Forex Trading Terms
Familiarize yourself with common forex terms
Foreign Exchange (or forex) trading comes with its own set of trading terms and jargon. Learning these common terms is an essential first step before jumping into this industry. Don’t worry about remembering all of these terms or understanding them right away; as time goes by, you’ll become fluent in their meaning and use… so let’s dive right in.
A currency pair represents the quotation of one currency unit against another currency unit. For instance, the Euro and U.S. dollar are paired as EUR/USD. In this case, the Euro is set as the base currency, and the USD is the quote currency.
A pip can be described as the smallest price change of a currency pair. It’s short for Percentage-in-Point and is considered a measure for exchange rate movement. All currency pairs have four decimal points. One pip is equal to 0.0001. Therefore, if the currency pair EUR/USD rises from 1.2345 to 1.2346, it represents one pip movement.
A spread represents the difference between a currency pair’s ask price and bid price. For instance, in the following currency pair, EUR/USD 1.1029/1.1031, the spread is two pips. The spread represents the cost of making a trade. There are two kinds of spreads, fixed spreads, and variable spreads. Fixed spreads aren’t affected by market changes and usually retain a constant number of pips between the ask price and bid price. Variable spreads often fluctuate depending on the market’s liquidity.
To trade, a trader requires margin. A margin is the minimum amount of funds needed to trade. Margins act as collateral or a deposit when you take a ‘loan’ from your broker.
Leverage is a ‘loan’ provided to you by your broker for the sake of opening a trade position. It bolsters your trading volume, and in cases where trade is thriving, it maximizes your profits. However, as much as it can enhance profits, it can also increase losses. Therefore, risk management techniques should be utilized at all times.
The exchange rate is the ratio of one currency against another. It’s the rate at which you can trade one currency for another. Market exchange rates are a crucial data point for you as a trader as they help you know how much of a quote currency you need in order to buy one unit of a base currency.
A long position, or going long, is buying a base currency because you expect the currency rate to rise. For instance, if you expect the Euro to rise against the U.S. dollar, you buy Euros by selling U.S. dollars to make a profit.
Taking a short position, or going short, is what you do when you expect a decrease in the value of the base currency. Therefore, you sell the base currency (Euros in our above example) and buy U.S. dollars. If you are right, then you will profit from selling the Euro.
A market order is an order to sell or purchase currency immediately at the current, live price. Market orders are the most common type of trading order.
Limit Order Entry
A limit entry order is a buy/sell order that’s placed away from the current and actual market price. For instance, if the currency pair EUR/USD is currently being traded at 1.34, you can set a sell order if the price reaches 1.35. The trading platform automatically executes this order once the price reaches the order price.
Stop Loss Order
This is an advantageous order that’s recommended for every trading position you open. It’s an order you make to close your trade as soon as it reaches a certain level of loss. It’s helpful as it eliminates the chance for extra losses beyond a certain level. Stop loss orders are highly recommended for risk management purposes.
Take Profit Order
This is an exit trade order that’s set by a trader in advance. If the price meets a certain pre-set level, the position is automatically closed, and the trader can collect his/her profits up to that exact point. With this type of order, the trader ensures that he or she at least gains some profit even though there might be a possibility for additional gains.
This is the price at which you can sell a currency pair. The bid price is always lower than the ask price. In other words, it’s the price at which your broker will buy a specific currency pair from you.
The ask price is the best price offered by your broker to buy bases in return for a quote. It’s also known as the offer price and is the price at which your broker will sell a specific currency pair to you.
Now that you have the necessary terms to begin trading, all that’s needed is continuous learning, perseverance, and the ability to read the market and make informed decisions.