20 Forex Terms You Need to Learn in 2016

If you’re new to the forex market, you’ve probably been bombarded by a deluge of unfamiliar terms and principles. The following glossary introduces you to 20 commonly used forex terms that you should wrap your head around before trading. Consider this part of your initiation into the world’s most liquid financial market.

Bid-Ask Spread: In financial trading, the bid/ask spread is the difference between the bid and ask price. The bid price is the price at which a buyer is willing to pay for an asset, whereas the ask price is the price the seller is willing to accept for an asset. In currency trading, the bid-ask spread is influenced mainly by the liquidity of the currency pair being traded.

Candlestick: A visual charting pattern that displays the lows, highs, opening and closing prices for a particular currency pair in a given day or period. Candlesticks consist of a “real body” and “shadows,” which signify daily price movement. Candlesticks are used to pinpoint trend reversals in a given market.

Currency Pair: The currency pair is the main asset that is traded in the forex market. As the name implies, a currency pair represents the value of one currency against another currency. The first currency in a currency pair s referred to as a base currency and the second currency is referred to as the quote currency. Therefore, the currency pair signifies how much of the quote currency is needed to buy one unit of the base currency.
Fundamental Analysis: A method of assessing the intrinsic value of a financial asset on the basis of broader economic, financial and policy factors. Fundamental analysis attempts to predict price movement of a financial asset, such as a currency pair, by looking at things like economic data, central bank statements and the performance of the economy.

Futures Price: A futures price is the price at which a financial asset can be bought or sold for payment or delivery sometime in the future. In this sense, a futures price is differentiated from the spot price of a financial asset.

Leverage: Put simply, leverage is the ability to control a large amount of capital using very little of your own. Leverage allows traders to borrow a large sum of money in order to trade. For example, brokers offering 100:1 leverage will allow traders to control a $100,000 position on a deposit of just $1,000. While leverage can significantly increase your returns, it can also amplify your losses.
Limit Order: A type of order to buy or sell a currency pair only when it meets certain conditions specified by the trader, such as when it reaches a certain price. A limit order is considered a pending order until the pre-specified conditions are met. This means that the actual execution of a limit order is not guaranteed.

Liquidity: One of the most important aspects in determining the size of a bid-ask spread, liquidity refers to volume and activity in a particular market. In general, a more liquid (i.e. a more active) market provides more frequent price quotes and greater opportunity for price movement.

Margin: In forex trading, margin refers to borrowing capital (usually from the broker) for the purpose of buying a security. This is usually referred to as “buying on margin.” In order to trade on margin, an individual must deposit collateral into their trading account. Margin percentages are usually set at 1% or 2% by the broker. For a trader, this means that a $1,000 deposit is required to trade a $100,000 position.
Margin Call: A margin call is a request from the broker to the trader that more funds must be deposited in order to maintain an open position that has gone against the trader. Often, a position that receives a margin call is simply closed by the broker. While unpleasant, this allows traders to avoid further losses on a bad trade.

Market Order: An order placed by a trader to buy or sell a currency pair immediately at the best available current price. Since it doesn’t contain any restrictions in terms of the bid/sell price or timeframe in which it is executed, a market order is immediately subject to fluctuations (i.e. supply/demand) in the market.

Pip: The smallest price change that an exchange rate can make, usually expressed to four decimal points or 1/100th of 1% (i.e. $0.0001). Pips provide traders with an easy way to measure their performance on a given currency pair and are one of the most fundamental concepts to understand in forex.

Resistance Level: In forex trading, a resistance level is a price that may act as a ceiling on a particular currency pair. This widely used technical analysis technique attempts to cap an increase in the price of a currency pair or other financial asset, giving traders an idea of how high a particular asset may rise.

Spot Price: Unlike a futures price, a spot price describes the current market price at which a particular currency pair or financial asset is bought and sold.

Stop-Loss Order: Similar to a take-profit, a stop-loss order is the instruction to sell a currency pair when it reaches a certain price. It is designed as a defensive mechanism to limit a trader’s loss in the event that the price moves in an unfavourable direction. It can be thought of as a way to limit even bigger losses in the event of a bad trade.

Support Level: In forex trading, a support level is a price that may act as a floor on a particular currency pair, which may lead to an automatic correction. It is the opposite of a resistance level. Traders usually identify several support levels when trading a currency pair.

Take-Profit (T/P) Order: A type of order used by forex traders specifying the exact rate at which an open position will be closed for profit. A T/P order allows traders to lock-in profits in the event that a currency pair moves in a favourable direction. A T/P order closes a position at the current market rate.

Technical Analysis: A method of evaluating a financial asset using past market data, such as price and volume. Technical analysis is the primary driver of forex trading and covers a wide spectrum of techniques that include oscillators, candlestick analysis, bar charts, line charts and many others.

Trailing Stop Order: A trailing stop order is similar to a stop-loss in that it can be used to limit losses. In the case of a trailing stop, the stop-loss price is contained in a certain percentage range or dollar amount below the market price as opposed to a single, absolute price. Unlike a stop-loss, a trailing stop order drags up when the price of a currency pair goes up.

Vanilla Option: A normal call or put option that gives holders the right to buy or sell a financial asset at a predetermined price sometime in the future. Options, which allow you to trade stocks, commodities and currency pairs, are a type of derivative. This means you don’t have to own the underlying asset to profit from it. Vanilla options allow traders to buy an asset (call option) or sell it (put option) on the open market.

Investopedia. Candlestick.
Investopedia. Currency Pair.
Investing Answers. Spot Price.
Babypips. Leverage and Margin Explained.
OandA. Forex Order Types.
Forex-markets.com. Forex Definitions and Terms.
Kesavan Balasubramaniam. “How does margin trading in the forex market work?” Investopedia.
Forex-markets.com. Forex Definitions and Terms.
OandA. Forex Order Types.
Matt Lee. “What is a pip and what does it represent?” Investopedia.
Forex-markets.com. Forex Definitions and Terms.
Investing Answers. Spot Price.
Forex-markets.com. Forex Definitions and Terms.
Investopedia. Take-Profit Order – T/P.
OandA. Forex Order Types.
OandA. Trailing Stop.
Senior Analyst (February 24, 2015). “Getting Started With Vanilla Options.” Forex.info.

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