Learn All The Forex Trading Terms And Lingo To Impress Your Date With This Friday!

Most Newbie forex traders make the mistake of Jumping right into forex trading blindlywithout properly investing in improving their trading skills or even gaining more trading experience, and these happen to be essential ingredients of success with online currency trading amongst a host of other things.

The least any aspiring forex trader or would be forex investor could do is to familiarize themselves with the common forex trading terms they’ll most likely come across in their day to day trading activities.

It’s no surprise that the first term we all learnt on through our forex trading journey is the ‘pip’ and rightfully so because this is going to be the standard with which we’re going to count our profits/losses, with that out of the way let’s start with the pip.

#1 Pip

A pip is the smallest price increment in a currency which is also often referred to as"tick/point" in the futures markets and stock market.

A move from 1.3356 to 1.3357 on the euro chart represents a one pip move and so,1 pip is equivalent to 0.0001 for EUR/USD and 0.01 for USD/JPY.

#2 Pip Value

The value of a pip could either be fixed or a variable depending on the currency pair.

For example, the pip value for EUR/USD is always $10 for standard lots, $1 for mini-lots and $0.10 for micro lots contract sizes.

#3 Long Positions

A long position refers to the trading position in which a trader attempts to profit from an increase in price i.e. Buy low, sell high.

#4 Short Positions

A short position refers to the trading position in which a attempts to profit from a decrease in price i.e. Sell high, buy low.

#5 Ask Price

The ask price is the price at which a forex broker/dealer is willing to sell a particular currency.

#6 Bid Price

The bid Price is the price at which a broker/dealer is willing to buy a particular currency.

#7 Bid/Ask Spread (or "Spread")

The Bid/Ask Spread refers to the distance, usually in pips, between the Bid and Ask price.

A tighter spread means lower trading cost which is a good thing for the trader.

#8 Liquidity

Liquidity is a function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provides more frequent price quotes at a smaller bid/ask spread.

#9 Offer

An offer refers to the price at which a broker/dealer is willing to sell a particular currency. Same as "Ask".

#10 Spot Foreign Exchange

Often referred to as the "interbank" market, spot foreign exchange refers to trading currencies between two counterparties, often major banks.

Trading is generally done on margin. Spot Foreign Exchange is more liquid and widely traded than currency futures, particularly by institutions and professional money managers.

#11 Stop

A stop order is simply a ‘buy at the market price only order’ when the market moves up to a specific price, or to sell at the market only when the market moves down to a specific price.

#12 Currency Pairs

A currency pair refers to the two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa.

#13 Base Currency

The Base Currency is the first currency in the pair. Also the currency your account is denominated in.

#14 Counter Currency

The Counter Currency is the second currency in the pair. Also known as the term currency.

#15 Support

A Support level is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor.

#16 Resistance

A Resistance level is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.

#17 Drawdown

Drawdown is the decline in account balance from peak to valley, measured until a new high is reached, usually reported in percentage terms.

#18 Lot

A lot is the standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro.

Some forex brokers offer the ability to trade in any unit size, down to as little as 1 unit (0.01 lots).

A Lot is also represented as volume within the Meta Trader Trading Platform in case you get a bit confused by the change in wording.

#19 Standard Forex Trading Account

A standard trading account is one with minimum contract sizes worth at least a minimum of 100, 000 units of the base currency. The pip value for EUR/USD on as standard account is $10.

#20 Mini Forex Trading Account

A Mini trading account is one where you trade mini contract sizes worth at least a minimum of 10, 000 of the base currency. The pip value for EUR/USD on as standard account is $1.

#21 Micro Forex Trading Account

A micro trading account is one where you trade micro contract sizes worth a minimum of 1,000 of the base currency. The pip value for EUR/USD on as standard account is $0.10.

#22 Margin

Margin refers to the deposit required to open or maintain a trading position. Margin could either be either "free" or "used".

#23 Margin Call

A requirement by the broker to deposit more funds in order to maintain an open position.

Sometimes a "margin call" means that the position which does not have sufficient funds on

deposit will simply be closed out by the broker. This procedure allows the client to avoid further losses or a debit account balance.

#24 Used & Free Margin

Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions.

With a $10,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $1, 000, 000. This allows you to leverage your account by up to 100 times or a leverage ratio of 100:1.

If your trading account falls below the minimum amount required to maintain your open position,

you get what is known as a margin call.

Most forex trading brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade in the first place.

#25 Leverage

Leverage refers to the ability to gear up your trading account into taking trading positions greater than your total account margin could normally afford.

Say for instance, if a trader has $1,000 of margin in his trading account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1.

A word of caution though, leverage is a double edged sword. Increasing your leverage magnifies both gains and losses.

If you ever needed to manually calculate the leverage you’re using divide the total value of your open positions by the total margin balance in your account.

For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000).

If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).

#26 Slippage

Slippage is the difference between the order price and the executed price, measured in pips.

Slippage often occurs in fast moving and volatile markets, or where there is manual execution of trades.

#27 Forex Broker

Forex brokers are usually compensated through the bid-ask spread of a currency pair.

For example, a retail forex broker might buy Euros for 1.3375 U.S. dollars and, at the same time, sell Euros for 1.3378 U.S. dollars. The spread in this case is $0.0003, or 3 pips.

If you’re trading on a standard trading account which has a pip value of $10 the spread you pay to you broker for opening this trading position on the Euro will be $30, $3 on a Mini account and $0.30 on a micro account.

It is a wise idea to test out the forex trading platform of any broker you decide to work with.

#28 Trading Platform

A forex trading platform is a type of trading software used to help currency traders with forex trading analysis and trade execution.

Currency trading platforms provide charts and order-taking methods as with trading platforms used for trading other securities like stocks or futures.

Most forex brokers allow you to open a demo trading account prior to funding a micro or a mini account. Be sure to try out each broker's software during their trial periods to helps you better decide which forex trading platform is the best for you.

#29 Forex Trading Hours

Forex Trading Hours refer to the hours during which forex market participants are able to buy, sell, exchange and speculate on currencies. The international currency market isn't dominated by a single market exchange but involves a global network of exchanges and brokers around the world.

The forex market is open 24 hours a day, five days a week. The International currency market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors around the world. Because this market operates in multiple time zones, it can be accessed at almost any time.

New York 8am to 5pm EST

Tokyo 7pm to 4am EST

Sydney 5pm to 2am EST

London 3am to 12 noon EST

The highest volume of trades occurs at times when the major financial centers overlap.

#30 Commodity Pairs

Although there are many countries with large natural and commodity reserves, such as Russia, Saudi Arabia and Venezuela, the commodities of many of these nations are usually highly regulated by their domestic governments or thinly traded.

The Canadian, Australian and New Zealand dollars are traded at high volumes and are therefore very liquid in the forex market and as are result the USDCAD, AUDUSD and NZDUSD are popularly referred to as the commodity pairs.

#31 Cross Rates

Cross rates refer to the exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in.

This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.

if an exchange rate between the Euro and the Japanese Yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the euro or the yen is the standard currency of the U.S. However, if the exchange rate between the euro and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.

All forex trading involves the simultaneous buying of one currency and selling of another, the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. When you buy a currency pair, you buy the base currency and sell the quote currency.

The bid price (buy price) represents how much of the quote currency is needed for you to get one unit of the base currency.

Conversely, when you sell a currency pair, you sell the base currency and receive the

quote currency. The ask price (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency.

For example, if the EURUSD currency pair is quoted as being EURUSD = 1/1.5 and you

purchase the pair, this means that for every 1.5 Euros that you sell, you purchase

(receive) US$1. If you sold the currency pair, you would receive 1.5 Euros

for every US$1 you sell.

#32 Exchange Rates

The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.32.

The exchange rate also account quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency.

The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.

#33 Market Order

A Market order is an order to buy or sell at the current market price.

#34 Limit Order

A limit order is an order to buy or sell at a pre-specified price level.

#35 Stop-Loss Order

A Stop loss order is an order to restrict losses at a pre-specified price level.

#36 Limit Entry Order

A Limit entry order is an order to buy below the market or sell above the market at a pre-specified level, believing that the price will reverse direction from that point.

#37 Stop – Entry Order

A Stop entry order is an order to buy above the market or sell below the market at a pre-specified level, believing that the price will continue in the same direction.

#38 OCO Order

An OCO or One Cancels Other is an order whereby if one is executed, the other one is cancelled.

#39 GTC Order

A GTC or Good Till Cancelled is an order that stays in the market until it is either filled or cancelled.

Currency Pairs and Their Respective Nicknames Terminology

EUR/USD = "Euro"

USD/JPY = "Dollar Yen"

GBP/USD = "Cable" or "Sterling"

USD/CHF = "Swissy"

USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")

AUD/USD = "Aussie Dollar"

NZD/USD = "Kiwi"

#41 Market Maker

A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price.

A market maker takes the opposite side of your trade and has the option of either holding that position or partially or fully offsetting it with other market participants, managing their aggregate exposure to their clients.

If a market maker chooses to keep the trader's position without offsetting it in the market, the trader's profit is the market maker's loss and vice versa, leading to a possible conflict of interest between the trader and his market maker.

A market maker earns their commission from the spread between the bid and offer price.

#42 Forex ECN Broker

ECN is an acronym for Electronic Communications Network. A Forex ECN broker does not have a dealing desk but instead provides a marketplace where multiple market makers, banks and traders can enter in competing bids and offers into the platform and have their trades filled by multiple liquidity providers in an anonymous trading environment.

The trades are done in the name of your ECN broker, thereby providing you with complete anonymity. A trader might have their buy order filled by liquidity provider "A", and close the same order against liquidity provider "B", or have their trade matched internally by the bid or offer of another trader.

The best bid and offer is displayed to the trader along with the market depth which is the combined volume available at each price. A greater number of marketplace participants providing pricing to the ECN broker leads to tighter spreads. ECN's typically charge a small fee for matching trades between their clients and liquidity providers.

#43 Limit Order

A Limit order is an order to buy at a specified price when the market moves down to that price, or to sell at a specified price when the market moves up to that price.

You might want to bookmark this page for reference whenever you find yourself trying to understand the meaning of some forex trading terms.

Hope you found this article helpful and most importantly I hope you take it as a nudge to settling your dilemmas of whether you should or should not trade the forex.

Don’t forget to share it with your friends.

I’ll be looking forward to your questions and comments. 

Cheers…

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