Confused about the terminology used in forex trading? Use this glossary of essential terms to get started in forex. Visit the Valutrades website for a more comprehensive glossary of terms.
“Ask” (or “ask price”) is a term used to describe the price at which a trader accepts to buy a particular currency.
“Asset” refers to an item or resource of value, such as a currency or currency pair.
Within a currency pair, the first currency listed is known as the “base currency”. For example, when it comes to the GBP/USD pairing, the GBP functions as the base currency.
This term is used to describe the price of an asset, currency, or security that is in decline. “Bear market” can also be shortened to simply “bear”, while the term “bearish” is also used to describe the state of the forex market when it’s in decline.
The opposite of a bear market, this term describes when the price of an asset, currency, or security is rising. Much like the term “bear market”, “bull market” is also often shortened, so you can expect to hear the terms “bull” and “bullish” used regularly.
“Bid” (or “bid price”) is the term used to describe the price at which a trader is willing to sell a particular currency.
Buy Limit Order
A buy limit order is an order to push through a transaction at a specified price or lower, with the term “limit” referring to the price threshold.
Closing a position means bringing a transaction to an end, incurring any related profits or losses as a result.
The nucleus of the forex market, a currency pair is what’s being traded within any forex transaction. Currency pairs take on various forms, with most pairs labelled “major”, “minor”, or “exotic”. For example, GBP/USD qualifies as a major currency pair.
A graph that breaks down the movements of a particular currency that have occurred within a single trading day.
A forex trade that is opened and closed on the same day.
Representing a distinct type of broker. An ECN Broker makes use of Electronic Communications Networks (ECNs) to provide clients with access to liquidity providers.
Representing what the forex market is built upon, the exchange rate is the cost at which one currency can be traded for another.
This term refers to when a trade is put in motion and subsequently completed.
Addresses the completion of an order, along with the price that it has been completed at.
Fill or Kill
If an investor has a set price in mind for a forex transaction, he or she can choose to implement a fill or kill order. What this means is that if the order isn’t fulfilled at the exact predetermined price, it is terminated.
Similar to a daily chart, a forex chart is a digital chart that highlights points and price movements related to a currency pair. Forex charts can usually be extended to cover days, weeks, months, and even years.
A hard currency is one that is often most resilient in times of political and economic instability and thus is generally considered to be dependable. For example, the Great Britain Pound (GBP), US Dollar (USD), and Euro (EUR) are well-known hard currencies.
A method of trading that is used to protect an investor by reducing the risk that is associated with volatile markets. Hedging requires the trader to make two independent investments that work to balance each other out. This works to minimise the loss that could be incurred by price fluctuations.
Representing an instruction to either close or open a transaction at a future price. For example, if EUR/USD is currently listed at 1.07503/1.07523, then a related limit order to buy EUR at a lower-than-current market value price would see the currency purchase occur at 1.07522 or below.
The amount (or volume) of a set currency currently available for active trading.
Any investor who takes a long position buys a base currency with a view to profiting on a market price increase.
A lot is a standardised quantity of the currency you are choosing to trade with, with one lot equalling 100,000 units of a particular currency.
“Margin” refers to the account balance required in order to maintain an open position.
For those who want to trade instantaneously, a market order is what’s required, as it is an order for a trade to be executed immediately (if possible) at the best price available.
A simple term to describe the position that a trader takes on a currency pair, subject to any profits and losses that it may accrue.
Standing for “percentage in point,” it represents the smallest possible price change that can occur within an exchange rate. More often than not, a currency is presented to four decimal points, with the smallest alteration in price occurring within the final decimal of the price listed.
Closing a forex position as a means to collect the related profit.
A standard abbreviation for “profit and loss.”
Within any currency pair, the second currency listed will always be referred to as the “quote currency”. For example, in the USD/GBP pairing, the GBP is the quote currency.
“Rally” references a currency’s recovery in price after a period of either short-term or long-term decline.
The price level that a currency finds difficult to go beyond. In such instances, a currency will consistently knock on a price ceiling, only to see a decline begin when it isn’t able to break above it.
Opposite of a long position, this involves taking a position that benefits from a currency’s decline in market price. When the base currency within the pair is eventually sold, then the position is assumed to be short.
Opposite of a hard currency, a soft currency is one that is often hit hardest by economic and political events and thus is generally considered to be unstable. For example, both the Zimbabwean Dollar (ZWD) and North Korean Won (KPW) are routinely labelled “soft currencies”.
The spread represents the difference between the ask and bid price of any currency pair. In most instances, this figure represents brokerage service costs and replaces transactions fees, with it usually presented in pips. It should be noted the spread could take on one of three forms through a fixed spread, a fixed spread with an extension, and a variable spread.
A market order to either buy or sell a currency when it hits a certain price. Generally speaking, a stop-loss order is placed in order to control losses occurring (or due to occur) in a set position.
Take-Profit Order (T/P)
A market order that stipulates that a position is to be closed once it hits a predetermined price or price range, thus taking all generated profit.
Investors use technical analysis as a means to forecast future price changes within the forex market. How this is conducted is by sifting through current and prior market data via trading indicators, charts, and other related tools.
This addresses the degree of uncertainty (and related price fluctuations) of a security, currency pair, or specific currency. It can also be used as a term to describe the state of the forex market as a whole.
“Yield” is a term that refers to the return on any forex investment made, with such usually displayed as a percentage figure within a trading platform.