Trading Basics
Speak Forex
Just like navigating a new city requires understanding the signs, forex trading has its own unique language – essential terminology that unlocks successful trades.
Basic Terms
Currency Pair : It is the quotation of one currency unit against another currency unit.
Exchange Rate : It is the rate at which you exchange one currency for another. The exchange rate shows you how much of the quote currency you need if you want to buy 1 unit of the base currency.
Quote : It is a market price that always consists of 2 figures: the first figure is the bid/selling price, and the second is the ask/buying price. (e.g. 1.23458/1.12347).
Ask Price : Also known as the offer price, the ask price is the price visible on the right-hand side of a quote. This is the price at which you can buy the base currency.
Bid Price : It is the price at which you can sell a currency pair.
Spread : It is the difference in pips between the ask price and the bid price. The spread represents the brokerage service costs and replaces transaction fees. There are fixed spreads and variable spreads. Fixed spreads maintain the same number of pips between the ask and bid price, and are not affected by market changes. Variable spreads fluctuate (i.e. increase or decrease) according to the liquidity of the market.
Account Currency : It is the currency you choose when you open a trading account. All your profits and losses will be converted into that particular currency.
Pip : A pip is the smallest price change of a given exchange rate.
Fractional Pip : It is an extra decimal place in the exchange rate.
Lot : Forex is traded in amounts called lots. One standard lot> has 100,000 units of the base currency, while a micro lot has 1,000 units.
Pip Value : The pip value shows how much 1 pip is worth. The pip value changes in parallel with market movements. So it is good to keep an eye on the currency pair(s) you are trading and how the market changes.
Margin : Margin is the minimum amount of funds, expressed as a percentage, that you will need if you want to open a position and keep your positions open.
Leverage : Leverage the forex broker lends you money so that you can trade bigger lots. Leverage depends on the broker and its flexibility.
Equity : It is the total amount of money in your trading account, including your profit and losses.
Used Margin : It is the amount of money kept aside by your broker so that your current trading positions can be kept open and you don’t end up with a negative balance.
Free Margin : It is the amount of money in your trading account with which you can open new trading positions. Free margin = Equity – Used Margin.
Margin Call : Margin calls are a major part of risk management: as soon as your Equity drops to a percentage of the margin used, your forex broker will notify you that you need to deposit more money if you want to maintain your position.
Position : It is a trade that you hold open during a certain period of time.
Long Position : When you enter a long position, you buy a base currency.
Short Position : When you enter a short position, you sell a base currency.
Close a Position : If you enter a long (buy) position and the base currency rate has gone up, you want to get your profit. To do so, you must close the position.
Order Types
Market Order / Entry Order : It is an order to buy or sell currency instantly at the current price.
Open Order : It is an order to buy/sell a financial instrument (e.g. forex, stocks, or commodities like oil, gold, silver, etc.) that will stay open until you close it, or you have your broker close it for you (e.g. via telephone trading).
Limit Order : It is an order placed away from the current market price.
Take Profit Order (TP) : It is an order that closes your trade as soon as it has reached a certain level of profit.
Stop-Loss Order (SL) : It is an order to close your trade as soon as it reaches a certain level of loss. With this strategy, you can minimize your loss and avoid losing all your capital.
Execution : It is the process of completing an order.
Re-quote : A re-quote is an unfair execution method used by some brokers. It occurs when your broker doesn’t want to execute your order on the price you entered, and slows down execution for its own benefit.
Congratulations! You've grasped the forex fundamentals and are ready to put your knowledge into practice. Before diving into the live market, though, there are two key decisions to make: selecting a forex broker and choosing a trading platform. Both factors will significantly impact your trading experience. Let's explore each in more detail to ensure you make informed choices.