Understanding forex trading terminology

Forex trading has a lot of jargon associated with it. It can be confusing for new traders, but it is essential to understand the terminology to make informed decisions about your trades.

Basic forex terms

The following are some basic phrases that you will frequently encounter in the FX trading sector:

Price: The market maker/broker’s asking price for the currency pair.

Pip: The smallest increment at which a currency pair is priced. Pips track forex pairs.

Spread: The difference between the Buy/Sell (Bid/Ask) prices made available to traders on a trading platform. When spreads offered by a CFD provider are lower than those of its competitors, traders may profit from a smaller gap between the Buy and Sell price of the underlying FX trading pair.

Base: The nominator, or top number, is the first currency (or top number) in a currency pair.

Ask: The market maker/broker’s asking price for the currency pair.

Quote: The second currency in a currency pair is the denominator (or bottom number).

Leverage: A way to get more currency exposure without paying the total value of your trade upfront. It allows you to conduct larger trades with less money. For example, a leverage of 1:50 means you may open a $10,000 trade with $200 in funding. This implies profit and loss.

Market trading terms

To assist you to grasp the many ideas and technical phrases, we’ve compiled a quick rundown of the essential market terms to remember:

Bull market: An appreciating market with traders eager to increase their prolonged trading activity (known as ‘going long’).

Bear market: When there is a market on the decline, traders expect prices to drop, suggesting that there will be more short selling (or traders ‘going short’).

Broker: An intermediary for traders and financial institutions to use when performing transactions.

GDP (Gross Domestic Product): The overall sum of a nation’s economic activity.

Federal Reserve: The United States’ central monetary authority manages the country’s money supply. The Federal Reserve is frequently abbreviated as ‘the Fed’.

Interest rates: The interest rates factored into lending money from a bank or credit provider. The levels of interest rates are generally controlled by central banks, which is crucial to a currency’s health.

Inflation: In a national/state economy, the price increase in goods and services.

Foreign exchange volatility: The degree of fluctuation in a currency pair’s price movement, or the degree to which it may vary widely. This is usually an indication of how risky a currency pair is to trade.

Indicators and reports

Various assets, such as currencies and commodities, are impacted by economic indicators and reports. The following are some of the most important ones to be aware of:

RSI (Relative Strength Index): The overbought vs oversold indicator is a measurement that indicates whether an asset is overbought or undervalued. It ranges from 1 to 100.

The CMI (Commodity Channel Index): A statistic ranges from -100 to +100 and quantifies the inherent variation from a defined average.

MACD (Moving Average Convergence/Divergence): A trading indicator that identifies moving averages and may suggest the start of an upswing or downturn in the market.

Correlation: The connection between two assets, indicating that they are comparable (or dissimilar) to one another. Correlations range from +1 to -1.

CPI (Consumer Price Index): The CPI is a common inflation statistic that helps measure the cost of products and services.

PMI (Purchasing Managers Index): The relative strength of the manufacturing industry is determined by this indicator.

QE (Quantitative easing): The act of putting money into the market to aid in avoiding recession.

Additional terms related to forex

The list below includes the main terms you will find on trading platforms.

Stop-loss: An order to close a losing position once it reaches a certain loss level.

Take profit: A market order is used to close a profitable position once it reaches a certain point.

Fundamental analysis: Focuses on more general economic and political data to forecast how a currency pair will move.

Technical analysis: Uses chart pattern (of past performance) to anticipate how a currency pair will move next.

Major pairs (or majors): A list of the world’s most commonly traded currencies. They hold the bulk of the foreign exchange market and are all priced and transacted in USD.

Minor pairs (or minors): Currency pairs aren’t as popular or liquid as the Majors. Exotics are a subset of Minor Pairs.