Forex trading vocabulary can seem like just a bunch of technical terms that don't mean anything to a beginner - but don't let that put you off. Here's our easy forex dictionary to get you up to speed with forex trading jargon so you'll understand trading terms in no time.
This blog is part of our new Make It Happen series, a series of blogs aimed at total beginners to forex: for people working a full-time job, with little capital to start off with, and limited time to learn how to trade. Sound familiar? Here’s how to get started on your trading journey.
Forex Dictionary: How to Understand Trading Jargon
Don't know your stop loss from your slippage? Don't worry - here we've compiled an easy forex glossary with definitions of the most commonly used terms, so you can feel comfortable trading. Whether you want to write flash cards and pin these to your wall, or take notes on your phone, here are the terms to memorise:
Currency pair: The currency pair is the exchange rate between two currencies. For example, EUR/USD represents how much US Dollar (USD) you need to buy one Euro (EUR), or if you prefer, how many EUR you get for one USD. Here are 5 best currencies to trade - and here's why >>
Margin trading: A highly leveraged trading form that involves borrowing money from your broker to open a trade position. Leverage allows you to trade with more funds. What is margin? Read more here >>
Leverage: Borrowed money from your broker to increase the size of your trading. If you commit only $1,000 but have $1,000,000 in buying power thanks to leverage, this is called a 100:1 ratio or a 1% margin requirement. What is leverage? Read more here >>
Technical analysis: A trading discipline used by many traders to forecast prices by studying past market data, primarily price and volume. Read more about technical analysis here. What is forex technical analysis? Read more here>>
Pips: Pips or points (as they are also known) are the smallest price increment available on the market. Most currency pairs trade within 10 to 15 pips and each pip is equal to 0.0001 price movement in the currency pair.
Spreads and the bid/ask spread: The spread is the difference between the bid and ask price and is expressed as a pip or pips. For example, if you buy British pounds versus US dollars and the bid price is 1.7265, and the ask price is 1.7275, then this would represent a spread of 10 pips.
Fundamental analysis: Fundamental analysis involves studying economic indicators, such as a country's GDP, government deficits, consumer debt levels, and inflation rate, to predict future trends in currency exchange rates. What is fundamental analysis? Read more here>>
Bar chart/candlestick patterns: Bars in a chart represent prices. A bar made up of an opening, closing, and highest/lowest prices is called a candlestick pattern chart. Candlestick patterns are not just on the daily charts but can apply to shorter time frames as well. See how to do candlestick chart analysis here>>
Lots: These are the standard size of orders for a currency pair. The number of lots you trade will depend on your chosen pip value, capital, and risk level.
Majors/minors: The Majors are the seven pairs of currencies that do the most trading in size every day. They are considered the most liquid currencies and include the USD, EUR, JPY (Yen), GBP, CHF (Swiss franc), AUD, and CAD. A minor currency pair is one that trades less often and has less volatility.
Base/quote currencies: A currency pair denotes one currency in terms of another. The first currency in the pair is the base or quote currency, while the second is known as the counter or transactions currency.
Slippage: Slippage occurs when there is a difference between the quoted and actual prices due to a price adjustment at the time of execution.
Market volatility: Market volatility measures how much the price of security ebbs and flows. Typically, stock markets will fluctuate by 1% or more in a given day. The value of a stock rises and falls over time.
Time frames: A period that the trader waits for an order to close. Typical time frames include daily, weekly, and intraday.
Stop loss: An order to sell a currency pair when it falls below a user-defined price. Traders use a stop-loss order to limit losses if the market moves against them. Here's where to set your stop loss - and why it's important>>
Takeaway profit: Profit made when you exit a trade by closing out all positions.
Abandoned baby? Whipsaw? We all know a forex glossary can include some bizarre terms - here are 10 trading terms you might not know >>
Forex Glossary: on Market Movements
Check out some critical forex dictionary terms regarding market movements:
Bearish/Bullish: A bearish market trends downwards while a bullish market increases or trends upwards.
Long/short positions: Long/short positions refer to whether a trader is bullish or bearish, respectively, on underlying currencies.
Demand zones/supply zones: The demand zone is a price level or an area in which there is an accumulation of demand for the currency. Hence a lot of people buy it and push the price towards the long term upwards. The supply zone is a region where there is an accumulation of supply, much more sellers than buyers.
Support and Resistance levels: Price levels tend to sustain at certain levels until enough selling or buying pressure moves prices through a tight channel. We call these resistance levels, and they are possible entry points for traders. Read more about trading using support and resistance here>>
Foreign Exchange Risk (FXR or FX Risk): There is always a risk of loss in forex trading. This risk is known as 'Foreign Exchange Risk' (FXR or FX Risk). This is the chance that depreciation might occur in one currency than general changes in exchange rates. FXR is the amount of funds a trader stands to lose on their open positions due to fluctuating currencies.
Swing trading vs. day trading: Swing traders hold long positions anywhere between 30 minutes to 2+ weeks. Day traders, on the other hand, tend to hold positions for a matter of minutes only. They are in-and-out of the market as often as possible. Which type of trader personality are you - and which strategy suits you best? Find out here>>
Breakout: Breakout trading strategy involves shorting a currency pair when it starts to rally through an overhead resistance level. A trader then uses a stop-loss order to protect the position by closing it out as soon as the price falls back through the resistance.
Trend: Trend refers to the price movement of a currency pair in either direction. Traders usually make profits when the price movement trend in their favour.
Hedging: Hedging consists of being long (or short) on one currency and short (or long). The purpose of hedging is to reduce the risks involved in trading a single currency by reducing price fluctuations.
Carry trade: Carry trade refers to the process of borrowing a foreign currency at a low-interest rate and investing the proceeds in a high-yielding domestic currency or vice versa.
Stay tuned for more in the Make It Happen series for practical tips on learning forex as a total beginner and getting your head in the trading game...