If you're thinking about starting to trade Forex, it's important that you are familiar with the most commonly used terms in the industry.
In this blog post, we will go over six of the most important terms that every trader should know.
By understanding these concepts, you'll be able to make smarter trading decisions and increase your chances of profitability!
Currency pairs – The two currencies in a trade
For example, if you're trading EUR/USD, the Euro is the base currency and the US Dollar is the quote currency.
The most popular currency pairs are typically those that involve the US Dollar, such as EUR/USD, USD/JPY, and GBP/USD.
Typically, the more popular a currency pair is, the narrower the spread will be.
Bid – The price at which a trader is willing to buy a currency
For example, if the bid price for EUR/USD is currently at $0.90, that means that traders are willing to buy Euros for $0.90 US Dollars each.
Typically, the bid price will be slightly lower than the actual market price.
Spot price – The current market price of a currency pair
The spot price is the most up-to-date market price for a currency pair.
It is constantly changing, and traders use this information to make decisions about their trades.
Spread – The difference between the bid and ask prices
The spread is the difference between the bid price and the ask price.
For example, if the bid price for EUR/USD is $0.90 and the ask price is $0.91, the spread would be $0.01.
The smaller the spread, the more liquid a currency pair is said to be.
Lot size – The quantity of currency that is traded in one transaction
A lot is the standard unit of measurement for a currency trade.
The size of a lot will vary depending on the currency pair that you're trading.
For example, a standard lot size for EUR/USD is 100,000 Euros.
Pips – The smallest increment of change in a currency's value
A pip is the smallest unit of change in a currency's value.
For most currency pairs, a pip is equal to 0.0001.
So, if the EUR/USD spot price goes from $0.90 to $0.91, that would be a one-pip move.
Pips are used to measure profits and losses in Forex trading.
Going Long – Buying a currency pair in the hope that it will increase in value
When you go long on a currency pair, you're buying the base currency and selling the quote currency.
For example, if you go long on EUR/USD, you're buying Euros and selling US Dollars.
You would do this if you think that the value of the Euro will increase against the US Dollar.
Going Short – Selling a currency pair in the hope that it will decrease in value
When you go short on a currency pair, you're selling the base currency and buying the quote currency.
For example, if you go short on EUR/USD, you're selling Euros and buying US Dollars.
You would do this if you think that the value of the Euro will decrease against the US Dollar.
Cross pairs – Currency pairs that don't include the US Dollar
Cross pairs are currency pairs that don't involve the US Dollar.
For example, EUR/GBP is a cross pair because it's two currencies (Euro and British Pound) that don't involve the US Dollar.
Cross pairs typically have wider spreads than major currency pairs.
Appreciation – An increase in the value of a currency
Appreciation is when the value of a currency increases.
For example, if the EUR/USD spot price goes from $0.90 to $0.91, that would be the appreciation of the Euro against the US Dollar.
Depreciation – A decrease in the value of a currency
Depreciation is when the value of a currency decreases.
For example, if the EUR/USD spot price goes from $0.91 to $0.90, that would be the depreciation of the Euro against the US Dollar.
Leverage – Using borrowed capital to increase the potential return of an investment
Leverage is when you use borrowed capital to increase your potential return on an investment.
For example, if you have a $100,000 account and you're trading with 100:01 leverage, that means that you can trade up to $100,001 worth of currency.
Leverage can be a great tool for traders, but it also comes with risks.
Margin – The amount of money that is required to be deposited in an account in order to trade
Margin is the amount of money that you need to deposit in your account in order to trade.
For example, if you're trading with 100:01 leverage and the margin requirement is 0.25%, that means you would need to deposit $250 in your account to trade $100,001 worth of currency.
Margin Call – A demand from a broker for a trader to deposit more money or close out positions
A margin call is when your broker demands that you deposit more money into your account or close out your positions.
This can happen if the value of your account falls below the margin requirements.
Position – The size of a trade in lots
Position is the size of a trade in lots.
One lot is equal to 100,000 units of currency.
So, if you're trading one lot of EUR/USD, you're buying or selling 100,000 Euros.
So there you have it, our top 15 Forex terms that every trader should know.
If you are just starting out in the Forex market, or even if you have been trading for a while, make sure to bookmark this page and refer back to it as needed.
And finally, remember that learning is an ongoing process; continue studying and expanding your knowledge so that you can become a successful trader.
How many of these Forex terms do you already know? Do you have any questions about any of them?
Let us know in the comments below!