8 Key Forex Terms You Need to Know
Are you new to trading and unsure about some of the terminology you see? Familiarising yourself with key forex terms is a crucial aspect of your trading education. The challenges that are attached to trading may seem difficult enough without the use of industry jargon thrown into the process. We explain 8 of the key forex terms you may come across which will help you to build your trading knowledge.
Bull and Bearish
If you see the terms bullish and bearish it normally refers to the market sentiment. If the price of a certain financial asset is going up then the market is recognised as being bullish as there are more buyers. Buying during this period means you are going ‘long’ as you are hoping to profit by selling the asset in the future once the asset’s price has risen. Being bullish also refers to the traders own sentiment as it highlights that the trader thinks the asset will rise and therefore opens a position. When the price of an asset is going up it is known as an uptrend.
If the asset’s price is going down then the market sentiment is bearish, as there are sellers present. You are known to be bearish as you go short in the hopes of making a profit once the asset’s price has fallen and you can sell. If the trader acts on a bearish market sentiment then they might choose to sell the asset they already have or go short. When a market is falling it is known as a downtrend.
Trading on leverage allows you to take advantage of both rising and falling prices by not fully owning the underlying asset. With leverage, you can open a larger position by placing a small initial deposit. Leverage can also be expressed as a ratio. For example, if you are offered leverage of 2:1, that means your position will be twice the size of your trading account. If you had $5,000 in your account then you will have exposure of up to $10,000 to buy or sell. However, using leverage can also mean any potential losses will also be magnified.
A margin is a deposit you make before you start trading CFDs, and will represent a certain percentage of the contract’s full value. The advantage of this is that traders are able to open large positions when only investing in a fraction of the assets full value. This means that you will gain full exposure to the position. However, you should only risk capital you can afford to lose and have extra funds in your trading account in case you occur any potential losses. Leverage can be like a double-edged sword, while trading on margin can magnify your profits, it can also increase your losses. Find out more about calculating margin here.
Bid and Ask Price
The bid and ask price refers to the market price of a particular asset. If an FX pair had a price quote of 1.3452 / 1.3453 then the trader who is looking to buy will pay 1.3453 and the trader who wants to sell would place an order at 1.3452. The spread represents the profit your trading provider makes and is the difference between the bid and ask price.
It is important to note that the spread can widen during periods of market uncertainty.
When trading forex, a pip refers to the point in percentage and is a unit of measurement for currency pairs. It also shows a change in value. Normally the pip is the last decimal place of the quoted price. It’s standard that most currency pairs will go out to four decimal places, there are some currency pairs that don’t go by this such as the Yen which goes out to two decimal places.
An example of this would be the GBP/USD is 0.0001 and then the GBP/JPY will be quoted 0.01. You might also come across the term pipette which goes beyond the standard two or four decimal place rule. When a broker quotes a pair to the fifth or third decimal place then it is known as a pipette.
When forex is traded it is done in amounts called lots, which refers to the number of units you are going to buy or sell. When you place an order on the trading platform it will be quoted in lots. The standard lot size is 100,000 units of currency. There are also mini, micro and nano lots which are 10,000, 1,000 and 100 units respectively.
Major, Minor and Exotic
When you participate in the currency market you are able to buy and sell currency pairs. For example, if we look at the AUD/USD. The value of the Australian dollar is being quoted against the United States dollar. If the AUD/USD rate is 0.726, then the Australian dollar is worth 72.6 U.S. cents. If you open a ‘buy position’ on the pair, then you are buying the Australian dollar while selling the United States dollar.
Major Currency Pairs
There are six major currency pairs. They are known as major currencies as they are the most heavily traded. These include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD.
Minor and Exotic Currency Pairs
Minor currency pairs are not normally associated with the USD. These types of currency pairs tend to be subject to a wider spread as there won’t be much liquidity as the major currencies. Minor pairs include the EUR/GBP, EUR/CHF, GBP/JPY, NZD/USD and the AUD/ZXD. Exotic pairs tend to be currencies from developing and emerging markets. An example of an exotic pair is the EUR/TRY (Euro / Turkish Lira).
Support and Resistance Levels
Support and resistance levels and being able to identify them is an important aspect of technical analysis. When there is an increased level of demand there is a downtrend to be expected and this price level is known as the support. If the price drops, then demand increases and forms the support line. When there are sellers in the market, the price increases and this causes a resistance level.
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Trading on margin is high risk.