Forex Trading Terms

Like any other trade, currency trading has its own terminology to promote easy communication and leave little room for misunderstanding.

Here is a (non-exhaustive) quick list of terms that you need to know to be able to start trading:

  1. Currency pair - the two currencies in an fx trade;
  2. Price (spot rate) - the price the buyer pays to exchange one currency for another;
  3. EUR USD pip explanation

  4. Base currency - the currency you buy in an fx trade (first in the pair name e.g. USD in USD/JPY);
  5. Quote currency - the currency you sell in an fx trade (second in the pair name e.g. JPY in USD/JPY);
  6. Cross currency - an exchange rate that does not have the domestic currency (of the country in which the quote is given) as a component of a currency pair;
  7. Pip (percentage in point) - one movement in price;
  8. Pipette - 1/10 of a Pip (10 pipettes = 1 pip)
  9. Spread - the fee your broker charges you to do a trade;
  10. Broker - an individual or company who executes buy and sell orders on behalf of traders;
  11. Trading platform - software used to execute trades i.e. open, close and manage trades (market positions);
  12. Bid - the price at which the market will buy a currency pair from you (you sell);
  13. Ask - the price at which the market will sell a currency pair to you (you buy);
  14. Lots - a lot (standard lot) is a trade size and is equivalent to 100 000 units of the base currency in a forex trade. A one pip movement in a standard lot is a $10 change;
  15. Mini-lot - 10 000 units of the base currency. A one pip move equals $1;
  16. Micro-lot - 1000 units of the base currency. A one pip move is worth $0,10 (10 US cents);
  17. EUR USD pip explanationr

  18. Price action - price action is the movement of a currency pair's price;
  19. Entry - the price at which a trader enters an fx trade;
  20. Exit - the price at which a trader exits an fx trade;
  21. Stop-loss - an order placed in advance to counter-trade an existing position in order to limit a loss on a trade;
  22. Trailing stop(loss) - a stop(loss) order used to lock in profits. A trailing stop follows the direction of you trade, and stops (freezes) when the trade turns against you. It closes the trade automatically when the reversing price reaches the stop;
  23. Profit target - a predetermined price at which a trader will exit a trade in profit;
  24. Bull - a trader who believes the price will rise;
  25. Bear - a trader who believes the price will fall;
  26. Long (long position) - the buying of a currency pair with the expectation that the price will rise;
  27. Short (short position) - sale of a borrowed (rented) currency with the expectation that the price will fall. See how a short is traded;
  28. USD JPY pips explanationr
  29. Risk to reward ratio (RR) - the relation between how much you may lose and how much you may win (see "stop-loss" and "profit target". Get an explanation of RR here;
  30. Chart - visual representation of price action;
  31. Exhange rate - the price of a currency in relation to another currency;
  32. Leverage - a loan provided by the broker to enable a trader to trade a higher value than the money in his/her broker's account (expressed as a ratio: 50:1, 100:1 etc). Leverage can create a situation where your losses exceed your available funds;
  33. Margin - a loan by the broker that enables the trader to trade larger positions than his own funds allow (margin is used to create leverage);
  34. Market position - the amount owned (earned) on a long position, or owed (borrowed) on a short position;
  35. Arbitrage - simultaneous purchase or sale of a financial product in order to take advantage of small price differences between markets.

How to trade forex