Understanding Popular Forex Terminology
The forex market is definitely a vast and overwhelming space, with more than 170 international currencies and daily trading volumes in excess of $6.6 trillion.
To make matters even more confusing, the forex market is packed full of unique jargon and terminology, and understanding this is crucial if you’re to get to grips with your trading career!
In this post, we’ve listed some of the most popular forex terminology, while breaking down some more complex concepts that will impact on your trading journey a little later on. Let’s get started!
- Currency Pair: Currencies are traded in pairs as they’re derivative assets, which means that you don’t buy, sell or own them directly. These pairs include a base and a quote currency, and you’re able to speculate in which direction the asset will move.
- Major Pairs: Currency pairs are split into major, minor and exotic categories. There are seven major currency pairings overall, which pit the US dollar against the Euro, the British pound, the Swiss franc, the Japanese yen, the Canadian dollar, the Australian dollar and the New Zealand dollar.
- Cross Pairs and Exotics: Conversely, cross pairs combine any two major currencies apart from the greenback and retain high levels of liquidity. Exotics refer to currencies that aren’t listed in the top 10 traded currencies in the world, while they tend to deliver increased volatility and are often favoured by risk-hungry traders.
- Exchange Rate: This refers to the real-time exchange rate of a specific currency pair, with traders often calling this the ‘price’. In fact, it shows the price of the base currency expressed in terms of the quote currency, and traders often speculate on whether this will rise or fall within a given period of time.
- Pip: When forex traders refer to profit and loss, they often utilise the term ‘pip’ (or pips). A pip is short for percentage in point and represents the smallest increment that an exchange can shift up or down, with a single unit usually equal to the fourth decimal of most currency pairs.
A Look at the More Complex Forex Terms
As you start to trade and execute orders through online brokerage sites, you’ll encounter other and more complex terms that you’ll need to keep in mind. These include:
- The Spread: Once you’ve selected your currency pair and chosen to enter a trade, you’ll have to pay a transaction fee to execute. While most licensed brokers don’t charge commission fees in 2021, you’ll still have to cover the bid/ask price, with the spread referring to the difference between these quoted figures. So, when bulls buy at the ask price, their position is immediately in a loss that equals the spread.
- Leverage: Leverage is central to forex trading, as this refers to the fractional increase in the amount you can trade in relation to your capital. Usually expressed as a ratio, most brokers offer inflated leverage of between 50:1 and 100:1 to traders, enabling them to control positions that are considerably larger than their initial deposit amount.
- Margin: There’s a close relationship between leverage and margin, with the referring to the actual deposit required to secure borrowed capital. Margin can either be free or used, with the former referring to the amount that’s open to new positions. Conversely, ‘used’ margin describes the amount being used to maintain an already open position, so you’ll need to monitor your trades and continually keep an eye on your account.
These terms should help you to understand the initial forex trading journey, from the core assets that you invest in and the execution of orders through an online brokerage site.
Understanding these terms also builds a solid foundation of knowledge, and one that can sustain long-term success and growth in the marketplace.
