Forex Trading Terms
In order to become a successful Forex trader, is important to remain up to date with Forex news and Forex terminology that will help you with your trading.
First you need to know the basics of foreign exchange. Understanding the basics is the first step towards your own trading strategy. Therefore, you should familiarize yourself with some common foreign exchange terms.
Basic Forex Trading Terms
Here is the list that you will come across quite often in the Forex Industry:
Pip: Pip is an acronym for “Percentage in Point”. The movement in the exchange rate is measured by pips.
In most forex pairs a pip is a movement in the fourth decimal place (0.0001) so it is equivalent to 1/100 of 1%. However, in currency pairs that includes a Japanese Yen a pip is quoted with two decimal places instead of four, hence the second digit after the decimal point is the pip.
Bid: Is the highest price a buyer in the market is willing to pay. The value of the underlying currency pair affects the Bid price.
Ask: Is the lowest price a seller will sell the currency pair. The value of underlying currency pair affects the sell price as well as in bid.
Spread: Is the difference between the Buy/Sell (Bid/Ask) prices that are offered on the trading platform. For example, some forex broker usually promotes lower spreads which means that traders can be benefited from smaller differences between the Buy and Sell price.
Base: The first currency in a currency pair, often referred to as the nominator. When you trade the USD/EUR pair, the USD is the Base.
Quote: The second currency in a currency pair, often referred to as the denominator. When you trade the USD/EUR pair, the EUR is the Quote.
Leverage: The leverage is when you are using borrowed money to invest. It allows you to trader larger amounts with less capital. For instance, a leverage of 1:50 means that you could use an initial margin of $200 to open a trade valued at $10,000. Using leverage can maximize profits bit also losses.
Additionally, you will also find the following Forex terms on trading platforms. These terms can help you in building your trading strategy.
Stop loss order: A market order used to close a losing position once it has reached a certain level.
Close at profit order: This feature allows you to set a specific rate at which your position will close at a certain level, in order to protect your profit.
Fundamental analysis: This kind of analysis is based on economic and political news to expect which way a currency pair will move.
Technical analysis: This kind of analysis is based on chart patterns of previous performance, to expect which way a currency pair will move.
Major pairs: This is a list of the most traded pairs of currencies around the world.
Minor pairs: These are pairs that do not include the U.S dollar, however they include at least of other three major currencies.
Cross Currency pairs: They do not include U.S dollar. But they include Euro to Pound (EUR/GBP), Euro to Swiss Franc (EUR/CHF) and Australian dollar to Japanese Yen (AUD/JPY).
Conclusion
These are some of the basic terms that you need to understand before starting your journey in forex industry. There are many other terms which some of them will be more relevant to you that others. This depends on the currency pair you deal with what type of trades you are executing.
