Forex trading has its special terminology set that every trader should be aware of. For beginner traders, some forex trading terms may seem subtle. You may, for example, have heard professional traders talking about going long or trading a bearish market and wonder what they really mean in forex trading. Those are some words used by forex traders referring to a trading action, term, or market state.
The following are the common most-used forex trading terms that you need to know:
Forex trading is primarily the process of exchanging one currency for another. That is why currencies in the forex market are traded in pairs. The currency pair is a quotation for one currency against the other; known as quote currency and base currency.
Currency pairs use the abbreviation of currency and country names. For example, the USD/JPY currency pair refers to the US Dollar against the Japanese Yen.
The exchange rate is the value of a currency relative to another currency. It is the price at which one currency is being exchanged for another. For instance, if the exchange rate of the EUR/USD pair is 1.1200, this means that one euro equals $1.20, or it takes $1.20 to buy one euro.
The rise in exchange rate reflects that the base currency is appreciating against the quote currency. Similarly, the fall in exchange rate reflects that the base currency is depreciating against the quote currency.
Read more about Currency Appreciation and Depreciation and what affects exchange rates.
Bid and Ask Prices
Bid and ask indicate the price at which a currency pair or another asset can be sold or bought at the current time. The bid price is the price that the trader is willing to pay for the base currency in forex trading. While the ask price is the price that the trader is willing to receive from selling the base currency.
The ask price is always a little higher than the bid price, the difference between both is known as the spread.
The quote is the market price for buying/selling a currency pair. It is always consisting of two figures; the bid/ buying price and the ask/selling price. For instance, the quote for USD/GBP currency pair can be $0.7130/32. The first figure represents the bid price of $0.7130, while the second figure represents the ask price, and the difference between the two is the spread worth of 2 pips.
Bullish and Bearish
Markets move in three directions: up, down, or sideways. In forex terms, bull and bear are used to describe a market condition. The bullish market is when prices are rising or are expected to rise. On the other hand, the Bearish market describes falling prices or a descending price trend.
The terminology is based on how the bulls and the bears attack their prey. Bears stomp their paws on the prey pushing it downwards, while bulls thrust their prey upward.
In a bull market, traders usually buy the base currency against the quote currency. Whilst in a bear market, traders look for selling the base currency to buy the quote currency.
- Read more on Bullish and Bearish Markets: What’s the Difference?
Forex Trading Terms: Long and Short
In forex trading terms and common language, long is a position type meaning buying the asset. So, if a trader has a long position, that means buying the currency pair. Long positions are used in bullish markets where there is an ascending price trend. In long positions, the base currency is being bought while the quote currency is being sold.
Entering a short position is selling the currency pair. In contrast to long positions, short positions are used in bearish market trends when the prices are falling. In short positions, the base currency is being sold while the quote currency is being bought.
What is the Pip?
The pip is the standard measuring unit for the change of value in a currency pair. It is represented as the last decimal point in the price quote and is equivalent to one basis point. A pip stands for percentage in point or price interest point. Pips are used to calculate the profit or loss of forex trade.
One pip is displayed as $0.0001, it is one-tenth of 1% and is equal to 1 basis point. For example, if the EUR/USD Pair moves from 1.1050 to 1.1055, then it did move 5 pips.
Pipettes or fractional pips are smaller units used to precisely define fluctuations in forex rates. Every pipette is equal to a tenth of the pip. They are additional decimals, the 5th and 3rd decimals, beyond the standard of 4 and 2 decimals.
What is the Lot Size?
The lot is one of the main forex trading terms. A lot is the quantity of the traded currency pair. It is basically the standardized unit of measuring the quantity of the trade.
There are four common types of lots in Forex trading; Standard, Mini, Micro, and Nano. The standard lot size is 100,000 units of the currency pair, mini is 10,000 units, micro is 1,000 units and nano is 100 units.
What is the Forex Leverage?
The forex leverage is basically a borrowed capital from the forex broker to trade currency pairs in the forex market. Instead of trading with $100 in your trading account, with a 1:100 leverage, you can trade with $10,000. The leverage enhances the trading capacity for any forex account. It is a common trading facility offered by most brokers.
As leverage is one of the most important forex trading terms, it is essential to know that leveraged trading is a double-edged sword. That’s why it is usually advised that forex traders know how to manage leverage properly and strictly apply a risk management plan to mitigate potential losses.
Enjoy competitive forex leverage with Aximtrade, up to Infinite Leverage. AximTrade provides a leverage range that helps you choose your preferred risk level.
What are the Trading Order Types?
Trading orders are among the top forex trading terms that every trader should know. There are two main types of trading orders provided by the Metatrader or the forex broker platform. The traders usually choose to set the forex order according to several factors which include the trading strategy, the account type, leverage, and risk management.
Market orders are defined as immediate orders to buy or sell at the next available price. Essentially, market orders are executed faster but the next available price could be different the trader is monitoring on the chart. During volatile times the next available price can change much higher or lower than the prospected price by the forex trader. This is another forex trading term which is called slippage. While you are starting your first steps as a beginner, you’ll need always to remember that opening market orders during high volatility times can result in high slippage.
Limit Orders are limited types of orders which will be expected at a specified price or at a better price. It is different from market orders as they allow full control over execution price. Eventually, the downside of the limit orders is that they won’t be executed if the order price is not available at the time of execution. However, forex traders like to use limited orders to be able to execute their strategy targets effectively.
Pending orders are orders which take place according to a certain level. These orders are set to execute in the future when the price hits certain entry levels. The pending orders in forex can be controlled by certain rules such as setting an expiration date, or GTC. Initially, pending orders can be executed as limit orders or as market orders depending on the trading strategy.
Stop Loss (SL)
A Stop Loss level is a preset price level at which the trade is closed automatically. It is usually placed with a market or a pending order. This order can help in minimizing the losses if the price begins moving in the opposite direction.
Take Profit Order (TP)
A Take Profit order is used to automatically close a trade when the price reaches the targeted profit levels. On the contrary to Stop Loss, Take Profit is intended for keeping profits.
The Trailing Stop is a pending order which is automated to close a position at a certain number of pips away from the highest price reached.
Buy Stop is a pending market order which is placed above the current price to buy once the price rises above the level.
Sell Stop is a pending market order which is placed below the current price to sell once the price falls below the level.
By learning the main forex trading terms, the investor should be able to understand the different definitions and common trading language used by forex experts. There are major benefits from understanding all glossary words as they are going to be repeated in forex tutorials and online forex courses. Eventually, Forex trading has been evolving over the decades and it requires a long time to understand all trading terms. Consequently, it is always good to be patient with learning the basics of forex trading.
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