Forex is the acronym for foreign exchange. Besides the stock market, forex is one of the most heavily traded markets in the world. Businesses, individuals and countries all trade on the forex market. In simple terms, forex trading refers to the practice of purchasing or selling one currency in exchange for another. It’s one of the less complicated trading practices and it is easy to get started without investing much capital.
it’s IMPORTANT that you understand basic Forex terminologies that are frequently utilized in forex. It’s a step towards being successful in the Forex market. But more importantly, knowing these terms will help you have an easier time getting a hold of how the trading market flows without so much hustle.
In a Snap: Forex Trading Terms
- Ask – the price trader is eager to SELL a certain instrument.
- Bid – the price trader is eager to BUY a certain instrument.
- Spread – the difference between the Bid and Ask.
- Currency Pair – a term used when buying and selling one currency concerning another.
- Pip – the smallest price movement in percentage
Ask is the best possible price tag to sell an asset. As a result, when we say “the ask price”, we mean the lowest cost of the asset a broker is aimed to sell.
For example, if an investor wants to buy a stock, they need to determine how much someone is willing to sell it for. They look at the ask price, the lowest price someone is willing to sell the stock for.
The bid price is the price that an investor is willing to pay for the security.
For example, if an investor wanted to sell a stock, he or she would need to determine how much someone is willing to pay for it. This can be done by looking at the bid price. It represents the highest price that someone is willing to pay for the stock.
The term used to describe the lowest price movement. When we use this term in reference to a particular currency pair or asset cost, we mean the 4th decimal place.
Example: let’s say you want to trade the EUR/USD pair with the starting price at 5.0031. That it goes up and reaches the level of 5.0036. It means that the price has increased by 5 pips (36 – 31 = 5).
The spread is the difference between the bid and ask price. The higher that difference is the higher revenue a broker gets.
It is actually the first terminology you will be introduced to when trading for the first time. The term refers to the process of trading currencies. It means that a trader buys and sells one currency about another.
Example: let’s say you have a certain amount of USD. You want to buy EUR with a certain amount of dollars you have. So, this is actually a currency pair of EUR/USD. The first one (EUR) refers to the currency you want to buy. It is also known as the base currency. The second one (USD) refers to the one you have. It is called the quote currency. When buying an asset, you will need to spend the amount of quote currency needed to cover the value of 1 base currency.
Terms in Trading Process
Now, we have learned enough to get involved in the trading process. The following terms used in Forex trading are generally used under real-life trading conditions. You will need them to launch the process and start trading.
In this particular section, we will explain Forex terminology that refers to opening and closing positions. Once a trader has entered the market with the aim of buying or selling an asset, the position has been opened. If you want to leave the market, you close the position. The key trading terms here are:
- Entry – the process of engaging with the broker when selling or buying assets.
- Exit – the process of closing the position no matter if a trader made a profit or loss.
Sounds pretty easy, doesn’t it? Well, the situation might get out of hand every second. Especially when considering today’s market uncertainty. Under such circumstances, the only tools that may help a beginner trader include:
A trading technique lets a trader define the position that is considered as a loss. Once you have reached that position, the order is closed automatically. The tool may come in handy in case of an unpredictable price movement. The situations when it goes in the opposite direction to the trade are common.
Another efficient tool to prevent beginners from huge losses right at once. It is used to set a fixed price upon your decision to take the profit instantly. The good thing about the features is that the target price can be set in advance before you enter the market.
Bull or a Bear?
Picking up the right trading strategy is vital. But defining your particular trading style is even more important. It will depend on your ability to predict the price and market movement. So, you need to decide whether you are “a bull” or “a bear”.
If you believe that the market is about to rise in the short or long run, you are definitely a bull. Being a “bullish” trader means expecting the rapid price increase in the nearest future. Bulls usually fight with their horns thrown upwards (the tactics are associated with the market rise).
If you believe that the market and price will drop down, you are a bear. The term refers to the way wild bears fight. They traditionally move their claws downwards when trying to beat the opponent. The movement describes the potential market fall. This is where a short-selling strategy might work out.