The Basic Forex Terminology- A Complete beginner Guide
Are you interested to earn money by trading in the forex market?
Foreign exchange is a process of exchanging a currency into another currency for several reasons, might be for business, hedge, overseas payment, or travel.
In the next section, we will guide you to the basics of the Forex market including the elements of it. Therefore, you would know the overall activity before jumping into forex trading where a wider money-making opportunity is waiting for you.
The basic forex terminology includes terms and phrases that you should know before taking forex trading as an earning opportunity. The forex market has a huge opportunity to make money online without having much effort except knowledge and execution. Therefore, understanding the basic forex terminology would take you one step ahead of other traders and investors.
Why You Should Know Basic Forex Terminology
If you are enthusiastic about forex trading or you want to take forex trading as a career, you must know all forex terms. Otherwise, it will be hard for you to catch information from the trading platform or indicator.
In the forex market, there are some words and phrases that are unusual compared to general life. For example, the meaning of spread is almost the same in the forex market and other financial world but in general life, the meaning of spread is different. Moreover, if someone talks about margin, don’t bring your notepad and draw vertical lines, lol!
Overall, if you don’t know the name basic forex terms it will be hard for you to make trading decisions or understand the market.
List of Basic Forex Terminology
In the basic forex terminology for beginners section, we will see the list of terminologies or phrases that every beginner traders should know:
#1 Bid Price
The bid price is the highest available price when a trader tries to sell a currency pair.
The bid price varies from platform to platform where the ECN platform has Bid price closer to the current market price. When the Bid price will expand the spread will increase which will increase the trading cost.
#2 Ask Price
The Ask price is the lowest available price when a trader tries to buy a currency pair.
If the Ask price remains closer to the current market price the trading cost will be lower. Conversely, if the Ask price remains higher than the current market price, the trading cost will be higher.
Spread is the difference between the Ask price and the Bid price. It is usually the trading cost that the broker will take from you as a charge.
If you open a website of a forex broker, you would see the spread as 1.2 or 1.5.
For 1.2, the spread is 12 pips and if you open a trade with a standard lot the trading cost will be 12 US dollars.
Pips are the lowest value of the price change. We will determine the price movement in pips, just like the kilometer, Kg, ounce, etc.
Pips are the fourth digits number change in the currency pairs.
For example, if the EURUSD price changes from 1.2030 to 1.2050, the pips change is 30.
Leverage is the loan that brokers pay traders to take a trade. By using leverage, traders can make trades with a higher lot. Therefore, taking higher leverage means increasing the buying or selling power for a strategy that is very profitable and risky.
Therefore, if the leverage is 1:500 and your deposit balance is $100, it will work as ($100X 500= $50,000). As a result, you can take trades as if your deposit balance is $50,000.
#6 Pending Order
Pending order means taking a trade on a specific price from where the trade will be executed automatically after hitting the price level.
Pending orders work as both buying as selling trade. If you want to open a selling price from above the current market price, you should open sell limit orders. On the other hand, if you want to open a buy order from below the current market price, you should open a buy limit order.
#7 Instant Execution
Instant execution is taking a trade on the current market price. Therefore, the trade will open immediately after taking the trade.
#8 Long and Short
When a trader opens a trade he should buy or sell a currency pair. On the other hand, in every currency pair, there is a first currency and the second currency. Going long means taking trades towards a currency and short means taking trade against the currency.
For example, if you Buy NZDUSD, you are going short USD and long NZD. Similarly, when you open a sell trade on EURUSD, you are shorting Euro and long USD.
#9 Lot size
The lot size is the size of the trade. The forex market is huge and for a trader, it is often difficult to buy a full lot of currency.
Therefore, by using a contract for difference, you can split the buying size that is known as a lot.
The micro lot starts at 0.01 and the standard lot starts from 1.0.
Moreover, the lot size has a direct relationship between the pips or movement. If you take 0.01 lot of EURUSD buy trade and make 20 pips of gain, you actually made 2$ profit. Similarly. For the same trade, if the lot size is 0.10, then the profit will be $20 and for a 1.0 lot size, the profit will be $200.
Here, we can see by changing the lot size we can change the profit with the same market movement.
It is a common term that you may see in forex trading where Bullish means the buying market. If someone says the price is bullish, it means there is buying pressure on the price. Buyers are stronger than sellers in price.
The buying pressure is defined by watching the price chart where the price will move by creating a higher high.
In forex trading Bearish means the selling market. If someone says the price is bearish, it means there is selling pressure on the price. Sellers are stronger than Buyers in the price. Selling pressure is defined by watching the price chart where the price will move by creating a lower low.
If you want to be successful in the forex industry, you should know the basic forex terminology mentioned above. Moreover, there are other tools and information that you should know to make trading more perfect.