Some Basic Forex Terms You Should Know

The Forex market can be a crazy place especially for new traders and newbies; the forex market can be full of terms that newbies and new traders haven’t heard before. Before I proceed further, note that there are a few terms that can be misleading even to traders that’s already have experience in trading the forex market –we are going to explain some of them here.

This lesson is useful to familiarize yourself with some of the common forex terms and trading jargon, one may come across while trading, do not worry about memorising each term, or even understanding them straight away –as they can be confusing.

This article is something you can constantly refer back to anytime you wish. There are a lot of information within this article and so you might find it beneficial to print this or bookmark it for future reference.

Bulls and Bears

When the forex market rises it is considered as a BULL or BULLISH market, a trader having this opinion is described as “bullish” or being a “bull”. This term is mostly used because when a bulls fights, they use their horns in an upward motion – this is a useful way of remembering the term.

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When the forex market falls it is considered as a BEAR or BEARISH market, a trader having this opinion is described as “bearish” or being a “bear”. This term is used because when a bear fights, they use their claws in a downward motion – this is a useful way of remembering the term.

Going Long or Long Position

When a forex trader says his LONG on a currency pair or refer to something as being LONG. In the forex market we think of it as going up, “Going Long or [having a] long position” is when you have opened a trade and bought something. You may hear the term, “I went long at this price” or “I’m long at the moment”. This means that the trader has entered a buy position. In forex trading, if the trader believed that the GBP/USD currency pair is going to rise, and they bought that pair, they would be described as “entering a long position”.

Short selling or Going Short

The concept or idea of going long in forex trading is relatively straight forward –as most traders understand it but not the term “going short or short selling”. If one think that the price will go down; one can enter into a “short sell” position by clicking “sell” on the trading platform.

When you click “sell” or “went short” You have, in fact, sold something you do not own, to buy it back at a different price. So if you short sell a currency pair and the price goes down, you make money – because you have made money by selling it at a higher price and then buying it back at the lower price.

If you think the price of a currency pair will go up, you click buy on your trading platform and if you think the price will go down, you click sell.

Risk to Reward Ratio

The “Risk to Reward Ratio” essentially refers to the ratio of how much you are risking on any single trade, to how much you make if the trade goes in your favour. So if you risk $10, then this is the amount of money you are prepared to lose. If the trade does not work out, you know exactly how much money you are risking and will not lose more than $10. If you are looking to gain $30, then this is the reward you are seeking and you think is achievable based on your analysis.

The risk to reward ratio is then 1:3, because you are risking $10 to gain $30.

Price Chart

A Price chart shows the price action over time and is the visual representation of the price action (candle sticks) and you use this for your analysis. It is what you use to observe the exchange rate or price of a currency pair over a period of time.

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On a price chart, the price of the currency pair is on the vertical axis on the right hand side (the exchange rate of how many units are needed of the second currency in the pair to buy one unit of the first currency in the pair). The time is on the horizontal axis on the bottom which displays the time the prices changes.

Japanese candlesticks

A Japanese candlestick is a method of illustrating the price movement and one of the popular charts used by most traders. They tell us a certain amount of information. First of all, the candlestick can tell whether the price has moved up or down, simply by the colour. Any colour can be used and the colour is set by the trader depending on their personal preference. The colour will change automatically as the candle either forms as a bearish or a bullish candle.

Pips

A pip is a measurement of how far the price has moved. It is an acronym for the phrase “percentage in point”. If you think of the exchange rate of the Great British Pound and the United State Dollar (GBP/USD), you might think of it as say, 1.57, where only two units follow the decimal point.

However, in the foreign exchange markets, this is broken down even further and we observe the price as 1.5700. The last number – the last 0 – is the pip. If the value of that currency pair moves from 1.5700 to 1.5701, it has moved by one “pip”.

Pips are how traders generally measure their profit. If a trader buys a currency pair, again the GBP/USD at 1.5700, and the price moves up to 1.5730, it is said to have moved up by 30 pips or, the trade has gained a 30 pip profit.

Many brokers break the price down even further and will include a 5th number called a fractional pip, or pipette – they publish the price as 1.57000. Do not be surprised to see five figures after the decimal when you are looking at the price of most currency pairs on your trading platform.

Japanese pairs are slightly different because their currency is generally devalued against other major pairs, so the pip is the second digit behind the decimal. So if the exchange rate of the USD/JPY is 77.084, then the pip is the number 8 and the pipette is the number 4.

Spread

The easiest way to understand the term spread is by thinking of it as a fee your broker charges you to trade.

If a currency pair has a certain price, say EUR/USD 1.3000, the broker will not sell the EUR/USD to you at 1.3000. Your broker will quote you a slightly higher price of, say, 1.3001. If you are looking to sell, they will not purchase the EUR/USD at 1.3000 but instead will only pay, say, 1.2999.

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You can see there is a difference between the price of 1.2999 and 1.3001 – 2 pips. This is what is called the spread.

The spread is therefore the difference between the price at which the broker is willing to buy off of you and sell to you. By buying off of you at a lower price and selling at a slightly higher price the broker makes money.

Bid

The bid is the best possible price at which the trader can buy the instrument being traded at the current time. In the forex market, the bid price is the highest price the broker will pay to purchase the instrument off of you.

Ask

The ask is the best possible price at which the trader can sell the instrument being traded at the current time. In the forex market, the ask price is the lowest price that the broker will sell the instrument to you.

Opening and closing a position

After having bought or sold a financial instrument, you have opened a position. Therefore, buying and selling is sometimes called entering a position. It is the same as “entering the market”. When the trader exits the market, they are said to have closed their position.

Entry

An entry is when a trader decides to open a position, either by buying or selling a financial instrument.

Exit

An exit is when a trader decides to close their open position in the market for either a profit or a loss.

Stop Loss

A stop loss protects you if the trade goes wrong. Let’s say you bought a currency pair and the trade does not work out and you start to lose money. As the price keeps going in the opposite direction to your trade, you could in theory lose your entire trading account.

A stop loss is an order that will automatically close the trade once it has reached a point that you consider the loss unacceptable.

Take Profit

A Take Profit is a price at which you decide to exit the market and take the profit that you have made. A Take Profit is generally determined ahead of time when the trader enters the market. This means that before you enter the market, if the trade goes well, you know how much money you will make on that trade.

In addition to the above term, there are still some that are worth mentioning and they are:

Leverage

Leverage refers to the use of credit or margins to trade currencies on the Forex market. With leverage, an individual can make one dollar have as much power as fifty dollars. This leverage must be used carefully because it can lead to losses as well as profit

Margin

Margins are also the credit many brokers will extend to traders, which allow them to trade large amounts of money without investing nearly as much. One can use $100 to wield thousands of dollars, simply through the use of margins. However, there is a risk which comes with this power.

Slippage

When you’re trading, sometimes you’ll notice a slight difference between the price you expect and the execution price (the price when the trade is executed). When this happens, it’s known as slippage. It’s a common thing to experience as a trader and it can work either positively or negatively. The main reasons for slippage are market volatility and execution speeds.

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