Forex Terminology: 20 Most Important Forex Terms To Remember

Jul 23, 2020

Before getting started in the world of forex, every trader needs to learn some essential terms that will help them execute their strategies better. Without knowing the ‘FX lingo’, it’s very hard to learn about trading and fully comprehend how it works. Below we have twenty of the most important forex words to remember, regardless if you are a new or seasoned trader.

The forex market is by far the biggest and most lucrative financial market in the world.

Currency Pairs

A currency pair refers to the price difference between two currencies. A currency cannot be traded on its own, therefore the value of one is quoted against another.  Currency pairs are traded on the forex exchange market which is by far the biggest and most liquid financial market in the world. The EUR/USD currency pair is considered the most liquid currency pair in the world and the USD/JPY is the second most popular currency pair in the world.

Exchange Rate

The exchange rate refers to one country’s currency against another country’s currency. Exchange rates are usually free-floating which means their value will fluctuate based on supply and demand.

Spread

A spread is the difference between two prices. In other words, it is the gap between the selling position and the buying position of a financial instrument. Spreads are important to traders as they indicate the primary cost of trading assets. Traders can calculate costs to maximize their profits.

Pip

A ‘pip’ stands for ‘Point in Percentage’. It is a unit of measurement that is used by traders to classify the smallest change in value between currencies.  It is represented by a single-digit move to the 4th decimal place in a forex quote. Should the price of EUR/USD move from 1.1302 to 1.1303 it’s a one pip movement. Pip value is calculated by multiplying one pip by a certain lot or contract size.

Lot

A ‘lot’ represents a consistent number of units in a financial instrument that is established by a regulator. For example, most stock trades will trade in lot sizes of 100 shares. Forex is traded in either micro, mini or standard lots. Each market establishes its own lot size.

Leverage

Leverage is an investment strategy that refers to using borrowed funds when trading in order to amplify returns. It helps traders increase their buying power in the market, but it also amplifies risk.  Leverage is a complex tool that new traders should use with care.

Margin

Margin refers to the sum of money that a trader needs to put down in order to trade, so when trading forex on margin you only need to pay a percentage of the total value of the position. It is not a transaction cost.

Bid/Ask Price

The bid/ask price is the best potential price that buyers and sellers are wishing to execute transactions in. Therefore, the bid price is what the buyer wishes to pay and the ask price is what the seller is wishing to sell for.

Going Long/Short

A long position (or “going long”) is when an investor or trader purchases a commodity, security or currency with the expectation that its value will increase. The investor or trader expects to benefit from this kind of purchase.

A short position (“or going short”) is when an investor or trader sells a commodity, security or currency with the expectation that its value will decrease.

Slippage

Slippage is the difference between the anticipated price of a trade and the actual price that it’s executed at. Slippage can happen at any time, but it’s most common during highly volatile periods.

 

Bears/Bulls

‘Bears’ and ‘bulls’ refers to market conditions and the direction that the market is heading. A bear market is when investors are pessimistic about a security, currency or commodity and expect it to decline in the near future. Bearish investors may take advantage of such conditions and attempt to profit from the declining prices by selling their assets.

A bull market is when investors believe that the value of an asset will increase in value, therefore they will proceed to buy it. Bulls are investors who believe that the country’s economy will continue in an upward trend.

Hedging

Hedging is a risk management technique used by investors to eliminate risk. Hedging involves various techniques that investors use to protect their portfolio.

Market Maker

A market maker (also commonly referred to as an MM) is a broker or individual that actively quotes two-sided markets in an asset. Market makers provide ‘bids’ and ‘asks’ as well as the market size of each.

Spot Price

The spot price is the current price of an asset. This means it can be immediately purchased for that amount of money. The spot value is commonly used to when referring to the price of futures, particularly commodity futures like gold, oil, coffee, etc.

Technical Analysis

Technical analysis is a trading technique that focuses on historical data to evaluate trading opportunities. Technical analysts follow past trading activity as well as price fluctuations and base their future actions on those movements

Fundamental Analysis

Fundamental analysis is a trading method that measures an asset’s intrinsic value based on the company’s financial reports and other financial factors. Fundamental analysts will focus on both macro and microeconomic factors in order to determine an asset’s fair value on the market.

Trailing Stop

A trailing stop locks profits and limits losses when a trade’s price moves favorably. It is essentially a modification of a standard stop order and is defined either as a percentage usually.

Volatility

Volatility is a statistical measure that measures how excessive an asset’s price fluctuations are. Assets that are highly volatile tend to be considered riskier than less volatile assets since it’s price becomes unpredictable.

Momentum

Momentum refers to how fast an asset’s price or volume accelerates. Based a security’s momentum, traders can decide whether they wish to take a short or long position.

Day Trading

Day trading is a technique that traders use to profit from price changes in an asset. This may be through scalping, which refers to making numerous small profits throughout the day on minor price fluctuations, new-based trading based on volatility caused by global news and also range and high-frequency trading.

Risk Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to the leverage on offer. Between 65 and 89% of retail traders lose money when trading CFDs. It is recommended that you do not invest money you cannot afford to lose in order to avoid any significant financial distress in case of loss.

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