Being familiarized with major terms used in Forex trading will form feedback you may constantly refer back to. To prevent you from browsing dozens of websites and glossaries, we have put all the baseline Forex trading terms in a single article. The explanations are provided in the most newbies-friendly manner. All you need is to learn everything you can and get going.
Baseline Terms Used in Forex Trading
Most beginners think that the financial market is nothing but a wonderland where everyone gets a chance to grab a piece of a pie. Well, that is not the way it works. Forex is a marketplace that strict financial and economic paradigms.
It is a kind of science featuring its unique rules, terms, and techniques used to generate revenues. Mastering those techniques is impossible without the learning curve like in any other science. Knowing the basic terms of Forex trading will prevent you from feeling stranded once you have entered the trading platform.
Beginner Forex Trading Terms
To make a good and hassle-free start, you need to learn at last the following:
- Currency Pair – a term used when buying and selling one currency concerning another;
- Bid – the price trader is eager to BUY a certain instrument;
- Ask - the price trader is eager to SELL a certain instrument;
- Pip – the smallest price movement in percentage;
- Spread – the difference between the Bid and Ask.
Now, let's have a closer look at all of the above-mentioned terminologies in forex trading.
It is actually the first terminology you will be introduced to when trading for the first time. The term refers to the process of trading currencies. It means that a trader buys and sells one currency about another.
Example: let's say you have a certain amount of USD. You want to buy EUR with a certain amount of dollars you have. So, this is actually a currency pair of EUR/USD. The first one (EUR) refers to the currency you want to buy. It is also known as the base currency. The second one (USD) refers to the one you have. It is called the quote currency. When buying an asset, you will need to spend the amount of quote currency needed to cover the value of 1 base currency.
The key goal is to "catch" the best possible price to buy or sell an asset. When it comes to buying, bid refers to that ultimate price tag every trader is waiting for. When we say "the best", we mean the highest price a trader is ready to pay.
Unlike the bid, Ask is the best possible price tag to sell an asset. As a result, when we say "the ask price", we mean the lowest cost of the asset a broker is aimed to sell.
Get $5000 from us when opening demo account now. Practice trading any strategy with real market conditions on on our free demo account with $5000 on it!
The term used to describe the lowest price movement. When we use this term in reference to a particular currency pair or asset cost, we mean the 4th decimal place.
Example: let's say you want to trade the EUR/USD pair with the starting price at 5.0031. That it goes up and reaches the level of 5.0036. It means that the price has increased by 5 pips (36 – 31 = 5).
The spread is the difference between the bid and ask price. The higher that difference is the higher revenue a broker gets.
Important Terms in Forex Trading Process
Now, we have learned enough to get involved in the trading process. The following terms used in Forex trading are generally used under real-life trading conditions. You will need them to launch the process and start trading.
In this particular section, we will explain Forex terminology that refers to opening and closing positions. Once a trader has entered the market with the aim of buying or selling an asset, the position has been opened. If you want to leave the market, you close the position. The key trading terms here are:
- Entry – the process of engaging with the broker when selling or buying assets;
- Exit – the process of closing the position no matter if a trader made a profit or loss.
Sounds pretty easy, doesn't it? Well, the situation might get out of hand every second. Especially when considering today's market uncertainty. Under such circumstances, the only tools that may help a beginner trader include:
A trading technique lets a trader define the position that is considered as a loss. Once you have reached that position, the order is closed automatically. The tool may come in handy in case of an unpredictable price movement. The situations when it goes in the opposite direction to the trade are common.
Another efficient tool to prevent beginners from huge losses right at once. It is used to set a fixed price upon your decision to take the profit instantly. The good thing about the features is that the target price can be set in advance before you enter the market.
Are you a Bull or a Bear?
Picking up the right trading strategy is vital. But defining your particular trading style is even more important. It will depend on your ability to predict the price and market movement. So, you need to decide whether you are "a bull" or "a bear".
If you believe that the market is about to rise in the short or long run, you are definitely a bull. Being a "bullish" trader means expecting the rapid price increase in the nearest future. Bulls usually fight with their horns thrown upwards (the tactics are associated with the market rise).
If you believe that the market and price will drop down, you are a bear. The term refers to the way wild bears fight. They traditionally move their claws downwards when trying to beat the opponent. The movement describes the potential market fall. This is where a short-selling strategy might work out. Read more about the short selling.
We have learned some basic Forex terms for beginners. At least, you won't stare like a stuck pig at new terminology. You just keep on learning and good luck! Stay tuned to our comprehensive knowledge base.
Also read about:
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.