Glossary of Common Terms

The Foreign Exchange market comes with what some would call its’ own language.  So, before you go any further into learning how to trade in the Forex market, it’s important that you learn and understand some of the basic terms and jargon that you will come across as you journey into the world of Forex trading.

Ask Price – The price at which the market – and your broker – will sell a specific currency pair to you is called the Ask Price.  This means that you can buy the base currency from your broker at the Ask Price.

BASE CURRENCY

The first currency listed in a currency pair is called the base currency.  It shows the value of the base currency as measured against the value of the second currency.  For example, if the USD/JPY (U.S.Dollar/Japanese Yen) rate equals .97219, the USD is worth JPY .97219.  In the Foreign Exchange market, the US dollar is typically considered the base currency for quotes.  What this means is that quotes are shown as a unit of $1 USD per the other currency quoted in the pair.  There are exceptions to this rule which include the British pound, the euro and the Australian dollar.

BEARS

Traders who may be holding short positions in anticipation of the market price going down.

Bid Price

The price at which the market – and your broker – will buy a specific currency pair from you is called the bid price.  Meaning, at the bid price, a trader can sell the base currency to their broker.

BULLS

Traders who may be holding long positions in anticipation of the market price going up

CURRENCY PAIR

The two currencies that make up a foreign exchange rate.  For example GBP/USD (British pound/US Dollar).

CURRENCY SYMBOLS

A symbol made up of three letters that represents the currency of a specific country.  For example, CAD (Canadian Dollar).

DAY TRADING

Placing and closing a trade in the same market in the same trading day.

FOREIGN EXCHANGE/FOREX/FX

The simultaneous buying and selling of currency pairs.  This global marketplace is referred to as the forex or FX market

GOING LONG

The buying of a currency with the expectation of the price increasing.

GOING SHORT

The selling of a currency with the expectation of the price decreasing.

HEDGE

A strategy used in the Forex market to minimize loss by having open trades in both the buy and sell positions.

Leverage 

Leverage is a strategic advantage used to put a trading account into a position greater than the total account margin.  For instance, if a trader has $1000 of margin and opens a $100,000 position, she leverages her account by 100 times, or 100:1.  If she opens a $200,000 position with $1,000 of margin in her account, her leverage is 200 times, or 200:1.  Increasing the leverage on your account increases both gains and losses.

Margin 

The deposit amount required to open or maintain a trading position.  Margin can be either “free” (the amount available to open new positions) or “used” (the amount that is being used to maintain an open position).

If a trading account falls below the minimum amount required to maintain an open position, the broker will issue a “margin call”.  This requires the trader to either add more money into their account or to close the open position.  Many brokers will automatically close a trade when the margin balance falls below the required amount. This amount varies depending on the broker.

OPEN POSITION

An open trade which has not been offset by an opposite and equal trade.

Pip 

Percentage in Points (PIP) is the smallest price movement increment a currency can make.

RANGE

Different from a trending market in that the price is fluctuating between a defined high price and a defined low price without breaking out of them.

REALIZED PROFIT/LOSS

The amount of money your either made or lost at the time your trade closed.

RESISTANCE

The price that acts as a ceiling, or the high price for past or future price movements.

RESISTANCE LEVELS

 A technical analysis technique that indicates a specific price ceiling at which a given exchange rate will correct itself automatically. This is opposite of support levels.

RISK MANAGEMENT

The use of specific strategies and techniques to minimize or control loss on an open trade.

Spread 

The difference between the buy price and the sell price of a currency pair.  In order to break even on a trade, it must move in the direction of the trade by an amount equal to the spread.  In a buy trade, the spread is covered in the first movements.  In a sell trade, the spread if covered in the final movements.

SUPPORT

The price that acts as a floor, or the low price for past or future price movements.

SUPPORT LEVELS

A technical analysis technique that indicates a specific price floor at which a given exchange rate will correct itself automatically.  This is opposite of resistance levels.

THE MAJOR FOREX PAIRS AND THEIR “NICKNAMES”
TRAILING STOP

Trailing stops allow a trade to continue to gain in value when the price moves in the favorable direction, but automatically closes the trade if the price suddenly moves in the opposite direction.  The trailing stop moves as the trade moves, locking in a specific amount of value in the event of a sudden change in direction.

TREND

A clear direction in which the net change in value is moving.  An upward trend is identified by higher highs and higher lows.  Conversely, a downtrend is identified by lower highs and lower lows.

VOLATILITY

Refers to market activity where prices fluctuate sharply and regularly.

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