Essential Forex Trading Terminologies
Essential Forex Trading Terminologies
The Forex market comes with its very own set of terms and jargon. Before you go any deeper into learning how to trade the FX market, you must understand some of the basic Forex terminologies you will encounter on your trading journey
Currency: Any form of money issued by a government or central bank and used as legal tender and a basis for trade.
Currency pair: The two currencies that make up a foreign exchange rate. For example, EUR/USD (Euro/U.S. Dollar).
Pips: The smallest unit of price for any foreign currency, pips refer to digits added to or subtracted from the fourth decimal place, i.e., 0.0001.
Leverage: Also known as margin, this is the percentage or fractional increase you can trade from the amount of capital you have available. It allows traders to trade notional values far higher than the capital they have. For example, leverage of 100:1 means you can trade a notional value 100 times greater than your trading account’s capital.
Market order: An order to buy or sell at the current price.
Limits/limit order: An order that seeks to buy at lower levels than the current market or sell at higher levels than the current market. A limit order sets restrictions on the maximum price to be paid or the minimum price to be received. For example, if the current price of USD/JPY is 117.00/05, then a limit order to buy USD would be at a price below the current market, e.g., 116.50.
Long position: A position that appreciates in value if market price increases. When the base currency in the pair is bought, the position is said to belong. This position is taken with the expectation that the market will rise.
Short position: An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.
Slippage: The difference between the price that was requested and the price obtained typically due to changing market conditions.
Margin call: A request from a broker or dealer for additional funds or other collateral on a position that has moved against the customer.
Base currency: The first currency in a currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF (US Dollar/Swiss Franc) rate equals 1.6215, then one USD is worth CHF 1.6215. In the forex market, the US dollar is normally considered the base currency for quotes, meaning that quotes are expressed as a $1 USD unit per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro, and the Australian dollar.
Spread: The difference between the bid and offer prices.
Bid price: The price at which the market is prepared to buy a product. Prices are quoted two-way as Bid/Ask. In FX trading, the bid represents the price at which a trader can sell the base currency, shown to the left in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Bid price is 1.4527, meaning you can sell one US Dollar for 1.4527 Swiss francs. In CFD trading, the Bid also represents the price at which a trader can sell the product. For example, in the quote for UK OIL 111.13/111.16, the Bid price is £111.13 for one unit of the underlying market.
Bid/ask spread: The difference between the bid and the ask (offer) price.
Ask (offer) price: The price at which the market is prepared to sell a product. Prices are quoted two-way as Bid/Ask. The Ask price is also known as the offer.
In FX trading, the Ask represents the price at which a trader can buy the base currency, shown to the left in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Ask price is 1.4532, meaning you can buy one US dollar for 1.4532 Swiss francs.
Sell: Taking a short position in the expectation that the market is going to go down.
Buy: Taking a long position on a product.
Stop-loss order: This is an order placed to sell below the current price (to close a long position) or buy above the current price (to close a short position). Stop-loss orders are an important risk management tool. By setting stop-loss orders against open positions, you can limit your potential downside should the market move against you. Remember that stop orders do not guarantee your execution price – a stop order is triggered once the stop level is reached and executed at the next available price.
Stop order: A stop order is an order to buy or sell once a pre-defined price is reached. When the price is reached, the stop order becomes a market order and is executed at the best available price. It is important to remember that stop orders can be affected by market gaps and slippage and will not necessarily be executed at the stop level if the market does not trade at this price. A stop order will be filled at the next available price once the stop level has been reached. Placing contingent orders may not necessarily limit your losses.
Support: A price that acts as a floor for past or future price movements.
Support levels: A technique used in technical analysis indicating a specific price ceiling and floor at which a given exchange rate will automatically correct itself—opposite of resistance.
Resistance level: A price that may act as a ceiling. The opposite of support.
Swap: A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.