Anyone considering trading forex needs to have a basic understanding of the terminology used with this type of trade. This article will go over the most common and important forex terms you’ll need to know before you start trading. We’ll try and explain everything in simple-to-understand language that even newbies will understand!
Forex trading baseline terms
Most newbies believe the financial markets are a place where everyone can get involved. However, forex has strict economic and financial paradigms. There are unique techniques, terms and rules that all traders need to know before they take part. Knowing these will mean you fare better when you enter the platform.
Trading forex: terms for beginners
To get off to a good start, you’ll need to know these basic terms:
· Currency pairs: This refers to selling one currency and buying another
· Bid: The price you want to buy at
· Ask: The price you want to sell at
· Pip: The smallest movement in price written as a percentage
· Spread: The difference between the Ask and the Bid
Let’s look at these terms in more detail:
Currency pairs
Currency pairs, or forex pairs, are the first thing you’ll need to get your head around when you start trading forex. It describes the process of swapping one currency for another. This means that someone is buying one currency and selling another and vice versa.
For instance, if you have USD and you want to buy GBP then the currency pair will be GBP/USD. The first (GBP) refers to the currency that you are looking to buy. Another term for this is the ‘base’ currency. The second (USD) refers to the one you want to sell, which is the one you’re currently holding. Another term for this is the ‘quote’ currency.
Whenever you buy an asset, you’ll need to spend the quote currency in an amount that covers one of the base currency units.
Bid
When you’re trying to sell or buy an asset, you need to get the best possible price. For buying, the term bid refers to the price that all traders are waiting for.
Ask
The ask is the best price for selling an asset. The ask price, refers to the lowest price at which brokers aim to sell.
Pip
This describes the lowest possible price movement. For forex, this term refers to the fourth decimal place.
For instance, if you want to trade GBP/USD with a price that starts at 5.0022 then it ends up at 5.0026, the price has risen by four pips (26-22 = 4).
Spread
When we talk about the spread, we’re talking about the difference between the ask price and the bid price. When the difference between the two is bigger, the broker will get a higher revenue.
Forex trading terms – the process
It’s also important to learn some terms that you’ll hear when physically trading forex. You’ll need these to start trading. Here are two key trading terms:
· Entry: This is when you engage with a broker to sell or buy.
· Exit: This is when you close the position regardless of whether a loss or profit was made.
Here are some more terms you’ll need for the process of trading:
Stop loss
This is a technique for trading. It allows you to define what you consider to be a loss. When you are in that position, your order will close automatically. The stop loss tool is good for unpredictable movements in price.
Take profit
This is another tool that prevents newbies from experiencing huge losses. You can set a fixed price on when to take an instant profit. You can set this before you even enter the market. If only tools like this were available for online casinos, as this is one of the biggest mistakes people make in that industry.
Being a bear or a bull
Having the right strategy for forex trading is crucial. Defining your own style is important too. This will depend on how good you are at predicting movements in prices and markets. Ultimately, you’ll be a bear or a bull.
Being a bear
When you’re of the impression that the price and market will drop, you can be described as being a bear. This reference refers to how bears fight in the wild. Their claws move downwards whenever they try to beat their opponent. It is used to describe the potential fall in the market. For bears, short-selling strategies are best.
Being a bull
When you’re of the impression that the market will rise either in the long term or short term, then you’re a bull. Bullish traders expect rapid rises in price in the near future. This term comes from the way bulls fight with their horns up.
Understand your trading terminology
So, there you have it, a range of forex terms to get you started trading in foreign exchange. When you’ve grasped this, you might want to consider CFDs too!
