I'm too lazy to read, what's the TL;DR?
Whether you're in the stock market, day trading Forex, or new to cryptocurrency, you'll hear a lot of trading terms that may sound unfamiliar. FOMO, ROI, ATH, HODL, what do these all mean? Trading and investment have their own language, and it can be daunting to learn all these new terms. However, they can be quite useful if you want to keep up with what's going on in the financial markets.
In this article, we've compiled some of the most important trading terms you should know if you're trading cryptocurrency.
While not exclusively a trading term, FUD is often used in the context of the financial markets. FUD is a strategy that aims to discredit a particular company, product, or project by spreading misinformation about it. The aim is to instill fear and gain an advantage somehow. This can be a competitive or tactical advantage or profiting off a stock price decline caused by the potentially damaging news.
As you'd expect, FUD is quite common in the cryptocurrency space. In many cases, investors may enter a short position in an asset then release potentially harmful or misleading news when the position has been established. This way, large profits can be made by short selling or buying put options. They may also position themselves with over-the-counter (OTC) deals beforehand.
In many cases, the information turns out to be false, or at the very least misleading. In some cases, however, it turns out to be true. It's always good to try to consider all sides of the argument. It can be helpful to think about what incentives people can have by publicly sharing certain opinions.
FOMO is the emotion that investors feel when they flock to buy an asset in fear of missing out on the profit opportunity. As there are heavy emotions involved, FOMO by a large number of people can lead to parabolic price movements. Investors "FOMO-ing" from asset to asset in a game of musical chairs can often signal the later stages of a bull market.
If you've read our Technical Analysis (TA) mistakes article, you know that extreme market conditions can change the usual rules of the markets. When emotions are rampant, many investors may jump into positions out of FOMO. This can lead to extended moves in both directions and may trap many traders who try to counter-trade the crowd.
FOMO is also commonly used when designing social media apps. Have you ever wondered why it's usually more difficult to view posts on social media timelines in strictly chronological order? This is also related to FOMO. If users were able to check all the posts since their last login, they'd have the feeling that they've seen all the latest posts.
By deliberately mixing older and newer posts on the timeline, social media platforms aim to instill FOMO in users. This way, the users keep checking back again and again in fear that they're missing out on something important.
HODL is a term that's derived from a misspelling of "hold." It's basically the cryptocurrency equivalent of the buy and hold strategy. HODL originally appeared in a now-famous post on the BitcoinTalk forum in 2013. The term was a spelling mistake in the title: "I AM HODLING."
HODLing refers to holding on to investments despite price drops. It's also commonly used in the context of investors ("HODLers") who admittedly aren't good at short-term trading, but want to get price exposure to cryptocurrency. It may also be used for investors who have high conviction in a particular coin and intend to hold on to their investment for a longer period.
The HODLing strategy is similar to the buy and hold investment strategy coming from the traditional markets. Buy and hold investors try to find undervalued assets and hold on to them for a long time. Many investors adopt this strategy for Bitcoin.
If you've read our dollar-cost averaging (DCA) article, you know that this would have been a highly profitable strategy for Bitcoin. If you've bought just $10 of BTC every week for the last five years, you'd be up more than seven times your original investment!
BUIDL is a derivative term of HODL. It usually describes participants of the cryptocurrency industry who continue to build regardless of price fluctuations. The main idea is that true believers of the crypto industry keep building the ecosystem regardless of brutal bear markets. In this sense, "BUIDLers" genuinely care about what blockchain and cryptocurrencies can bring to the world, and they are actively working towards this goal.
BUIDL is a mindset that aims to exemplify how cryptocurrencies aren't just about speculation, but about bringing this technology to the masses. It acts as a reminder to keep our heads down and keep building the infrastructure that may very well serve billions of people in the future. In addition, BUIDLers understand that the teams that keep building with a long-term mindset will likely do well over the long-run.
SAFU originates from a meme uploaded by Bizonacci. It incorporated Binance's CEO, Changpeng Zhao (CZ), saying "funds are safe" during unscheduled platform maintenance.
The video went viral within the cryptocurrency sphere. In response, Binance has established the Secure Asset Fund for Users (SAFU), an emergency insurance fund that's funded by 10% of trading fees. These funds are stored in a separate cold wallet. The idea is that the SAFU may cover the loss of user funds in extreme cases, offering an additional blanket of protection for Binance users. This is why you might often hear the phrase "funds are safu."
Return on Investment (ROI) is a way to measure an investment's performance. ROI measures the returns of an investment relative to the original cost. It's also a convenient way to compare the performance of different investments.
Here's how you calculate ROI. You take the current value of the investment and subtract the original cost of the investment. Then you divide that number by the original cost.
ROI = Current Value - Original Cost / Original Cost
Let's say you bought Bitcoin at $6,000. The current market price of Bitcoin is now $8,000.
ROI = 8000-6000/6000
ROI = 0.33
This means that you're 33% up from your original investment. It's also worth taking into account the fees (or interest rate) that you have to pay to get a more accurate picture.
Raw numbers aren't the whole picture, however. When comparing investments, other factors are also at play. What are the risks? What is the time horizon? How liquid is the asset? Can slippage affect your purchase price? ROI isn't the ultimate metric by itself, but it's a useful tool to measure your investments' performance.
Calculating position size is crucial when thinking about investment returns. If you'd like to read about a simple formula that will help you effectively manage risk, check out How to Calculate Position Size in Trading.
We probably don't have to explain this one, do we? The All-Time High is the highest recorded price of an asset. For example, the ATH of Bitcoin during the 2017 bull market was 19,798.86 USDT on the BTC/USDT pair on Binance. This means that this was the highest price that Bitcoin was traded for on this market pair.
One compelling aspect of an asset reaching All-Time High is the idea that almost everyone who ever bought is in profit. If an asset has been in a prolonged bear market, many traders holding losing bags will likely want to exit the market when their position reaches break-even.
However, if the asset breaches its ATH, there aren’t any sellers left who are waiting to exit at break-even. This is why some refer to ATH breaches as "blue sky breakouts," as there aren't necessarily any obvious resistance areas ahead.
Does breaching the ATH mean that the price will just keep going up forever? Of course not. Traders and investors will look to take profits at some point and may set limit orders at certain price levels. This is especially true if previous All-Time High levels keep getting breached again and again.
Parabolic moves can often end up in very sharp price drops, as many investors rush to the exit once they realize the uptrend may be coming to an end. Check out the price drop after Bitcoin's parabolic move to $20,000 in December 2017.
Bitcoin drops from $20,000 to $11,000 in five days.
Breaking an All-Time Low on an asset can lead to a similar effect as when breaking the All-Time High – but in the opposite direction. Many stop orders may trigger when the previous All-Time Low is breached, leading to a sharp move down.
Since there is no price history below the previous All-Time Low, the market value can just keep going down, drifting lower and lower. Since there aren't necessarily logical points for it to stop, buying during such times is very risky.
Many traders will wait for a confirmed trend change by an important moving average or some other indicator to even consider entering a long position. Otherwise, they could end up holding the bag for a long time, trapped in a position that keeps going lower and lower.
When it comes to the financial markets, DYOR is a term closely related to Fundamental Analysis (FA). It means that investors should do their own research into their investments and not rely on others to do it for them. "Don't trust, verify" is a commonly used phrase in the cryptocurrency markets with similar meaning.
The most successful investors will do their own research and come to their own conclusions. As such, anyone who wants to be successful in the financial markets will have to come up with their own unique trading strategy. This may also lead to disagreements between different investors, which is a completely natural part of investment and trading. An investor may be bullish on an asset, while another may be bearish.
Different opinions can accommodate for different strategies, and successful traders and investors will have wildly different strategies. The main idea is that they all did their own research, came to their own conclusions, and made their investment decisions based on those conclusions.
Due diligence (DD) is somewhat related to DYOR. It refers to the investigation and care that a rational person or a business is expected to make before coming to an agreement with another party.
When rational business entities come to an agreement, it's expected that they do their due diligence on each other. Why? Any rational actor wants to ensure that there aren't any potential red flags with the deal. Otherwise, how could they compare the potential risks with the expected benefits?
The same is true for investments. When investors are scouting for potential investments, they need to do their own due diligence on the project to ensure that they can take into account all risks. Otherwise, they won't be in control of their investment decisions and may end up making the wrong choices.
Anti Money Laundering (AML) refers to a number of regulations, laws, and procedures that aim to prevent criminals from disguising their illegally obtained money as legitimate income. AML procedures make it much harder for criminals to "launder" their money clean by hiding it or disguising it as coming from legitimate sources.
Criminals will always look for ways to conceal the true source of their funds. Due to the complexity of the financial markets, there can be many different ways to do that. Derivatives products made up of derivatives products, and other complex market machinations can make tracing the true source of funds quite difficult (though not impossible).
AML regulations require financial institutions such as banks to monitor the transactions of their customers and report on suspicious activity. This way, criminals are less likely to get away with laundering illegally obtained funds.
Stock exchanges and trading platforms have to comply with national and international guidelines. For example, the New York Stock Exchange (NYSE) and the NASDAQ have to comply with regulations set by the United States government.
Know Your Customer (KYC) or Know Your Client guidelines ensure that institutions facilitating the trading of financial instruments verify their customers' identity. Why is this important? The main reason behind it is to minimize the risk of money laundering.
In addition, KYC regulations aren't only valid for participants of the financial industry. Many other segments also have to comply with these guidelines. KYC guidelines are generally a piece of a much broader Anti Money Laundering (AML) policy.
Cryptocurrency trading terms can seem a bit confusing at first. But now you know a good chunk of them, so you can feel more SAFU with all these abbreviations. Make sure to DYOR on FUD, not blindly FOMO into a coin that has reached ATH, and keep HODLing and BUIDLing!
Still eager to learn more about cryptocurrency trading terms? Check out our Q&A platform, Ask Academy, where you can get your questions answered by the Binance community.