Forex or the Foreign Exchange Market is the largest and the most liquid market in the world among investors, where one currency is traded for another. It trades 24h hours a day and 5 days a week. Today, more and more people around the world turn to Forex in order to earn some extra money due to issues caused by economic recession and financial problems. In this market no one can reach the ‘inside information‘ – the same news reaches all the participants at the same time. The changes in the exchange rate are caused by macroeconomic conditions and by actual monetary flows.
The Forex Market has its own terminology, so it‘s important to understand the basic notions in order to go deeper into learning how this market operates.
This article will enable you to learn the common terms and concepts in the Forex trading.
#1 The Eight majors
The top eight most tradable currencies at the Forex market are : US dollar (USD), European Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD) and New Zealand Dollar (NZD).
#2 Currency Pair
A currency pair is the relative value of one currency against another one, For example, you can trade USD for GBP (USD/GBP) or NZD versus JPY (NZD/JPY). The first currency in a pair is the base and the second the quote currency. The exchange rate indicates how much of the quote currency one needs if he or she wants to buy 1 unit of the base currency.
#3 Bid/Ask Spread
The bid presents the price at which the market/broker buys a particular currency pair from you. On the other hand, the ask price presents the price at which the market /broker sells a particular currency pair. So, the Bid/Ask Spread presents the difference between the ask price and the bid price.
#4 Fundamental Analysis
Based on political, economic and financial factors, fundamental analysis tries to predict the price movement considering elements such as central bank statements, economic performance of a country or economic information.
#5 Currency Futures
The futures are contracts that determine the price at which a currency can be bought or sold in the future. In addition, the amount of a particular currency must be bought or sold at a set date and price.
A pip is the slightest change in price that a currency can make, and it changes with market movements. It is usually expressed in 4 decimal points (eg. $0.0001). In a currency pair, it presents the last decimal point. The Japanese yen differs since it is expressed only in two decimal points, for example USD/JPY= 54,62
A lot is the basic unit in currency trading. A standard lot counts 100 000 units for USD based pairs. This means that this is the smallest amount one can buy or sell.
‘Buying on margin‘ means borrowing capital for buying a security. It‘s the minimum of capital that you need to open a position and keep it opened. One should observe the change in the exchange rate and according to the agreement between you and your broker, you either pay (if the exchange rate moved against your estimations) or get paid (if it moved in your favor).
#9 Margin call
It‘s a call from a broker to deposit more funds to maintain an open position that has become endangered. The initial deposit is a guarantee for a leveraged amount that protects a broker from potential losses, and the broker usually closes the unstable position, so the trader can also be protected from further losses.
To put it simply, leverage is the money that you borrow from your broker in order to trade larger lots. One should be very careful with the leverage – it can bring a trader a significant increase in returns, but it can also lead to serious losses.
Stop-loss enables you to lose only a small amount of your investments, regardless of the situation on the Forex market. It is an arrangement with a broker to sell a security when it reaches a certain price.
#12 Trailing Stop Order
Similarly to stop-loss order, it can be used to limit the losses. In trailing stop order, the price drags up with the increase in the price of a currency pair.
Liquidity is the volume and the activity in a market. More liquid means more active, and thus it opens a better opportunity for price movement and more frequent price quotes.
#14 Market Order
This arrangement helps a trader to buy /sell a currency pair at the best available price at the moment. It‘s directly exposed to supply/demand in the market dealing with no restrictions in terms of time or the bid/sell price.
Trends indicate the general direction of a market or the price and they can be divided to short, long or intermediate. If you are able to visualize a large-scale scene or predict an upcoming trend, this ability can bring you a great profit.
#16 Support and resistance
Support level is the ground price, and the resistance level is the top price for a particular currency pair. These levels are used for technical analysis to give traders an idea of how a particular asset can move.
#17 Spot Price
It‘s the current market price at which a particular asset can be bought or sold.
#18 Take Profit Order
This order closes your trade when it reaches a particular level of profit. It‘s beneficial for traders since it locks up profit when a currency pair moves in a favorable direction.
#19 Technical Analysis
Technical analysis is necessary to evaluate the market data, being of utmost importance in the Forex trading covering a wide range of methods and techniques presented by candlestick analyses, bar charts, oscillators, etc.
#20 Vanilla Option
This option allows holders to buy or sell assets, currencies or securities at a predetermined price in the future, but they are not obliged to do so. The trader doesn‘t have to own the assets to buy/sell them on the open market.
This extensive list introduces some basic terms and concepts related to the Forex market that will give you an idea how the foreign exchange market operates. The Forex market is a place where understanding basic terms is crucial if you want to gain some success. Opinions may differ on how to create a successful trading strategy, but with these terms, you‘ll surely know how to avoid great loss and tax deductions.