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BlogA guide to common forex terminology you should know before you trade

A guide to common forex terminology you should know before you trade

So, you’ve decided to enter the exciting world of forex trading to try and make a little extra money or even potentially make a career change. The problem is that you don’t know where to start and it all seems a little overwhelming.

This is understandable as it is an involved industry with many intricacies and nuances. A fantastic place to start is with your forex terminology. There is a host of lingo that you need to know to understand what people are talking about.

With this basic terminology mastered you can then start to learn the basics of trading. So, let’s jump into the world of forex terminology where you will come to learn what terms like stop loss and take profit mean and why risk management is essential!

Currency pair

Forex works on the basis of currency pairs, so this is easily the most important term to understand. A currency pair includes two different foreign currencies — you buy one and sell the other.

For example, you could buy the United States dollar (USD) by selling pound sterling (GBP). These two actions together make exchange rates which we discuss below.

Exchange rate

You should have heard this term before if you have ever bought currency for a holiday abroad. An exchange rate relates to how much of one currency you can buy with another. For example, how much USD you can buy with EUR.

Spread

Due to the constant changing nature of the forex market, there is often a difference between bid and ask prices. The bid price is what someone wants to pay, and the ask price is what the purchasing price is listed at.

If there is a disparity, this is known as the spread. The spread is the difference between the bidding and asking prices of currency pairs.

Appreciation/depreciation

Appreciation and depreciation basically state the current value of a currency exchange rate and how it has changed. Appreciation indicates how much the value of an exchange rate has increased while depreciation or devaluation means how much the value of an exchange rate has decreased.

Pips

Pip is an acronym for percentage in point. This is basically the smallest denomination possible when we discuss the price movements of currency pairs. A pip relates to the final number or fourth number after the decimal point and it is the main way that profits and losses are measured in the forex market.

Leverage

If you are looking to retire early and make some huge profit, then leverage is an important term to understand. Many forex trading platforms offer leverage, which essentially means trading with more money than you actually have.

For example, a broker might offer 10x leverage. This means that if you have £100, you can effectively trade with 10x that amount, or £1,000 without depositing that money. Caution is needed with leverage though as any losses you make on the leveraged amount still apply.

Stop loss

A stop loss is a type of forex trading order. These are used to minimize losses and enable you to somewhat automate your trading process.

Stop loss orders let you automatically sell a currency pair when it drops to a pre-set price. This helps you protect against potential further price drops. Remember though that your order still needs to be bought by someone and this isn’t guaranteed.

Take profit

Take profit orders are essentially the reverse of stop loss. Instead of selling at a pre-set price drop, you are closing an order when it reaches a pre-set price increase or profit margin. This helps you lock in profit and avoid potential sudden price drops or reversals in currency pairs that could result in a loss.

Risk management

When trading with forex there is inherent risk. Prices fluctuate and you can always make a loss on any pair you trade.

Risk management is the art of having sound trading strategies that help you avoid these losses. This could be using tools like stop loss orders for example.

Get your forex lingo on lock with these basic terms

This should give you a solid starting point and we have covered most of the common words and phrases you will hear and read when learning about forex trading.

Make sure that you understand these terms fully and you could even do more research on the specifics. For example, there are entire articles about risk management, stop loss orders and how to use spreads to your advantage.

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