Jul 23, 2020
Before getting started in the world of forex, every trader needs to learn the essential terminology 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.
A currency pair refers to the price difference between the 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.
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.
A spread is a 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.
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 moved 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.
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 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 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.
The bid/ask price is the best potential price that buyers and sellers wish to execute transactions. Therefore, the bid price is what the buyer wishes to pay, and the asking price is what the seller wishes to sell for.
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 is the difference between the anticipated price of a trade and the actual price that it’s executed at. It can happen at any time, but it’s most common during highly volatile periods.