Forex Trading Glossary of Terms
The Forex Trading Glossary of Terms plays an important role in your understanding of the “lingo” used within the Financial Industry. Understand certain terminology will help you feel more comfortable whilst trading and putting certain things into action. This will avoid you from simply watching from the sideline, wondering what is being spoken about or indicated.
This goes hand in hand with general Forex education that you should pay attention to and grasp the concept of. We will keep this Glossary as simple as possible, only indicating the very essentials you as a trader would need to understand. It will be slightly biased towards Forex trading and common terms used.
A lot of these terms can be similar to those used in the Stock, Indices and Commodity markets.
We will leave out the more advanced terminology and write a full article on them which will help you better understand their meanings and functions. A lot of the terminology has already been covered in a full article, which we will link to accordingly.
The Forex Trading Glossary of terms is focused on Forex & CFD Trading.
Assets including Forex, Stocks (Equities), Indices, Bonds, Commodities or even Cryptocurrency. It refers to a tradable resource that can be exchanged on an exchange such as the JSE (Johannesburg Stock Exchange) or any other global exchange. Forex (Currencies) has no fixed exchange and it traded globally with the price based on liquidity throughout multiple providers.
Ask (Offer/Asking) Price
Ask price refers to the lowest price an asset is willing to be sold at. Prices are quoted in two ways, the Bid and the Ask, which the difference is called the spread. The asking price is also called the offer, where a seller is willing to offer an asset at a given price. In Forex the spread is calculated in pips.
The base currency is the first quote in a currency pair and is also called the base currency within a given quoted price. This is quoted in conjunction with the second currency called the quoted currency. One currency is always being sold or bought for another.
Bid (Buying) Price
Bid price refers to the highest price an asset is willing to be bought at. It is also referred to as the buying price, the highest bid offer to purchase an asset.
The difference between the bid and the asking (offer) price is what is referred to as the spread. The spread can be fixed or floating.
CFDs (Contract for Difference)
A Contract for Difference (CFD) are derivatives of the physical asset, allowing you to enter into a contract and pocket the difference of the price fluctuation. You do not own the financial product or asset. A trader can go long or short and benefit from an increase or decrease in price.
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A commission can be one of many things. Some brokers offer ECN (Electronic Communication Network) and charge a commission per round trip on a standard lot. This is compensation for a much lower to no spread on the asset. Swaps are a form of commission charged for holding a trade overnight. It is a form of interest charged.
Currency pairs are always traded in pairs. The base and quote currency. A currency pair is the value of one currency pair vs. another currency of the quote in the FX market (Foreign Exchange Market).
A contract is a standard lot size (100,000) unit in Forex trading. When entering and exiting a trade it is also referred to as a round trip.
Day trading is a short term trade, contained within a day (24 hour period). Trades are normally closed before the market close on the same day of opening the position. Multiple day trades can be taken during a day.
A derivative is similar to CFDs. The price is determined by the physical asset (underlying asset). This allows a trader to go long or short.
Forex, FX or Foreign Exchange is the ability to trade on the international currency markets.
Fundamental analysis is when traders trade news or economic events, trying to capitalise on the price movement or harsh drops or spikes in the market. The purely base their decisions on these events, speculating its outcome in advance.
Free margin is the difference between your equity (balance with running profit or loss) and your margin to maintain the open positions.
Leverage or Margin trading allows a trader to trade much larger positions than their account capital. This has an impact on potential profits and losses. Higher leverage is riskier and can put your account at risk when “over-leveraging”.
Long vs. Short
Going long, buying, speculation an increase in price is when your analysis indicates the price will go up. Going short, selling, speculating that price will decrease in price is when your analysis indicates the price will go down.
Margin goes hand in hand with leverage. It is the amount of collateral put aside to open and maintain an open position.
MetaTrader 4 (MT4)
Designed by MetaQuotes, MetaTrader 4 is the world’s most popular trading platform for Forex trading.
A pip, or point in percentage, is the 4th digit in a currency quote. The only exception is the JPY (Japanese Yen) where the pip is the second digit.
A pipette, similar to a pip, is a fraction or fractional pips. On normal currency pairs, it is the 5th digit and in JPY pairs the 3rd digit. Most brokers quote the price with the pipette.
The quoted currency is the price displayed on the chart. How much of the quoted (the second currency in the pair) to purchase 1 unit of the base currency (first currency in the pair).
Scalping is a trading strategy. Traders would take short trades trying to capitalise on moves in the market. They only stay in the market from a few seconds to a few minutes.
Technical analysis is by looking at price on a chart, at face value. Traders can use price action or indicators to do their analysis and do not often take Fundamental analysis into consideration. They may use it as a positive to stay out of the market an hour before and after such events.