Basic forex terminology

 

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.

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 200 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 $250,000 and leverage of 50, the required margin is $5000).

Risk management → involves the use of strategies in order to control or reduce financial risk. An example is a stop-loss order which is used to 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 preset price. This protects against further losses on an open position if prices continue in an unfavourable direction for the investor.

Take profit → a take profit order is a risk management tool allowing a position to be closed automatically, once it reaches a specific preset profit goal. This protects 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 positons.

For a more in-depth look at common words, terms and useful phrases associated with trading and the financial markets, please visit our Trading Glossary page. Alternatively, find out more about the similarities and differences between forex trading and CFDs.

Next trading guide: Introduction to CFD trading

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