Trading on the forex (foreign exchange) market comes with a whole new glossary of terms that are unique to financial trading. Make navigating the forex market easier by learning the following forex trading terms and applying them appropriately.
Currency Pair
Let’s start with a currency pair. In forex trading, currencies are traded in pairs, which consist of two currencies, where the value of one currency is quoted against the value of another currency. For example, EUR/USD, JPY/ZAR, and GBP/USD are all examples of currency pairs. You get Major Pairs, Minor Pairs, and Exotic Pairs.
Bid Price
The bid price is the price at which the market is willing to buy a currency pair. It is the price at which traders can sell the base currency, which is the first currency in the currency pair.
Ask Price
The ask price is the price at which the market is willing to sell a currency pair. It is the price at which traders can buy the base currency.
Spread
The spread is the difference between the bid price and the ask price of a currency pair. It represents the cost of trading and is typically measured in pips. You get fixed spreads and variable spreads.
Pip
Pip stands for “percentage in point” or “price interest point”. It is the smallest price movement that a currency exchange rate can make. Most currency pairs are quoted to four decimal places, so a pip is equal to 0.0001.
Lot Size
Lot size refers to the volume or quantity of currency traded in a forex transaction. Standard lot sizes are 100,000 units of the base currency. There are also smaller lot sizes such as mini lots (10,000 units) and micro lots (1,000 units). Choose your lot size wisely.
Leverage
Leverage, provided by brokers, allows traders to control a larger position size with a smaller amount of capital. It is expressed as a ratio, such as 30:1, 100:1, or 200:1. While leverage can amplify potential profits, it also increases the potential for losses so apply risk management when using leverage.
Risk Management
Risk management involves identifying, assessing, and mitigating potential risks to protect your capital and maximise returns. It involves Stop Loss Orders, Take Profit Orders, and Risk-Reward Ratios to name but a few.
Stop Loss
As mentioned, a stop-loss order is a risk management tool used to limit losses on a trade. It is an order placed with a broker to sell a certain currency when it reaches a certain price level.
Take Profit
And then a take-profit order is an order placed with a broker to automatically close a position once it reaches a certain profit level. It allows you to lock in profits and avoid potential losses from market reversals.
Margin
Margin is the amount of money required to open and maintain a leveraged trading position, it is like a security deposit. Margin requirements vary depending on the broker and the currency pair being traded.
These are some of your basic, yet fundamental, forex trading terms that are important to know and implement correctly. It is important to continue your forex education, making use of the many free resources available.
