Forex, or the foreign exchange market, is the biggest financial market in the world. In the Forex market, you and another country’s citizens can trade currencies with each other and gain profits.
Now, to have a successful run in the Forex market, you must be well aware of all the basic Forex terminologies. In this article, we will be focusing on all the commonly used Forex trading terms and their meanings.
The most common trading amount that Forex markets use is in “lots.” It essentially means the number of currency units that you intend to buy or sell in the Forex trading.
The standard lot is 100,000 units of currency. Although in recent times, there has been an invention of mini, nano, and micro lot sizes. These are 10,000, 1,000, and 100 units, respectively. And you will see that most Forex traders now make use of mini and micro-lots.
An appropriate trading lot size directly affects the market moves on your account. Therefore, to find the best lot size, the safest way would be to use a risk management calculator. This can help you decide the best size according to your prevailing trading assets.
Primarily, all the currencies of countries are priced against the US dollar. Therefore, a cross rate defines any foreign exchange rate that does not include the USD. These currency rates are significant in specific market pairs such as EURGBP, EURCHF, EURJPY, and AUDNZD.
A cross rate also implies the exchange rate between two currencies that are not the official currencies whose exchange rate quotes are given to the countries. Thus, if you want to obtain the exchange rate of your base currency without involving USD, then you will need to find the cross rate.
To do so, you must find the two currencies first. One should be your home currency, and the other should be the foreign currency you want to exchange yours with. Once you do that, you have to find the quote for each of those currencies. By knowing the quote, you can use the appropriate rule and derive your cross rate.
If you are into Forex trading or are planning to engage in it, then you should be prepared for this particular term. Pips are used in the Forex market quite often, which is why you must know about the pip values to calculate profits and losses.
Now, what exactly does pip mean? Pip is essentially a measurement unit that people use to express a change in the value between two separate currencies. It stands for “Percentage in Point.”
For instance, if USD increases from 1.1051 to 1.1052, then the 0.0001 USD increase in value is “one pip.”
A pip occurs in 4 decimal places, and the fourth digit of the decimal is the pip movement. However, there is an exception in these pairs, such as the Japanese Yen, which reaches only two decimals.
If you are a forex broker, then the forex spread indicates the difference between your selling or bidding rate and the buyer’s rate for exchanging or trading currencies. Therefore, the difference that occurs in trading is the spread that you will have to pay.
Most of the Forex pairs are traded without any commission. However, the spread is a vital cost that is applied to all trades. An important thing to remember in terms of forex spread is that every market and its Forex pair will have huge differences in spreads. They can be narrow or wide according to the country’s economic status, the time at which the trade begins, and, most importantly, the currency involved.
Moreover, the Forex spread manages to interfere with your trading profit and loss depending upon the trading strategies that you are implementing and especially, the market you are trading. As a result, you will have to pay a hefty amount for your trades.
Bid and Ask prices
Depending on the Forex pair or the market that you decide to trade, the bid and ask prices vary considerably.
For example, if you are buying, then you will be dealing with the “Bid” price. This is the highest price that you will be willing to pay for security.
On the other hand, if you are selling, then the “Ask” price will be used. This price is the lowest amount that you will have to accept by the buyer.
Note that the difference between these two prices is the spread. If the spread is small, then the liquidity of the security will be greater and vice versa.
Eventually, you benefit from this bid-ask spread if you are the sole market maker. For instance, if you are quoting $10.60/$10.65 for security, it means that you are willing to buy the security at $10.60 (Bid price) and sell the security as $10.65 (Ask price).
A tick, in the Forex trading world, is a unit of measurement that tracks the minimum up and down movement of a security’s price. It can also indicate the change in the security prices between two trades.
The tick lays down a specific profit in your local currency. In addition to measuring changes in prices, it also acts as an indicator of a trade’s transaction. An uptick suggests a higher-priced transaction than the previous ones, and a downtick indicates a lower transaction payment.
The minimum tick size for the trading of stocks at more than $1 is 1 cent. And the minimum ticks in a minute in Forex trading is usually between 12-500 movements based on the market opening’s volume.
In Forex trading, the term volume indicates the amount that you wish to trade. A volume is what you trade in multiple lots in a Forex pair at a specific time. Moreover, it measures exactly how much the price has moved within a time frame.
Since Forex is a decentralized market, there is no standard formula to measure the volume. Therefore, an easy way to measure volume is through tick movements.
What exactly does that mean? It is quite simple. The up and down movements of a tick represent the increase or decrease of a price, respectively.
Hence, by measuring the number of times ticks price moves in a particular duration, you can easily track the volume regardless of the number of transactions made.
Sometimes, you will find yourself in a situation where the price in which you had entered a trade is not the same by the time your order is executed. This unexpected scenario is what we call slippage in Forex terms. A slippage can either be a bonus or a downfall, and you can witness this occurring in majorly fast-paced markets as they are more prone to sudden turns.
A huge factor that amounts to slippage is high volatility, which is also a quality of fast-moving markets. This usually results from news announcements or abrupt market trend changes.
However, there are certain ways in which you can protect yourself from such a situation, like using your limit orders or a guaranteed stop that will stop your active trade once your asset price reaches the level that you specify.
Going Long and Going Short
While talking about trading, you might have often come across the words “going long” and ” going short.” But do you when and where to use these terms?
In simple terms, long in trading means a scenario where you make a profit if the market price increases. Therefore, when you say that you are going long, it can mean that you are either making spread bets or buying future contracts. This way, you are taking a long position in the trading market without buying the underlying asset.
On the contrary, short indicates that your trade will profit only if the asset in transaction falls in price. Hence, if you are going short, it means that you are either borrowing an asset from a broker or engaging in CFD trading.
Bearish and Bullish
Both bearish and bullish represent your thoughts as a trader on whether the prices of an asset will rise or fall in the coming future. A bear and a bull market indicate two sides of the trading market.
- Bullish: When you are bullish about an asset, it means that you believe that the prices will increase because a Bull market represents increasing prices.
- Bearish: If you are bearish about an asset, you are saying that the prices are going to fall because a Bear market stands for a fall in prices.
Support and Resistance
One of the most widely used terms in Forex markets is support and resistance. Support indicates a situation where the prices that are already decreasing stop and change their direction and start rising. It is often seen as a “floor” that holds prices.
On the other hand, resistance refers to a level where the prices that were rising stop and change direction and start falling rapidly. It is seen as a “ceiling” to keep the price from going high.