Foreign exchange, also referred to as Forex and FX, means the exchange of one currency for another, e.g., USD/JPY (US Dollar – Japanese Yen), EUR/USD (Euro – US Dollar), and GBP/USD (British Pound – US Dollar). Like every other profession with its terminologies, so in the Forex market. Understanding these basic forex terminologies can be pretty complex, especially if you are new to trading Forex.
Knowing the trends and common terms used in the Forex market is essential for thoughtful and effective trading. Understanding these terminologies is the first step toward developing your trading strategy.
Here are 25 common terminologies you must know before you start trading Forex; otherwise, you risk continuing to be mediocre.
25 Basic Forex Terminologies You Must Know As a Newbie Trader
When Forex traders discuss profits or losses, they often use the term “pips.” A pip stands for “Percentage In Point.” It represents the smallest increase that an exchange rate can move up or down.
Typically, one pip equals the fourth decimal of most currency pairs, i.e., a single pip equals 0.0001. For instance, if EUR/USD is presently trading at 1.1558 and increases to 1.1562, that increment would equal a change of 4 pips.
However, note that some currency pairs have pips situated at the second decimal place, mostly Yen pairs. For example, if USD/JPY presently trades at 110.25 and falls to 110.10, that fall would equal a change of 15 pips.
2. Exchange Rate
The Exchange Rate implies the rate at which you exchange one currency for another. This shows you how much of the quote currency you need to buy 1 unit of the base currency.
A currency pair exchange rate is what all traders follow. Often, the exchange rate is called the Price because it shows the base currency price expressed in the counter-currency terms.
For instance, if the exchange rate of EUR/USD is 1.15, one euro is $1.15, or you need $1.15 to buy one euro or EUR/USD = 1.3115.
An increase in currency pair exchange rate shows that the currency base is rising against the counter-currency or that the counter-currency is falling in contrast to the currency base. Also, an exchange rate reduction signifies that the currency base is dropping against the counter-currency or the counter-currency is rising against the currency base.
Leverage is the ratio that states the amount of loan, mostly called “margin,” that traders can use to access more significant amounts of trading capital. Leverage should be wisely used as it can increase profits and losses. Because of leverage, Forex providers such as HotForex have severe leverage restrictions to help traders minimize risk.
The Forex market is open around the time and offers traders the opportunity to earn profit not only on prices increment but also on prices reduction.
Leverage trading allows traders to open a much more prominent position than their original trading account size would otherwise allow. As a result, the Forex market is known for enormously high leverage ratios offered by retail brokers.
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4. Technical Analysis
Technical analysis is where a trader forecasts what will happen to the market based on historical charts analyses. Technical traders analyze price movements believing price reflects valid evidence; support and resistance trading play a significant role in this kind of trading analysis.
Support and resistance are one of the most significant notions in technical analysis. The markets are made of several people who speculate, trade, hedge, invest or gamble in the markets. Traders remember certain price levels where the price encountered problems and couldn’t drop further.
Therefore, they place their buy orders around those levels because they believe the price will increase, anticipating a bull market. This is how support levels are created. Simply put, a support level is a previous low at which the price has a higher chance to retrace and move up.
Resistance is the direct opposite of support. While support levels are based on former lows, resistance levels follow past highs when the price experienced difficulties breaking the high.
Traders keep those levels in mind and place their sell orders around them because they believe those levels will offer sales pressure and move the price down again. Since fresh memory is more significant than old one, current support and resistance levels often rank higher than old support and resistance levels.
Forex market upcoming contracts always have a fixed size. For instance, US dollar contracts may be available in lots of $5000. Therefore every $5000 contract is known as a lot. Hence, to buy 25,000 USD later, you must purchase 5 lots. Different currencies have different lot sizes.
FOMO stands for “Fear of Missing Out.” It refers to when traders feel missing out on good trade opportunities. As a result, FOMO can make traders enter the market too soon or at the wrong time.
This is called the nominator or top number in the currency pair. Simply put, a Base is the first currency in a currency pair. For instance, when trading the USD/CAD pair, the USD is known as the Base.
The Quote is the price of one currency in terms of the other. It’s the second currency in a currency pair, also known as the bottom number or denominator. Therefore, when trading USD/CAD, the CAD is said to be the Quote.
11. Bid / Ask Price
These prices are shown on the left-hand side of MT4 in the “Market Watch” section. The bid price refers to the price a trader wants to sell a currency pair, and the asking price refers to the price a trader wants to purchase a currency pair. The difference between both prices is known as “The Spread.”
12. Going Long / Short
When trading Forex, a long position (buy) refers to an asset purchase with the hope that its market value is about to rise, while a short position (sell) refers to the sale of an asset with the belief that its market value is set to drop.
Sometimes if you’re trading Forex, you’ll notice a slight difference between your expected price and the performance price (the price when the trade is executed). When this occurs, it’s referred to as slippage. Slippage in trading can work either positively or negatively. The main motives for slippage are market unpredictability and speed performance.
Margin is the opening capital a trader needs to open a position. Also, margin allows a trader to open a more significant position size. Therefore, a margin can be considered the minimum collateral or deposit required to trade.
It is the variation in pips between the buying price (Bid) and selling price (Ask). For example: Look at this pair quotation (EUR/USD 1.1031/1.1033). The Spread, in this case, is – 2 pips; the selling price of this pair is 1.1031, while the buying price is 1.1033. then the Spread is 1.1031minus 1.1033 = 0.0002
There are two forms of Spread, Fixed spreads and variable spreads. Fixed spreads retain the same number of pips between the ask and bid price and are unaffected by market fluctuations. On the other hand, variable spreads fluctuate (i.e., rise or fall) according to the market liquidity.
16. Bull / Bear
A bull is a trader who believes the market will go up. Such markets are regarded as bullish markets. Technically, it is a market condition when the price of the base currency is consistently increasing over the quote currency. The direct opposite of this market condition is regarded as a bearish market, and traders in such positions are called Bears.
17. Day Trading
Day trading is a trading style where one trades full-time daily by basically opening positions in the morning and closing them at the end of the day
18. Swing Trading
Swing trading is considered to be the opposite of day trading. Swing trading involves opening a position and leaving it open for days, weeks, or months before closing it.
CFD is the acronym for Contract for Difference. Currently, the most common way people trade Forex is CFD forex trading. When trading CFDs, you typically contract to purchase an asset at a specific price. Technically, you never own the asset.
Confluence is defined as where two points meet. It’s an excellent thing to look for when trading Forex. For instance, when two signals indicate that you should make a trade, it can be described as confluence. Because you have two or more signs to trade, ultimately, it increases your odds of success.
21. Profit Target
A profit target is a rate at which you want to take your profit and leave the market. It is mainly determined before a trader enters a position. Meaning before you enter a trade, you already know how much profit you will earn on that trade if it goes well.
22. Risk To Reward Ratio
The risk-to-reward ratio is, in essence, the ratio of the rate you risk on every single trade to the amount you realize if you execute a favorable trade or when the odds go in your favor.
So, if you risk $10, then this is the amount of money you are ready to lose. On the other hand, if your profit target is $30, this is the reward you are looking for and believe is attainable based on your analysis. Therefore, the risk-to-reward ratio is 1:3 since you risk $10 to gain $30.
Scalping is a trading style where scalpers use relatively small price fluctuations by opening and closing large amounts of trades in a single trading day to catch numerous small wins. Scalping is a sophisticated type of trading where a trader opens and closes many trades rapidly. It is highly risky.
Equity is the total amount of money in your trading account, including your profit and losses. For example, if you deposit USD 10,000 into your account and make a profit of USD 3,000, your total equity is USD 13,000.
25. Stop Loss
A stop-loss order is a risk management tool allowing a position to be closed once it gets to a particular pre-set price to protect against further losses on an open position.
Simply put, a stop-loss is a tool for trading Forex that allows you to exit a position. If the price gets too low, you will take a risk.
Conclusion On The Basic Forex Terminologies For Newbie Forex Traders
As you have read, there are several basic forex terminologies and acronyms to familiarize yourself with while trading Forex. Trading Forex can be an intricate beast to tame, but with the right gears and knowledge, we can continue to develop as traders.
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