Before you start trading forex, it’s important to familiarise yourself with the basic forex terminology. There is plenty to learn, but below is a quick look at some of the most common terms used by traders.
Currency pair → forex is traded in currency pairs: one currency is bought, the other is sold. Together they make up the exchange rate.
Exchange rate → the rate of which one country’s currency can be exchanged for another currency
Base currency → the currency that comes first in the currency pair (e.g. in GBPUSD the GBP is the base currency)
Quote currency → the second currency quoted in a currency pair (e.g. in GBPUSD the quote currency is USD)
Long position (buy) → a long position refers to the purchase of an asset, with the expectation that its market value is set to rise
Short position (sell) → a short position refers to the sale of an asset, with the expectation that its market value is set to fall
Bid price → the market price for the sale of an asset
Ask price → the market price for purchasing an asset
Spread → the difference between the “bid” and “ask” prices (the selling price and the purchase price).
Appreciation → an increase in the value of an exchange rate
Depreciation/devaluation → a decrease in the value of an exchange rate
Gapping → An opening price significantly above or below the previous day’s close with no trading activity in between. This means that a limit or stop order could be filled at a price different from the desired order price.
Pips → a pip stands for “percentage in point”, and is the smallest price movement any exchange rate can make. It measures the amount of change in the exchange rate for a currency pair in the forex market. A pip is the fourth and final number after the decimal point (with the exception of Japanese yen-based currency pairs, which are displayed to only two decimal points). Pips are the means by which market profits and losses are quantified
Lot → forex is traded in lots. A standard lot is equivalent to 100,000 units of the base currency. This is $100,000 if you were trading in US dollars. A mini lot has 10,000 and a micro lot has 1,000 units.
Leverage → Leverage is a way for an investor to increase their trading power and manage a greater position on the market with a nominal investment. An online broker may offer leveraged trading for up to 30 times the value of a trader’s initial investment.
Margin → the minimum deposit needed to maintain an open position (e.g. with an open position of $150,000 and leverage of 30, the required margin is $5,000).
Risk management → involves the use of strategies in order to help control or reduce financial risk. An example is a stop-loss order which is used to potentially minimise losses on a trade.
Stop loss → a stop loss order is a risk management tool allowing a position to be closed, once it reaches a specific pre-set price. This can protect against further losses on an open position if prices continue in an unfavourable direction for the investor. Please note, that placing a normal stop loss order does not guarantee you will be filled at that particular market price due to slippage.
Take profit → a take profit order is a risk management tool allowing a position to be closed automatically, once it reaches a specific pre-set profit goal. This can protect against profits being lost in an unanticipated reversal of price direction before the investor can close the position.
Profit/Loss → the proceeds of a trade, which are from realised (closed) trade positions.