Forex trading is not always easy in the beginning. It is partially because of the jargon of traders and brokers. These terms are important to understand so that you can be able to trade with a lot of confidence and make wise decisions.
In this guide, we will discuss the most significant Forex terminology every novice is to become familiar with.
1. Pip
The smallest movement of prices in most currency pairs is termed as pip. It is an abbreviation of the percentage in point.
Example:
EUR/USD moves from 1.1050 → 1.1051. This 0.0001 change is 1 pip.
Profit and loss in Forex trading is measured with the help of pips.
2. Lot
A lot means how large your business is. It displays the quantity of currency you are selling or purchasing.
- Standard lot = 100,000 units
- Mini lot = 10,000 units
- Micro lot = 1,000 units
The lot size influences the amount of money which you will make or lose with each pip movement.
3. Leverage
Leverage enables traders to operate a bigger position using a lesser sum of money.
Example:1:100 leverage This implies that you can control $100 in the market using only $1 of your own money.
Watch out: leverage increases profits and losses.
4. Spread
The spread is between the price that you can sell (bid price) and the price that you can purchase (ask price).
Example:
EUR/USD Bid = 1.1050, Ask = 1.1052 → Spread = 2 pips
The cost of trading is basically the spread.
5. Bid and Ask
- Bid: This is the price at which you can sell a currency pair.
- The price, at which you may purchase a currency pair.
Note: the difference between the ask and bid is the spread.
6. Margin
Margin refers to what you must have in your account so as to open a trade. It is closely associated with leverage.
Example: you have a leverage of 1:100, and a 100 margin can enable you to have control over 10,000 in the market.
7. Stop-Loss and Take-Profit
- Stop-Loss (SL): An instruction to automatically sell a trade at the specified loss.
- Take-Profit (TP): A request to automatically make a trade at a particular profit.
These tools are involved in controlling risk and profit lock-ins.
8. Currency Pairs
Exchange rates are also traded in pairs, euro-US dollar (EUR/USD), Pound sterling- Japanese yen (GBP/JPY), or United States dollar- Japanese yen (USD/JPY).
- Major pairs: The most frequently traded pair, usually involves USD.
- Minor pairs: Less popular USD free pairs.
- Exotic pairs: Hard to find currencies that have increased spreads.
9. Trend
General direction in which the market is moving:
- Uptrend: Prices are rising
- Downtrend: Prices are in a down trend.
- Sideways trend: The prices are operating within a range.
Technical analysis is associated with identifying trends.
10. Volatility
Volatility is a measure of the movement of prices during a duration.
- Large volatility = larger fluctuations in prices = greater opportunity and risk.
- Low volatility = fewer price changes in the market = less turbulent market.
Final Thoughts
The first step that the beginner should do is to learn Forex terminologies. The terms might appear daunting initially, but once you get to know them, then trading is not so challenging and puzzling.
Good knowledge of Forex terminologies will assist you:
- Read charts accurately
- Follow news and analysis
- Manage risk effectively
- Be able to communicate effectively with the other traders.
These are the simplest words to begin with and as you proceed with your trading career you acquire more complex words.
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