21 Key Terms to Know Before Starting Forex Trading

21 Key Terms to Know Before Starting Forex Trading

The world of Forex trading can be a little overwhelming at times, with a number of phrases frequently used in the trading game that don’t commonly pop up in day-to-day speech. For new traders looking to increase their chances of success, being fluent in the lingo is key. Let’s break down some of these tricky terms into easy-to-understand explanations in our alphabetical glossary.

Appreciation: Not a round of applause or a pat on the back, instead, appreciation in Forex is the increase in the value of an exchange rate

Ask price: The market price when trying to purchase a currency asset

Bid price: The market price when trying to sell a currency asset

Base currency: Each Forex pair is made of two currencies, with the first one being the base currency, for example, in EURUSD, EUR is the base currency. When trading, EUR is the currency you are selling and USD is the one you are buying. USDEUR is the reverse.

Currency pair: One currency is bought and another is sold in every Forex transaction. The two currencies form a currency pair that looks like USDEUR (US Dollars and Euros)

Depreciation/devaluation: The opposite of appreciation, this is when the value of an exchange rate decreases

Exchange rate: The rate of exchange for one currency against another

Leverage: Trading with leverage allows investors to increase their trading power by holding a larger position on the market. Some brokers offer leverage as high as 100:1!

Long position: When you purchase an asset with the intention of holding it for enough time to see considerable price growth

Loss: Negative proceeds from a trade when the position is closed

Lot: Forex trades take place in three different sized lots. Standard lot: 100,000 units of the base currency. Mini lot: 10,000 units of the base currency. Micro lot: 1,000 units of the base currency

Margin: The amount needed to open a leveraged position, for example, at a leverage of 50 and a position of $100,000, you’d need to deposit $2,000

Pips: Pip stands for ‘Percentage In Point’. This is the smallest possible price movement that an exchange rate can make. The pip is the fourth point after the decimal in a price value (except for JPY), and is the traditional measurement for profits and losses in Forex

Profit: Positive proceeds from a trade when the position is closed

Quote currency: The first currency in a pair is the base currency, and the second currency is the quote currency. In GBPEUR, EUR is the quote currency

Risk management: Using different trading strategies to manage and mitigate trading risk, by minimising losses of ensuring profits in particular

Short position: A short position occurs when an asset is sold because the Forex trader believes the market price is about to fall in the short term

Spread: There is a difference between the selling price (bid) and the purchase price (ask), with this small amount equating to a type of commission for the broker or exchange

Stop Loss: One of the best risk management tools is a stop loss, which allows traders to define a low price that a position will automatically close at. This means that if the market takes a dip and the exchange rate drops to this stop-loss price, the position will close and the investor will not continue to lose money on the currency. In some cases, if the market is dropping too fast, slippage occurs and the position will not close

Take profit: The reverse of a stop loss is a mechanism that allows you to take profit. This means that when the price reaches a certain high point, the position will close and the profits will be secured in case a reversal occurs and the price suddenly drops.