Most Used Forex Terms – Beginner’s Guide

Basic Forex Terms You Should Know Before Trading

Trading currencies in the foreign exchange (forex) market can feel like entering a foreign country, with its language and customs. Before starting Forex trading, it is essential to learn the basic Forex terms and concepts that Forex traders use on a daily basis. This knowledge will allow you to navigate the Forex landscape with confidence and communicate effectively.

In Forex, you will find unique terms such as:

• “pip”,

• “leverage”,

• “ currency pairs”,

• “offer price”,

• “bear market , ”

• “base currency”.

You will need to understand key operations terms such as spreads, margins and position size. While Forex terminology may seem complicated initially, understanding these fundamental terms and ideas is essential for any beginner Forex trader.

This article will explain some of the most common Forex words and phrases. common. We will define terms such as “open position”, “base currency” and “long or short option”. You will also learn about different types of orders, including stop losses and take profits. By familiarizing yourself with the basic Forex vocabulary, you will find it easier to develop trading strategies and analyze the forex market.

With a little study, you can learn the language of forex trading. This terminology precisely describes the instruments, actors and mechanisms that make up the foreign exchange market. Fluency in Forex terms will allow you to research trading techniques, evaluate signals and trends, and make informed trading decisions.

Start developing your Forex vocabulary today.

Forex Basic Terms

Exchange Rate

One of the most basic forex terminologies is the exchange rate, which refers to the current market price at which one currency can be exchanged for another. Basically, it is the price you pay to convert one currency into another and tells you how much of one currency you need to buy one unit of another currency. The exchange rate is sometimes also called the exchange rate or the exchange rate. change.

For example, if the EUR USD exchange rate is 1.2500, then 125 USD is worth 100 EUR.

Starting today, February 3, 2024:

• 1 US dollar is approximately equivalent to 0.93 euros.

• 1 US dollar is approximately equivalent to 1.34 Canadian dollars.

• 1 US dollar is approximately equivalent to 146.76 Japanese yen.

Exchange rates may fluctuate throughout the day depending on several factors, including:

1. Supply and demand: if there is more If there is more demand for a currency than supply, the price of that currency will increase.

2. Interest rates: Countries with higher interest rates tend to have stronger currencies.

3. Economic performance: A country’s economic performance can also affect the value of its currency.

4. Political stability: Political instability can lead to currency devaluation.

Ask price

The Ask price , also known as Offer Price, refers to the lowest price at which a seller is willing to sell a particular currency pair or any other security negotiable. It represents the minimum amount they are willing to accept in exchange for selling their stake.

Essentially, it is the price you would pay to purchase the base currency in the pair.

Example:

• Imagine that you want to buy 100 euros with US dollars.

• The current selling price EUR USD is 1.2000.

• This means you would have to pay $120 to buy the 100 euros.

The sale price is always slightly higher than the offer price, creating the differential between supply and demand, which represents the distributor’s profit.

Defining asset classes

In finance, an asset class refers to a category of financial instruments that exhibit similar characteristics and behave similarly in the market. The top 5 asset classes are:

1. Equity

2. Fixed Income

3. Commodities

4. Coins

5. Real Estate

These broad asset classes are traded in their respective financial markets, such as the stock market, bond market, foreign exchange market, futures market and real estate market. Each market has its dynamics and offers different risk-return profiles. Diversification across different asset classes can help mitigate portfolio risk.

Currencies are a distinct asset class in the foreign exchange market, with major currency pairs, such as EUR/USD and USD/JPY, which behave differently than stocks and bonds.

Offer Price

The Offer Price In Forex, also known as buy price, is the highest price a trader is willing to pay for a specific currency in a pair. foreign exchange. Represents the amount of quoted currency a trader will get for selling one unit of the base currency.

This is how it works:

• Currency Pair: A combination of two currencies, such as EUR/USD (Euro versus US Dollar), GBP/JPY (British Pound versus Japanese Yen), etc. .

• Base currency: The first currency listed in the pair (EUR in EUR/USD).

• Quote Currency: The second currency listed in the pair (USD in EUR/USD).

Example:

Imagine that you have 100 euros and you want to exchange them for US dollars. The current EUR/USD bid price is 1.1900, which means you would receive $119 for selling your 100 euros.

Definition of base rate

The base rate is the reference interest rate set by a central bank, such as the Reserve Federal in the United States or the European Central Bank in Europe. This rate influences the interest rates that banks charge borrowers and offer to lenders.

By adjusting the base rate, central banks can attempt to control inflation and stimulate growth. economic growth. A higher base rate makes borrowing more expensive and generally strengthens the country’s currency by attracting foreign capital flows seeking higher returns.

The base rate has different names depending on the country, such as example:

• “Official cash rate” in New Zealand

• or the ” Federal Funds Rate” ” in the US

Currency Pairs

In the world of finance, a currency pair is a quote of two different currencies, representing their value relative to each other. It is essentially a price tag that indicates how much of a currency you need to exchange. to get one unit of the other.

Think about it this way: imagine you are at a currency exchange booth and you want to convert your US dollars (USD) to euros (. EUR). The currency pair you will find will look like this: EUR/USD.

• EUR is the base currency, which means it is the reference point for the quote . .

• USD is the quoted currency, which indicates how many US dollars you need to exchange for one euro.

So, if the EUR/USD exchange rate is 1.2000, it means that you will have to pay $1.20 for every €1 you want to buy.

There are many different currency pairs available, and the most traded ones involve major currencies such as the US dollar, euro, Japanese yen, British pound, Australian dollar and Swiss franc.

Here There are some additional details about currency pairs:

1. Major Currency Pairs: These are the most traded pairs, usually involving the US dollar against other major currencies . Examples include EUR/USD, USD/JPY, GBP/USD, USD/CHF and AUD/USD.

2. Minor Currency Pairs: These pairs involve less – traded currencies, often paired with a major currency. Examples include EUR/GBP, AUD/NZD and USD/MXN.

3. Exotic Currency Pairs: These pairs involve currencies from emerging markets or economies that are traded less frequently. They tend to be more volatile than major or minor pairs.

Short position

A short position in forex trading is also known as shorting or short position, it refers to sell a coin. pair with the expectation that its value will go down, allowing the trader to buy it back at a lower price and make a profit on the difference.

To open a short position, the Traders click the “Sell” button on their trading platform, which immediately opens a short trade at the current market price.

Example:

Let’s say you believe the Euro (EUR) will weaken against the US Dollar (USD). You short the EUR/USD pair to 1.1200, which means you borrow 1 EUR and sell it for 1.12 USD. Later, if EUR/USD falls to 1.1100, you buy back 1 EUR for 1.11 USD and return it to your broker. Your profit is 0.01 USD (or 10 pips).

Definition of the closing price

The closing price in forex trading refers to the final rate at which a currency pair is traded at the end of the trading day or trading session. In the foreign exchange market, which operates 24/5 because trading takes place in different time zones, the concept of a single, global “closing price” does not translate directly.

However, 5:00 p.m. EST, which is also the time when the New York trading session ends, is considered the standard closing price in the foreign exchange market.

Pip value

In forex trading, one pip (percentage in points) represents the smallest price movement for a currency pair. which helps to measure profits, losses and risks in different trades.

Concept:

• One pip is usually equivalent to the fourth decimal of a currency quote. For example, at EUR/USD 1.1234, one pip is 0.0001 (the “4” in the final decimal).

• However, for JPY pairs, the pip is the second decimal due to its lowest individual value (for example, USD/JPY 134.56 has a pip of 0.01).

• The pip value varies depending on the pair currency:

  • For pairs with USD as the quoted currency, the pip value in USD remains constant for a size of specific lot (e.g. 1 pip = $10 for a 100k lot).

  • For other pairs, the pip value in USD changes depending on the type exchange rate.

Calculate the pip value:

• Formula: Pip value in USD = (1 pip / price of quoted currency) * lot size

• Example: Calculate pip value in USD for 1 EUR/USD at 1.1234 with 10k lot:

  • Pip value = (0.0001 / 1.1234) * 10,000 = $0.8906

Leverage

Forex leverage is a facility provided by Forex brokers that allows traders to trade larger positions than the actual balance of your account. Leverage allows traders to multiply their purchasing power in the market by borrowing capital from their broker.

This is expressed as a ratio, such as 10:1, 50:1 or even higher . A 10:1 leverage means you can control $10 for every $1 you deposit, but you must provide margin, which is a percentage of the total position value, as collateral.

Example:

• With $1,000 and 10:1 leverage, you can open a position of $10,000.

• If the currency pair rises by 1%, your profit is $100 (1% of $10,000), essentially a 10% return on your $1,000 capital.

Margin used

In forex trading, margin used represents the portion of your account funds currently tied up in open positions. It is essentially the collateral you have posted to maintain your positions, calculated as the sum of all margins required for each open trade.

Example:

• Imagine you open a EUR/USD position with a value of $10,000 and a margin requirement of 1%. This means you need $100 (1% of $10,000) as required margin.

• If you then open another USD/JPY trade with a value of $5,000 and 2% of margin requirement, another $100 is used as margin.

• Your margin used becomes $200 ($100 + $100), reflecting the total capital locked in these open positions. .

Definition of daily order

In forex trading, a daily order refers to an instruction that you give to your broker to buy or sell a currency pair at a specific price , but with a crucial limitation: it only remains valid until the end of the trading day.

Example:

• You think EUR/USD will rise and place a daily order to buy at 1.1300 (a limit order).

• Yes the price reaches 1.1300 during the trading day, your order is filled and you buy EUR/USD.

• But if the price stays below 1.1300 until the market closes, your order is canceled and you lose the trade.

Long position

In forex trading, a long position essentially means buying a currency pair with the expectation that its value will increase in the future. This allows you to potentially make a profit by selling the currency pair later at a higher price.

Example:

• You believe that the euro will strengthen against the dollar, so you open a long position in EUR/USD at 1.1200.

• This means you buy 1 EUR for 1.1200 USD.

• Later, if the EUR/USD pair rises to 1.1350, you sell your 1 EUR for 1.1350 USD, making a profit of 150 pips.

Limit order

In forex trading, A limit order instructs your broker to buy or sell a currency pair at a specific price or better. This order type offers more control over the execution of your trade compared to market orders.

You specify a limit price, which is the maximum price you are willing to pay for a buy order or the minimum price you will accept for a sell order:

• Buy limit order: The order is only executed if the market price falls to or below your limit price.

• Sell limit order: The order is only executed if the market price rises or exceeds its limit price.

Futures Contract Definition

A futures contract is a standardized agreement between two parties to buy or sell a specific amount of a currency pair at a predetermined price on a specific future date. Unlike spot foreign exchange trading, where currencies are exchanged immediately, futures contracts fix the exchange rate and settlement date in advance.

Here’s a breakdown :

• You agree to buy or sell a particular currency pair at a fixed price (the delivery price) on a specific future date (the delivery date) .

• Both parties are legally obliged to fulfill the contract on the delivery date, regardless of the current market price.

• This allows you hedge against future price fluctuations or speculate on currency movements.

Defining Interest Rates

Interest rates represent the cost of borrowing a currency and are set by central banks to manage inflation and the economy. growth. Here’s how they impact Forex:

• Higher interest rates in a country generally make its currency more attractive to investors looking for higher returns. This increase in demand can cause the currency to appreciate.

• Conversely, lower interest rates make a currency less attractive, which could lead to depreciation.

• Therefore, comparative interest rates between different countries significantly influence currency movements.

Traders can borrow from a bank in a low-interest currency and invest in a high-interest currency, pocketing the interest rate differential; this is known as carry trade trading strategy .

Market order definition

A market order in trading Forex trading tells your broker to buy or sell a currency pair at best available price currently listed on the market. This means that it essentially prioritizes immediate execution over specific prices, ensuring that your trade is completed as soon as possible.

Example:

• You see the EUR/USD price quoted at 1.1234/1.1238 (bid/ask). You place a market order to buy 10,000 EUR.

• Your broker can execute the order at different prices depending on the liquidity available in the market:

  • If someone sells 10,000 EUR at the asking price (1.1238), their order is filled at that price.

  • If multiple sellers offer lower quantities, your order may be partially filled at different prices within the bid/ask range.

Entry Stop Order

In forex trading, an entry stop order acts as an automatic trigger for Initiate a buy or sell trade only when the market price reaches a specific level that you set. This allows you to automatically enter positions when your forecasted price movements occur, potentially capturing profitableopportunities.

Example:

• You think EUR/USD will rise and want to buy at 1.1300. Set a buy stop entry order at 1.1300.

• If the price reaches 1.1300, your order is activated and becomes a market order, buying EUR/USD at the current market price (which could be slightly above or below 1.1300).

Close a position

In forex trading, closing a position refers to ending your participation in a trade that opened previously. Basically, you are undoing the initial buy or sell trade to exit the market by placing the opposite trade to exit your previous trade:

• For a long position, sell the same amount of currency that you bought to exit the trade.

• For a short position, buy back the same amount of currency that you sold close the trade .

Example:

1. You buy 10,000 EUR/ USD at 1.1200 (long position).

2. Later, you decide to close the position. You sell 10,000 EUR/USD at 1.1300.

3. If the price increases, you make a profit (100 pips = 10,000 x (1.1300 – 1.1200)).

4. If the price decreases, you have a loss.

Exchange Definition

In finance, a ” Exchange” is a market where investors and traders buy and sell financial instruments such as stocks, bonds, currencies, commodities and derivatives, providing a platform for buyers and sellers to come together to trade financial instruments in a fair, orderly and efficient manner.

Examples include the New York Stock Exchange (NYSE) for stocks, the Chicago Mercantile Exchange (CME) for futures contracts, and Coinbase or Binance for cryptocurrencies.

Profit Order (TP)

A Profit Order is a type of limit order that you place with your broker to automatically close a position when the market price reaches a specific profit level. This helps you lock in profits and avoid leaving your trade open to potential losses if the market turns against you:

• For long positions: Placed above the entry price, the order is activated when the price reaches or crosses your specified profit level.

• For short positions: Placed below the entry price, the order is activated when the price falls to or below your specified profit level.

Definition of open positions

An open position refers to any trade you have initiated but not yet closed in the forex market. This means that you currently hold a long or short position in a currency pair.

Definition of Fundamental Analysis

Fundamental Analysis (FA) in the currency trading It involves evaluating the economic, political and social factors that can influence the intrinsic value of a currency and, consequently, its exchange rate. Basically, it helps you understand the “why” behind currency movements, going beyond simple technical chart analysis.

High Frequency Trading Definition

High Frequency Trading (HFT) refers to algorithmic trading strategies that involve the Quick execution of a large number of orders and positions to capitalize on small price movements in the forex market.

Definition of resistance level

A resistance level is a specific price at which selling pressure is strong enough to prevent the price of a currency pair from rising. Indicates a maximum level at which the increase in supply of the currency pair satisfies the corresponding demand.

Key psychological price points as the big round number 1.3000, previous high, Fibonacci Levels, or moving averages often act as resistance. Resistance levels are marked horizontally on the charts.

Work order definition

Work orders refer to open market orders that have been placed but not yet have been executed. These work orders are pending in the market waiting to be activated.

The main types of work orders are:

1. Buy Limit – An order to buy the currency pair at a specified lower price. It is placed below the current market price.

2. Sell limit – An order to sell the pair at a higher specified price. It is placed above the current market price.

3. Buy stop – A buy trade order above of the current market. price. Triggered if the price rises to the specified level.

4. Sell stop – An order to sell below the current market price. Triggered if the price falls to the specified level.

Short Selling Definition

Short selling involves selling a currency pair first with the expectation of buying it back later at a lower price. It allows traders to profit from drops in currency exchange rates.

Bull Market/Bear Market

Bull Market represents a sustained period of rising prices or an upward trend in a pair currencies or the currency market in general. The bear market represents a sustained period of falling prices in a currency pair or the currency market in general.

Margin Call

A Margin Call In forex trading it is a requirement by your broker to deposit additional funds into your account when the value of your open positions falls below a certain level. This level is called the maintenance margin, which is usually expressed as a percentage of the total value of your positions.

Demo account

A demo account, also known as practice account, is a simulated trading environment provided by forex brokers. It allows you to trade virtual currency to practice trading strategies, learn the platform, and gain experience before risking real money.

Final Thoughts

While this article covers fundamental Forex terms such as exchange rates, currency pairs, base currencies, and long or short positions, it is just the beginning. As you gain experience, you will encounter many more terms for strategies, order types, risk management techniques, and chart analysis. Don’t be intimidated by the jargon of trading terms – add new words to your trading dictionary as you go.

The most successful Forex traders never stop deepening their knowledge, so continue reading articles and forums. , glossaries and guides.

Also don’t be afraid to ask questions: no term is too basic.

If in doubt, Consult this manual about key Forex language. With constant learning over time, you will also be fluent in pips, lots, volatility, margins and all aspects of forex trading.

With the foundation of terminology Forex basics, you can Now start searching for brokers to find the right platform for you. However, comparing brokers can be overwhelming – how do you evaluate factors such as regulation, trading tools, asset classes and commissions?

Instead of tackling broker research just, take advantage of the analysis of our Forex broker comparison page.