Ask: 100.02
* Spread: 0.02 (0.02%)

## Other Important Terms

### Position

* **Definition**: The investment exposure you hold
* **Types**: long position, short position, closed position
* **Management**: Position size determines risk exposure

### Pip Value

* **Definition**: The value of the smallest price movement
* **FX**: typically the fourth decimal place
* **Calculation**: Pip value = Contract size × Minimum price increment

### Slippage

* **Definition**: The difference between the expected price and the actual execution price
* **Causes**: market volatility, insufficient liquidity
* **Impact**: increases trading costs

### Swap (Overnight Interest)

* **Definition**: The interest differential incurred when holding a position overnight
* **Calculation**: based on the interest rate difference between two currencies
* **Impact**: an important cost for long-term positions

## Practical Tips

### Notes for Beginners

1. **Start small**: Use small capital to get familiar with concepts
2. **Paper trading**: Practice first in a demo account
3. **Learn gradually**: Don’t rush to use every tool
4. **Risk first**: Understanding risk matters more than chasing returns

### Common Misconceptions

* **Myth 1**: Higher leverage is always better

  * **Reality**: Higher leverage means higher risk
* **Myth 2**: Spreads don’t matter

  * **Reality**: For frequent trading, spread costs add up significantly
* **Myth 3**: Margin is a cost

  * **Reality**: Margin is collateral and is returned after closing the position

## Summary

These basic terms are the universal language of trading. Understanding them deeply not only helps you read analysis reports, but more importantly enables you to:

* Accurately assess transaction costs
* Use leverage tools appropriately
* Manage capital risk effectively
* Make rational trading decisions

Remember: professional trading starts with a solid grasp of the fundamentals.