When you are new to forex trading, navigating the forex market may prove to be cumbersome if you do not know the meaning of the most common forex jargons and other related terms. Before you learn about the market in detail, it’s important to know the basics.
Let’s take a look at the most important forex terms and definitions that can transform you from a forex novice to an expert.
As a beginner in forex trading, one of the foremost forex terms you should understand is currency pairs since forex trading essentially involves selling one currency and buying another. Forex is short for foreign exchange.
Currency pairs are two different national currencies traded against each other in the forex market.
In a currency pair, the value of a trading currency is quoted against the value of another currency.
The first currency in the currency pair is called the base, while the second one is called the quote.
- When you buy a particular currency pair, you are buying the base currency and selling the quote currency.
- When you are selling a currency pair, you are selling the base currency to buy the quote currency.
Leverage means borrowing money to trade in the forex market. It allows you to open a larger trading position with a lower margin, increase capital, and earn more returns. The kind and amount of leverage you get depend on your forex broker.
For instance, let’s say you have 1000 AUD in your trading account, but you want to open a trade larger than that. If your broker grants you 100:1 leverage, you can open trading positions of up to 100×1000 AUD
Margin is closely related to leverage trading. A margin is the amount of money you must deposit in your account for the broker to lend you funds for leverage trading.
For instance, if your broker requires 1% margin to leverage, then that means you need to have 1000 AUD in your account for you to control a trade of 100,000 AUD. Your broker can then lend you the remaining 99,000 AUD.
PIP or Percentage in Point, is the unit of measurement which describes the change in the value of a currency pair.
You can use PIP to calculate profit or loss in your trade position. You can also calculate the spread between your ‘bid and ask’ with PIP.
A practical example of PIP is if USD/EUR, originally quoted at 1.1500, moves to 1.1501. The 0.0001 increment equals a single PIP move.
Bid/ Ask price
Bid/ Ask price represents the selling price and buying price in forex. The Bid represents the price you intend to sell a currency pair, while the Ask price is the price you want to buy a currency pair.
In the forex market, you can’t just buy or sell one unit of currency. There is a standard amount of currency units you can trade. Lot is the standard measurement of units of currency you can trade.
A lot can come in different sizes ;
- Standard lot: 100,000 units of a currency
- Mini lot : 10,000. Units
- Micro lot: 1000 units
- Nano lot: 100 units
A forex spread is the difference between the buying and selling prices of a currency pair. It is calculated in PIPs.
For instance, if EUR/ GBP is quoted as 1.235/ 1.240 bid and ask price, then the spread will be: Spread = Bid (1.235) – Ask (1.240) = 5 PIPs
Going long or going short
Going long and going short are forex terms used to describe when you should buy or sell in the forex market.
Going long means buying, while going short means selling. You can decide to go long or short after careful speculation of the market movement.
If you expect a fall in the prices of a currency pair, you should go short. On the contrary, if the currency pair prices are expected to increase, you should go long.
Liquidity and volatility
Liquidity is how fast you can trade some currency pairs in the forex market without significant change in their exchange rates. While some currencies are liquid, some are illiquid.
Liquid currency pairs are actively traded in high volume in the forex market without significant variance in their exchange rate. Highly liquid currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF,AUD/CAD,NZD/USD,USD/CAD
Volatility refers to how fast the price of a currency pair rises and falls. A currency pair has high volatility when its price fluctuates rapidly. A currency pair with minimal price fluctuation has low volatility.
The liquidity of a currency pair determines its volatility. Highly liquid currency pairs usually have low volatility. It is important to consider the volatility of a currency pair before you open a trade position.
The market for a currency pair is considered bullish when its exchange rate is rising and the trend is moving up. The market is considered bearish when the exchange rate is falling and the trend is coming down.
For instance, a 20% increase in exchange rate after a previous decrease signals the beginning of a bullish trend. But a 20% price decrease signals a bearish trend.
By identifying bullish and bearish markets, traders can determine whether they should sell or buy currency pairs.
Additional Terms Related to Forex
A stop-loss order is placed on trade to minimise a trader’s loss. When this order is placed on a transaction, the trade will be automatically closed when a preset amount of loss is incurred.
Close at profit order
Also called taking profit orders, it is an order placed on trade to close the trading position once a certain profit has been made.
Fundamental analysis means analyses of the factors that influence changes in the forex market so that a forex trader can make a smart trading decision. It involves the analysis of political, social and economic factors that drive the value of currencies.
Technical analysis in forex involves forecasting the movement of the forex market based on past movements and patterns of the market.
Major Pairs (or Majors)
Major pairs are the most actively traded currency pairs in the forex market. The major pairs include ;
- NZD/ USD
- AUD/ USD
These pairs are prominent because these currencies belong to the world’s biggest economies and these currencies are traded in higher volumes on the forex market.
Minor Pairs (or Minors)
Minor pairs are currency pairs in the forex market that do not include the USD but include at least one of the three major currencies. The prominent minor pairs include
EUR/GBP,EUR/JPY, GBP/JPY,GBP/CAD, CHF/JPY.
Cross Currency Pairs (or Crosses)
Minor Pairs are also called Cross Currency Pairs. Cross currencies pairs are pairs that do not contain the USD.
Forex trading is profitable only when you are well informed and you choose the right platform.
Blueberry Markets is a leading forex trading platform that offers tight spreads and lightning fast executions.
You can also access our free forex trading program especially designed for beginners, intermediates, and advanced traders to brush up on your trading knowledge.