Forex Trading Terminology: 10 Must-Know Terms
Being new in the forex market is exciting but, at the same time, frustrating because as much as you’re eager to learn, the beginning can be challenging. You google “Forex Trading Terminology” and end up with a long glossary. Although all seem essential, you might get lost if you start reading them one by one.
All terms are indeed essential; however, as a newbie, it’s best to start from must-know ones and gradually broaden your forex vocabulary. Read on as we give you ten carefully selected words that every forex trader must know.
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A broker is an individual or a company that gives clients access to markets and organizes trading financial instruments as an intermediator. Many brokers give their users educational material to help them learn forex trading online.
Exchange Rate (ER)
ER is the price you pay to buy another currency. For example, if the ER of EUR/USD is 1.05, it means that for 1 EUR, you have to pay 1.05 USD.
Ask price or offer price is the amount the buyer is willing to pay to buy the currency. On the other hand, the bid price is the one at which the trader will sell the currency.
Spread is the difference between two prices, yields, or rates. The most common types are the bid-ask spread and the yield spread. The first is the difference between the ask and bid prices, while the latter shows the ROR between two investment vehicles.
Using borrowed funds from the broker to make a profit is called leverage. It allows you to expose and trade large amounts without paying the total in advance. Usually, leverage goes as 100:1, meaning that with $1,000, you can trade with up to $100,000.
It’s best to look for a broker that offers negative balance protection – a feature that stops your actions once your account depletes so that you won’t owe money to your broker.
Equity is the amount on your trading account. Let’s say you open an account and deposit $10.000. If you made a profit of $2.500 and a loss of $1.200, your equity amount would be $11.300.
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Currency is money, banknotes, and coins, issued by a government or central bank for legal trade. Two currencies create a currency pair that has an exchange rate. When you buy the EUR/USD pair, you sell USD to buy EUR.
Seven currencies are considered significant: EUR, GBP, CAD, JPY, NZD, AUD, and CHF.
Some coin pairs don’t include the USD. These are cross pairs. There are also exotic pairs formed when a major currency is coupled with one from an emerging country.
Percentage in point or pip is the smallest amount that the exchange rate can increase or decrease. If ER for EUR/USD is 1.0504 and increases to 1.0509, the difference of 0.0005 is five pips.
A smaller unit is called a pipette or fractional pip, located on the fifth decimal place, so ten pipettes = 1pip.
Margin is a percentage of the amount of a trade you need if you want to open it. For example, if you want to open a $10.000 position on a 1% margin, you only need to have $100 in your account as a deposit.
The amount your broker keeps aside as risk security is called used margin. In this case, your trading position stays open, and you cannot end with a negative balance.
There is also the term free margin – the money you can use to open new positions in your trading account. Presented in a formula that would be:
Free Margin = Equity – Used Margin
Lastly, a margin call is a notification that alerts you to add funds to your account and increase the margin. It happens when you lose a huge part, i.e., fall under the maintenance margin amount.
Order, also known as a market order or entry order, is the instruction to buy or sell currency.
An open order stays are unfiled orders waiting on the market to be executed or meet specific requirements. These orders stay open until they are closed or finally meet the conditions.
Limit orders are another type that has predetermined high and low price limits. When a trade meets these, then you buy or sell.
Similar types are the stop-entry and stop-loss orders. Stop-entry lets you only enter a trade at a specific price limit, whereas a stop-loss order will immediately initiate when a trade reaches a loss limit you have set in advance.
Another type is the take-profit order which defines the closing time of the trade when a certain level of profit is achieved.
When we say you need to build trading skills, this includes understanding forex terms. Once you absorb the must-know, broaden your knowledge with new ones.