As a new forex trader, you must have heard so many forex trading terminologies during the initial stage. These terms may be unusual and confusing for you. If you are not aware of various critical forex concepts and terms, then it may affect your profitability and stability in the forex market. Learn these important forex trading terms to become pro in forex trading. Understanding these various forex concepts are effective because it will make thing easy for you while trading in forex. We will look at some essential forex terms and concepts to nourish your knowledge and make you an expert in the forex market. The various important forex terminologies are currency pair, exchange rate, base currency, quote currency, long position, short position, bid price, ask price, spread, pips, lot, leverage, margin, stop loss, and Take profit. Let us discuss what all these mean one by one.
Some important Forex trading terminologies
A currency pair is the price of two distinct currencies. Two currencies form a combination with each other to show the price movement concerning each other. The first currency of a currency pair is termed as the base currency, and the second currency is termed as the quote currency. Both the Base currency and quote currency compare the value to each other. It shows how much of the quote currency is required to purchase one unit of the base currency. These currency pairs are traded in the forex market for buying, selling, exchanging, and speculation of currencies. For example, in EURUSD, two currency the US dollar and Euro are combined to form a currency pair for trading.
Exchange rate in Forex trading terminologies
exchange rate compares the price of currency between the two nations. It means the value of one nation’s currency concerning another nation’s currency. For example, if you want to buy the Euro in exchange for US dollars, then the transaction will be done, as per the current price of the two separate currencies.
Base currency and Quote currency
As discussed above, two currency forms the combination with each other to form a currency pair. The first currency in the currency pair is called Base currency and the second currency called the quote currency. In forex trading terminologies, the base currency represents, how much of the quote currency is required to get one unit of the base currency. For example, in the currency pair EURUSD, EUR is the base currency and USD is the quote currency.
Long position and Short position
Holding a long or short position in forex means trading on a currency pair to either go up or go down in value. Going long or short depends on the engagement with the markets. When a trader goes long, he or she will have a positive investment balance in an account, hoping the price will increase. When a trader goes short, he or she will have a negative investment balance, hoping the price will decrease. So traders hold the position according to the relative increase and decrease in the price. For example, if someone is trading in EURUSD, then he or she will hold the position as per the relative increase and decrease in the price of quote currency which is (USD).
Bid price and Ask price
In forex trading, the bid price is termed as the rate, which a dealer is willing to pay for a currency. On the other hand, the ask price is the rate at which a dealer will sell the same currency. For example, David wants to exchange his US dollar in return for Euros, he found two dealers with the different exchange rate of 1.30 and 1.40 respectively. David found the first one cheap, so he exchanged his US dollars with the first dealer. In this situation, 1.30 and 1.40 rates are the respective ask price of the dealer and 1.30 is the bid price of the buyer.
Some common Forex trading terminologies
Spread arises when the currencies are exchanged. The difference between the asking price of the seller and the bid price of the buyer is called the spread,hence, the difference in the selling rate of forex brokers and the buying price of buyers is termed as a spread. Thus, in the above example, the difference in the seller’s rate and Davids’s buying rate is the spread.
PIP stand for “percentage in points” or “price interest point”. It expresses the small measure or movement change in a currency pair in the forex. A pip is a fourth and final number after the decimal point (except for Japanese yen-based currency pairs. These are illustrated to only two decimal points). For example, if any trader earned 40 pips, it means there is a 40 pips movement between the currency pair, he traded.
Do not get confused with a lot in the list of Forex trading terminologies. In simple words, a lot is a unit that measures the transaction amount. It indicates the number of currency pairs, you will buy or sell. Any trader orders the quantity in a lot during his trading session in the forex market. There are four types of lot named standard, mini, micro, and nano. For example
- one standard lot = 100,000 units of currency
- 1 mini lot = 10,000 units of currency
- one micro lot = 1000 units of currency
- 1 nano lot = 100 units of currency
Another important term in the list of Forex trading terminologies is Leverage. Leverage means acquiring a certain amount of the money required to invest in something. Thus, in the case of the forex market, money is normally borrowed from a broker. Forex trading does allow high leverage in the reason that, for an initial margin requirement, a trader can develop higher because it will help in smooth investment.
You need to divide the total transaction value by the amount of margin you are required to put up in order to derive the margin-Based leverage:
Margin-Based Leverage = Total Value of Transaction / Margin Required
Margin is the amount of money that a trader requires to establish an open trade. When you trade forex on margin, you only require to pay a percentage of the whole value of the position to open a trade. It helps the small traders to increase their position size. Margin is one of the important term in the list of various Forex trading terminologies. The formula to calculate the margin level is as follows:
Margin level = (equity / used margin) x 100
Take profit and stop loss
Two of the common beneficial tools available in forex trading terminologies are the “Take Profit” and “Stop-Loss”. These enable traders to define when they require to stop an order, either to maximize profits or to reduce the risk of major losses. Stop Loss and Take Profit are both marvelous tools to help with risk management strategies and consequently your financial returns.
A stop-loss order is placed with a broker to buy or sell a security when it reaches a specific price. Stop-loss orders are composed to limit an investor’s loss on a position in a security. Stop loss is the place to avoid the lowest minimum loss on the trade while Take profit is placed to gain the maximum profit on the trade. For example, if you gain on trade, then the currency-pair price reaches to take profit and when you lose on a trade, it means the price of currency-pair reached stop loss as per the buy and sell of currency and vice-versa.
Stop-loss acts as an order which helps traders to limit losses in an open position if the underlying assets reverse its moving direction opposite of the expectation of the trader. In this case, the trade can cause losses, to limit those losses we can put stop-loss order. Stop loss are very important to place because you can avoid big loss on your trade.
If you are new in the field of forex trading, then you need to learn and understand these terms before starting actual trading on the real account. forex trading is worth or not depends on these factors. If you will not engage yourself in conceding these essential forex trading terminologies, then you may ruin your account soon. This will result in short stability in the forex market. Thus it is very important to understands forex trading terms as it will help you to invest on right opportunity. If you will focus and learn these forex trading terms then you will easily place right trade. By learning these terms, you will also able to find the right opportunities to enter and exit from the trade.
Forex trading concepts are vast and need time to understand them completely because these contain many difficult terms as well. You should give your time in learning and understanding these because it is very crucial before starting forex trading. Some forex concepts will take time to understand because of some complex terminologies. But in the end you will feel pro while trading in forex.