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:
- Currency pair – the two currencies in an fx trade;
- Price (spot rate) – the price the buyer pays to exchange one currency for another;
- Base currency – the currency you buy in an fx trade (first in the pair name e.g. USD in USD/JPY);
- Quote currency – the currency you sell in an fx trade (second in the pair name e.g. JPY in USD/JPY);
- 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;
- Pip (percentage in point) – one movement in price;
- Pipette – 1/10 of a Pip (10 pipettes = 1 pip)
- Spread – the fee your broker charges you to do a trade;
- Broker – an individual or company who executes buy and sell orders on behalf of traders;
- Trading platform – software used to execute trades i.e. open, close, and manage trades (market positions);
- Bid – the price at which the market will buy a currency pair from you (you sell);
- Ask – the price at which the market will sell a currency pair to you (you buy);
- 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;
- Mini-lot – 10 000 units of the base currency. A one-pip move equals $1;
- Micro-lot – 1000 units of the base currency. A one-pip move is worth $0,10 (10 US cents);
- Price action – price action is the movement of a currency pair’s price;
- Entry – the price at which a trader enters an fx trade;
- Exit – the price at which a trader exits an fx trade;
- Stop-loss – an order placed in advance to counter-trade an existing position in order to limit a loss on a trade;
- 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;
- Profit target – a predetermined price at which a trader will exit a trade in profit;
- Bull – a trader who believes the price will rise;
- Bear – a trader who believes the price will fall;
- Long (long position) – the buying of a currency pair with the expectation that the price will rise;
- Short (short position) – sale of a borrowed (rented) currency with the expectation that the price will fall. See how a short is traded;
- 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;
- Chart – a visual representation of price action;
- Exchange rate – the price of a currency in relation to another currency;
- 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;
- 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);
- Market position – the amount owned (earned) on a long position, or owed (borrowed) on a short position;
- Arbitrage – simultaneous purchase or sale of a financial product in order to take advantage of small price differences between markets.
- A list of terms can be found here and here is an exhaustive list
- An in-depth article about the Foreign Exhange Market
- What is an edge?
- Forex resources