Forex Trading Terms And Meanings
When it comes to Forex terminology, there are many different words and phrases that you will see used on the various broker websites, forums and other Forex educational sites that you might find a little confusing to begin with. While some might be familiar or more obvious, there will be others that you haven't heard of before. To help you get to grips with, and understand the various terms, we have put together this useful glossary.
The simultaneous buying and selling of a currency pair, often used in short selling to produce small profits from the price differentials. In simple terms it is taking advantage of the price difference between multiple markets and capitalising on the imbalance.
The lowest price that a seller is willing to accept with the bid price being the highest price that a buyer is willing to pay. In the case of Forex trading the ask price is the price that you are required to pay for your trade.
Declining prices and a low confidence in the market. A bear market means that the prices are falling and selling is encouraged.
High prices and the opposite to a bear market. In a bull market confidence is high and the markets are strong.
The point at which you exit your trade. This is usually a predetermined point which can be minutes, hours or longer in advance. A stop loss can be set to allow you to exit a Forex trade at a particular point.
Carrying out a trade/s that balances the exposure in a specific currency or the entire exposure. There is no risk to the investment regardless of the exchange rate.
Foreign Exchange or FX; Simultaneous buying and selling of a pair of currencies usually involving the US dollar as one of the pair currencies.
Good-Till-Cancelled; An order to buy or sell an asset against another at a set price. The order remains until cancelled or executed.
To reduce the risk of trading, hedging involves purchasing opposite positions in the market by buying one currency pair at one position and selling at another to minimise the risk involved. While it is a good strategy to minimise risk it can lead to zero profits unless the second trade is executed at the right time.
The increase in the cost of consumer goods and an overall economic condition which negatively affects purchasing power.
To place a guarantee on future performance the trader must be able to make a sufficient deposit of collateral.
London Interbank Offered Rate; When borrowing from other banks the large international banks use LIBOR.
A unit of measurement, a lot is used to measure the value of the deal.
The market maker is either a company or an individual that quotes a buy or sell price in order to make a profit on the spread. In the case of Forex trading the market maker is often the Forex broker.
An option is a derivative financial instrument which establishes a contract between a trader and a broker in relation to the call/put (buying/selling) of an asset during a pre-determined time frame (the expiry time). The assets are commonly stocks, bonds, indices or currency pairs and are priced according to market value plus a premium based on the expiry time.
An instruction to a broker from a trader to execute a trade. It can be placed at the market price or a specific price and is good until filled or close of business.
The smallest measurement of movement in price quoted in Forex trading. It is the smallest upward or downward movements and can be as little as 0.0001 pip. A good example is the EUR/USD - 140.005 - to 140.004 Euro. This movement indicates one pip.
Automated software that is used to trade on your behalf. A robot software uses a variety of market calculations, history and other data available to place the trades for you based on what is the most likely outcome. Robot trading is usually charged for on a subscription basis and can be more successful than your own trading habits as they remove all emotion and only deal in facts. Being a computer the sheer amount of information that they scan in seconds would take an individual a number of hours of research.
The range is the difference in the price of an asset during a trading session. It will be the difference of the lowest and the highest points reached by a particular asset.
If you don't have time to be at your computer all day to monitor your Forex trade, stop loss is a strategy that can be used to exit the trade automatically when a specific price point is reached. It is available with most Forex brokers and is well suited to part time traders.
The spread is the difference between the bid price and the offer price used to measure the liquidity of the market. The smaller the spread, the more liquid the market.
A method of evaluating stocks and determining how much risk is being taken or how much should be taken. This information is then used to devise short or long-term investment objectives. An effective trading plan will also advise on the type of trading systems and analytical tools that should be used.
The statistical measurement of the dispersion of returns for a security or market index, in this case Forex currency pairs. High volatility indicates higher risk.
Jessica has written for us for 5 years and offers a unique perspective due to her having worked in the financial industry internationally. In fact, Jessica has worked in a staggering 8 countries including Germany, China and the USA. Learn more.