Below are some common terms used by traders when talking about the Forex markets. Just like all other fields, traders also felt they needed some unique words to describe what they do. If you’ve been reading our regular posts, you’ve probably encountered most of these.
For those who already know them, feel free to suggest more terms, and for those who don’t, here are some terms you can use to impress your friends next time you’re in a bar or wherever.
Currency pair labels
I can imagine you’re tired of having to mention the entire currency pair all the time, 24 hours a day. You’re not alone, and traders have come up with simple labels to help identify various commonly traded pairs. These include the Loonie, cable, swiss/swiss, Aussie, Ozzie, kiwi, etc. There are plenty more you can find out on your own, but these are the ones you will encounter most often.
Going short and long
Short simply refers to selling an asset while long is buying the asset. These terms can be used in various ways, for example, “I’m short on the cable”, or “Short the cable”. Long is the opposite, buying or betting on a currency or asset e.g. “I’m long on gold”
Bid/ask price
The bid price is the value at which your trade is executed when you short the base currency. By bidding, you’re asking the markets to buy whatever asset or currency you are selling, and like an auction, buyers will offer you the price they are willing to offer. The asking price is the opposite, with you asking the markets to offer you something, so the asking price is the price at which sellers will offer you the asset so that you can buy it.
Bid/ask spread
We’ve already looked at what spreads are and how you can use them (See how to find the best Forex spreads). However, if you still want to know, here it is in brief – the difference between the bid and ask prices.
You can see the bid price in red and the asking price in blue. The difference between the two figures (1.06649 - 1.06637 = 0.00012) is the spread.
Points, pips, and ticks
To increase accuracy and divisibility, currency pairs are usually listed with 4 decimal places. In the above example with the EUR/USD pair, though, you can see that the pair has 5 decimal places. This is a slight modification to make the smallest changes in price count, and this 5th decimal place is called the pipette. The pipette, therefore, represents the smallest unit in which the price of an asset can change. So, if the bid price changed from the current 1.06637 to 1.06639, we’d say it has moved 2 pipettes.
Points, on the other hand, refer to changes to the left of the decimal point. Currency pairs’ points rarely move, so points are not often mentioned in the Forex market but rather in the stock market or among indexes. This is why you commonly hear statements like, “The Dow Jones dropped 50 points today”. (Trading stock indices)
Volatility
Again, you can guess the meaning from the definition – volatility refers to the variations from one moment to the next. A volatile situation, for example in Syria, refers to how there can be a swift change from peace to chaos in minutes. In the Forex market, volatility refers to the fluctuation in price within a certain timeframe.
The best measure for this is the average daily range (ADR), which provides an average movement. When prices shift in price more than the ADR for several consecutive hours, days, or weeks, that currency pair can be considered volatile. Below is one of the real-time Forex charts showing volatility in the GBP/USD pair.
Slippage
This is simply the difference between the price at which an asset is filled and the price shown on the Forex trading platforms. This usually happens when markets are highly volatile and prices are quickly moving up and down. In this situation, by the time your order is received by your broker and then sent to the liquidity provider, the price will have changed. Instead of just rejecting the order, your broker will have it filled at the next best price. The difference between this figure and the one you saw on your ‘Place order’ window is the slippage.
Bearish and bullish
The exact origin of these terms is still a mystery with several plausible theories, but we don’t need to get into that. The words are used to indicate market sentiment. Market sentiment is the general direction of the price of an asset in the markets. When the prices are getting higher with time, this is a bullish sentiment and when they are going down, it’s a bearish sentiment. (Forex market sentiment indicators)
To determine whether the markets are either bullish or bearish, you have to look at a longer timeframe. Just because the 1-minute chart shows a bullish sentiment does not make the markets bullish – it has to be going on for a few days or weeks.
Commodities for difference (CFDs)
The term CFD covers various trading instruments, but CFDs only bet on the change/difference in the value of these instruments without necessarily owning them. For example, futures, forward contracts, and options are all CFDs because the owner does not require delivery of the commodity, stock, or currency (Options trading). These CFD trading Forex brokers will have a variety of CFDs on offer.
Hedge/hedging
In general, it refers to a strategy intended to reduce losses in the future in case there are any. A jewelry company that buys gold or silver futures is said to be hedging (All you need to know about trading futures). For Forex traders, though, we can sell and buy the same currency pair. If the winning trade goes well, you just have to wait a while until the losing trade is small enough that it doesn’t cancel out the winning trade.
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