Overview: Forex Terminology

Learning the language of forex is the greatest approach to really get started on your forex journey. When it comes to trading, unfamiliar forex terminology and a lack of understanding can be a major roadblock to a trader’s success. There’s a lot to understand, but here’s a rundown of some of the most commonly used words by traders.

Currency pair

In circulation are 180 recognized currencies, which are used in 195 countries. Currency pairs are used to trade forex: one currency is bought and the other is sold. They add up to make the exchange rate.

Leverage

With a small investment, an investor can enhance their trading ability and handle a larger stake in the market. High leveraged trading allows you to trade your favorite Forex pairs and more without risking a large amount of money.

Bid / Ask price

A trader’s bid price is the amount he or she is willing to sell a currency pair for. A trader’s ask price is the price at which he or she will buy a currency pair.

Long / Short position

The acquisition of an asset with the anticipation that its market value would rise is referred to as a long position. The sale of an asset with the anticipation that its market value would fall is referred to as a short position.

Margin

The initial capital that a trader must put up in order to initiate a position is known as margin. Margin also enables a trader to take on higher position size.

Pips

The smallest price movement that any exchange rate may make is called a pip, which stands for “percentage in point.” It calculates the amount of change in a currency pair’s exchange rate in the forex market. Pips are the units of measurement for market earnings and losses.

Lot Size

The currency market is divided into lots. A normal lot is the same as 100,000 base currency units. If you were trading in US currency, this would be $100,000. A micro lot has 1,000 units, whereas a mini lot has 10,000.

Exchange rate

The rate at which a currency from one country can be exchanged for a currency from another. To put it another way, it shows how many units of a foreign currency a customer can purchase with one unit of their native currency.

Base / Quote currency

The base currency is the one that appears initially in a currency pair. The quote currency is the second currency in a currency pair that is quoted.

Spread

The discrepancy between the bid and ask prices is known as the spread.

Appreciation / Depreciation

An increase in the value of an exchange rate is known as appreciation. A decrease in the value of an exchange rate is known as depreciation or devaluation.

Gapping

With no trading activity in between, an opening price that is significantly above or below the previous day’s close. This indicates that a limit or stop order may be filled at a price other than the one specified in the order.

Risk management

It entails employing measures to aid in the control or reduction of financial risk. A stop-loss order, for example, is used to limit the amount of money lost on a trade.

Stop loss

A stop-loss order is a risk management instrument that allows you to close a position once it hits a certain price. If prices continue in an unfavorable direction for the investor, this can protect against further losses on an open investment.

Take profit

A take profit order is a risk management instrument that allows a trade to be automatically ended once it has reached a pre-determined profit target. This can safeguard profits from being lost due to an unanticipated price direction reversal that occurs before the investor can close the transaction.

Profit/Loss

The profit from a trade, which is derived from closed trade positions.

Final Thoughts

As you can see from the article above, the world of Forex trading is full of technical forex terminology and acronyms. As traders, we should continually be reading, learning, and expanding our knowledge in order to become more well-rounded traders and hence more profitable. Forex trading is a difficult beast to tame, but with the correct tools and instruction, we can keep improving as traders.