Forex Terminology That You Cant Afford To Ignore
Getting Started In Forex Trading
- when you are a lawyer they say you always speak law, and when you are a Forex trader you ought to speak forex.
- “Don’t make friends with trend, make friends with each candlestick”
― Vivek Nair
What does this quote even mean, check the most fascinating terminology of Forex trading there ever is.
The best way to get started on the forex journey is to learn its language. Here are a few terms to get you started:
Forex, also known as foreign exchange or FX trading, is the conversion of one currency into another. It is one of the most actively traded markets in the world, with an average daily trading volume of $5 trillion.
Base currency/ Quote currency
In forex, the base currency represents how much of the quote currency is needed for you to get one unit of the base currency. For example, if you were looking at the CAD/USD currency pair, the Canadian dollar would be the base currency and the U.S. dollar would be the quote currency.
An exchange rate is the value of a country’s currency vs. that of another country or economic zone. Most exchange rates are free-floating and will rise or fall based on supply and demand in the market.
- Micro forex accounts: Accounts that allow you to trade up to $1,000 worth of currencies in one lot.
- Mini forex accounts: Accounts that allow you to trade up to $10,000 worth of currencies in one lot.
- Standard forex accounts: Accounts that allow you to trade up to $100,000 worth of currencies in one lot
A forex broker is a financial services company that provides traders access to a platform for buying and selling foreign currencies for example Deriv above is a broker commonly used in sub-Saharan Africa.
Ask: An ask is the lowest price at which you are willing to buy a currency. For example, if you place an ask price of $1.000 for GBP, then the figure mentioned is the lowest that you are willing to pay for a pound in USD. The ask price is generally greater than the bid price.
Bid: A bid is the price at which you are willing to sell a currency. A market maker in a given currency is responsible for continuously putting out bids in response to buyer queries. While they are generally lower than ask prices, in instances when demand is great, bid prices can be higher than ask prices.
Bear market: A bear market is one in which prices decline for all currencies. Bear markets signify a market downtrend and are the result of depressing economic fundamentals or catastrophic events, such as a financial crisis or a natural disaster.
Bull market: A bull market is one in which prices increase for all currencies. Bull markets signify a market uptrend and are the result of optimistic news about the global economy.
Leverage: Leverage is the use of borrowed capital to multiply returns. The forex market is characterized by high leverages, and traders often use these leverages to boost their positions for instance a trader might deposit $1000 dollars in their account then the broker lends them $10000 to open a much huge position in the market.
Lot size: Currencies are traded in standard sizes known as lots. There are three common lot sizes: standard, mini, and micro. Standard lot sizes consist of 100,000 units of the currency. Mini lot sizes consist of 10,000 units, and micro lot sizes consist of 1,000 units of the currency. Some brokers also offer nano lot sizes of currencies, worth 100 units of the currency, to traders. The choice of a lot size has a significant effect on the overall trade’s profits or losses. The bigger the lot size, the higher the profits (or losses), and vice versa.
Margin: Margin is the money set aside in an account for a currency trade. Margin money helps assure the broker that the trader will remain solvent and be able to meet monetary obligations, even if the trade does not go their way. The amount of margin depends on the trader and customer balance over a period of time. Margin is used in tandem with leverage (defined above) for trades in forex markets.
Pip: A pip is a “percentage in point” or “price interest in point.” It is the minimum price move, equal to four decimal points, made in currency markets. One pip is equal to 0.0001. One hundred pips are equal to 1 cent, and 10,000 pips are equal to $1. The pip value can change depending on the standard lot size offered by a broker. In a standard lot of $100,000, each pip will have a value of $10. Because currency markets use significant leverage for trades, small price moves, defined in pips, can have an outsized effect on the trade.
Spread: A spread is the difference between the bid (sell) price and ask (buy) price for a currency. Forex traders do not charge commissions; they make money through spreads. The size of the spread is influenced by many factors. Some of them are the size of your trade, demand for the currency, and its volatility.
Scalping is a position held for seconds or minutes at most, and the profit amounts are restricted in terms of the number of pips. Such trades are supposed to be cumulative, meaning that small profits made in each individual trade add up to a tidy amount at the end of a day or time period. They rely on predictability of price swings and cannot handle much volatility. Therefore, traders tend to restrict such trades to the most liquid pairs and at the busiest times of trading during the day.
in the Market Execution mode, a trader agrees to execute a deal at the price offered by a broker. A click on “Sell by Market” or “Buy by Market” creates an order to a broker to execute a Sell or Buy deal respectively at the broker defined price.
A pending order in the foreign exchange, or forex, market instructs your broker to automatically buy or sell a currency when the market reaches a certain price in the future. This type of order differs from a market order, which instructs your broker to immediately buy or sell at the current price.
Line charts: Line charts are used to identify big-picture trends for a currency. They are the most basic and common type of chart used by forex traders. They display the closing trading price for the currency for the time periods specified by the user. The trend lines identified in a line chart can be used to devise trading strategies. For example, you can use the information contained in a trend line to identify breakouts or a change in trend for rising or declining prices.
Bar charts: Much like other instances in which they are used, bar charts are used to represent specific time periods for trading. They provide more price information than line charts. Each bar chart represents one day of trading and contains the opening price, highest price, lowest price, and closing price (OHLC) for a trade.
Candlestick charts: Candlestick charts were first used by Japanese rice traders in the 18th century. They are visually more appealing and easier to read than the chart types described above. The upper portion of a candle is used for the opening price and highest price point used by a currency, and the lower portion of a candle is used to indicate the closing price and lowest price point. A down candle represents a period of declining prices and is shaded red or black, while an up candle is a period of increasing prices and is shaded green or white. The formations and shapes in candlestick charts are used to identify market direction and movement.
Above are some of the useful forex terminology you will need to know right through in your forex trading journey.