Terms in Forex Trading for Beginners

Trading in forex requires a trader to understand the terminology used in forex trading. Some basic forex terms may or can confuse a beginner.

For example, in forex, a pip is quite different from a small seed in a fruit or an attractive person. Likewise, execution does not refer to a legal order to seize an asset, or assets, of a person who is in default of his or her debt.

May the clarification of the following terms used in forex trading provide a sound basis for beginners to start a successful journey in forex trading and to flourish financially.

The intention is not to provide a complete list, but to explain the most basic terms used in forex trading.

Account balance

The account balance refers to the amount of money a trader has in her or her trading account, also called forex account. Although, bear in mind that this balance does not include any profits that may be generated, or losses that may be incurred, from any open positions.

Account currency

The currency in which all withdrawals and deposits with regard to trades are denominated in a trader’s trading account.

Ask

See Ask price.

Ask price

The ask price refers to the price at which a trader is willing to buy a particular currency. It is also referred to as the ask or the offer price.

It is the price indicated on the right of a currency quote, implying the price at which a trader can purchase the base currency.

Bar chart

A bar chart also called an OHLC (open-high-low-close) chart, is a group of price bars, indicating price movements of a currency pair for a certain period. A price bar is a vertical bar (line), representing a currency pair’s trading range over a set period of time such as ten minutes, one hour, and so forth.

The top of a vertical bar shows the highest price traded for the given period, while the bottom is the lowest. The small horizontal line, also called horizontal hash, on the left side of the vertical bar indicates the opening price of the currency in the given trading period, while the small horizontal line on the right-hand side represents the closing price.

Base currency

The first currency in a currency pair is called the base currency. For instance, in the currency pair of the US dollar (USD) and the British pound (GBP), GBP/USD, the British pound is the base currency.

Bear market

In forex trading, a bear market refers to a situation where the values of currencies are declining or are expected to fall.

However, forex trading is always done in currency pairs, implying that when a currency is declining in value, the other one is strengthening in value, allowing traders to take advantage of declining and rising markets.

The term bear market derives from the metaphor of a bear wiping its paws downward.

A bear market is the opposite of a bull market.

Bearish

The feeling or perception prevalent in a bear market, represents a pessimistic feeling that a market is declining.

Bears

In forex trading, bears refer to traders who have a negative outlook on the forex market, expecting values of currencies to fall.

Bid

Refer Bid price.

Bid price

The bid price is the opposite of the asking price. It is the amount at which a trader is willing to sell a currency.

The bid price, also known as the bid, is always lower than the asking price.

Broker

In forex trading, a broker is an individual or company that executes trades to buy and sell currencies on behalf of traders or financial institutions.

A broker in forex trading, referred to as a forex broker or retail forex broker, acts as an intermediary between sellers and buyers of currencies.

Bull market

Contrary to a bear market, a bull market refers to an optimistic market where the value of a currency or values of currencies are continuously appreciated.

The term bull market derives from the metaphor of a bull that thrusts its horns up in the air.

Bullish

The sentiment or belief present in a bull market represents a positive sentiment that prices in a market are rising.

Bulls

In forex, bulls are traders who have a positive outlook on the forex market, anticipating prices of currencies to rise.

Buy limit order

A buy limit order is a type of order to execute a trade at a specified price or lower, in anticipation that the price of a specific currency, has decreased to a certain level, will rise.

The term ‘limit’ refers to the price specified.

Close a position

Closing a position is the process of terminating a transaction (buying or selling a currency), resulting in the liquidation of the position, incurring any related loss, or generating a profit as a result.

Closed position

A closed position is a position that has been completed or terminated, irrespective of whether it was a long or short position.

Closing market rate

Also referred to as the closing price, it indicates the final price (value) that a currency is traded at during a specific trading day or time frame.

Closing price

In forex trading, the closing price refers to the final price at the end of a trading day on a specific forex exchange, which is part of the global forex market. For example, the New York forex exchange.

Cross-currency pairs

Cross-currency pairs, commonly referred to as crosses, do not include the US dollar. Examples of common crosses are the euro to the British pound (EUR/GBP) or the Australian dollar to the Japanese yen (AUD/JPY).

Cross rate

A cross rate is the exchange rate between two currencies in which the US dollar is not involved. Both currencies are valued against a third currency, most often the US dollar (USD). For instance, to compare the values of the South African rand (ZAR) and the Tunisian dinar (TND), both currencies are valued against the USD.

Currency appreciation

When a currency increases in value against another currency, it is called currency appreciation, which is the opposite of currency depreciation.

Currency code

A currency code is the three-letter abbreviation of a country’s currency. Typically, the first two letters are an indication of the name of the country, while the third letter denotes the name of the currency. For example, the currency code of the South African rand is ZAR.

The currency code is also known as the ISO 4217 code, referring to the list of currency codes published by the International Organisation for Standardisation (ISO).

Currency depreciation

When the currency of a country falls in value compared to another currency or currency, it is referred to as currency depreciation, which applies to currencies in a floating exchange rate.

Put differently, currency depreciation occurs when the purchasing power of a specific country’s currency decreases against the purchasing power of other currencies.

Currency depreciation is the opposite of currency appreciation.

Currency devaluation

The devaluation of a currency occurs when the monetary authority of a country intentionally decides to lower the value (exchange rate) of its currency in a fixed exchange rate.

Currency fluctuations

In currency trading, fluctuation refers to a situation when the price of a currency irregularly moves up and down.

The majority of the prices of the world’s currencies fluctuate because they are bought and sold according to flexible exchange rates, based on their supply and demand in the forex market.

Currency pair

Forex trading is executed in currency pairs, in which one currency unit is quoted against another currency unit. For example, when the US dollar (USD) and the South African rand (ZAR) are involved in a transaction, they constitute the currency pair USD/ZAR, in which the dollar is the base currency and the rand the quote currency.

Currency peg

A currency peg refers to the situation when the government or monetary authority of a country pegs or links the exchange rate of its currency to that of another currency or basket of currencies. A currency that is pegged to another currency is called a pegged or linked currency.

Currency sign

See Currency symbol.

Currency symbol

A currency symbol is a graphical or symbolic representation of a country’s currency. For instance, $ for the US dollar, £ for the British pound, and R for the South African rand.

Daily chart

A daily chart Is a graph that shows the price movement of a particular currency during a single trading day. The price movement is shown in bars, lines, or candlesticks.

Day trading

Day trading refers to a trading strategy in which trade positions are opened and closed on the same trading day.

Demo account

A demo account is a virtual account (funded with virtual money), allowing a trader to test a trading platform and explore the forex market without the risk of losing money.

Direct quotation

In a direct quotation, the exchange rate of a currency pair is expressed in terms of the foreign currency (represented by the quote currency) for one unit of the domestic currency (represented by the base currency).

Entry order

A forex entry order is an order that is used to open a trade at a specified price level for a currency pair. Once the specified price is reached, the order is executed. However, if the price of the currency pair never reaches the specific price level, the entry order is not filled.

Equity

Equity is the total amount that a trader has in his/her trading account, including profits and losses.

Exchange rate

The exchange rate is the rate at which one currency can be exchanged for another, indicating the cost at which one currency can be exchanged for another. For instance, the following currency pair, USD/ZAR = 15.70, indicates that one US dollar (the base currency) equals R15.70 (the quote currency).

Execution

Execution occurs when a trade or order is carried out and subsequently completed.

Exotic currency pairs

Exotic currency pairs, commonly called exotics, include one major currency alongside an exotic currency, which is a currency from a developing or emerging country, such as the South African rand, Polish zloty, or Turkish lira.

Forex

Forex, also indicated as FX, is the abbreviation for foreign exchange.

Forex account

A forex account is a type of account that a forex broker opens for a forex trader to hold and trade foreign currencies. It is also known as a trading account.

Forex market

The forex market, short for foreign exchange market, and also referred to as the FX or currency market, is a decentralised global online network where traders buy and sell currencies.

Fill

Fill refers to the completion of an order.

Fixed exchange rate

A fixed exchange rate is when a government ties the value of its currency to a widely used or popular currency of another country, or a basket of currencies, comprising currencies of different countries. A fixed exchange rate is also called a pegged or linked exchange rate.

Flexible exchange rate

A flexible exchange rate is an exchange rate that is determined by supply and demand in the forex market. It is also referred to as a floating exchange rate.

Floating exchange rate

See Flexible exchange rate.

Foreign exchange

Foreign exchange, also known as forex or FX, is the conversion of one currency into another at a specific exchange rate.

Forex chart

A forex chart is a graphical (visual) representation of the price movements of currency pairs over a given period of time.

Forex trader

A forex trader is a person who trades currencies on the forex market.

Free margin

Free margin is the money available in the trading account of a forex trader which is available to open new trading positions.

Free margin = Equity minus used margin.

Going long

In forex trading, going long refers to a strategy to buy a currency, expecting that it will rise in price. It is the opposite of going short.

Going short

Contrary to going long, going short means that a trader is selling a currency, anticipating that the currency will decline in value.

Hard currency

Hard (strong) currency refers to a currency that is dependable and stable. A currency in which investors and traders have confidence. It is widely accepted as a form of payment for goods and services. Examples of hard currencies are the US dollar, the euro, and the British pound.

Initial margin

Initial margin is the minimum amount a trader is required to deposit before he/she is allowed to start trading (open a position).

It is also known as the required margin, entry margin, or deposit margin.

Leverage

Leverage is a service offered by forex brokers to traders, enabling them to maximise their buying power. With a small deposit, a trader is allowed to trade currencies in large volumes.

Leverage is expressed by ratio. For instance, leverage of 1:50 increases a trader’s buying power by 50 times, meaning the trader could use $500 to start a trade with a value of $25 000.

Leverage provides opportunities for high profits but also magnifies potential losses.

Limit order

Is an order (instruction) from a trader to his/her forex broker to execute a trade at a specific price that is more favourable than the current market price.

Limit price

The price is specified in a limit order.

Line chart

A line chart is a basic price chart on which a line connects all the closing prices for a given trading period, indicating a trend in the price of a currency pair.

Liquidity

In forex, liquidity refers to a currency pair’s availability in the market, determining how easily the pair can be bought or sold without affecting its exchange rate significantly.

Live account

A live account, also called a live forex trading account, gives a trader access to the forex market through a trading platform to trade currencies in real-time and with real money.

Long position

A trader with a long position, buys a base currency, expecting to profit from an increase in the value of the currency. It is the opposite of a short position.

Lot

Currencies are traded in lots. In forex trading, a lot is a standardised quantity of the currency a trader is choosing to trade with. One lot equals 100 000 units of a particular currency.

Margin call

A margin call happens when a trader’s forex broker will notify him/her to deposit more money in his/her trading account to maintain existing open positions.

A broker makes a margin call to a trader when his/her equity drops to a certain percentage of the margin used.

Major currency pairs

Major currency pairs are the most common and most traded pairs, all of which include the US dollar (USD) as one of the currencies.

The eight major currency pairs (in no specific order) are USD/JPY (Japanese yen), USD/GBP (British pound), USD/CHF (Swiss franc), USD/CAD (Canadian dollar), AUD/USD (AUD represents the Australian dollar), NZD/USD (NZD indicates the New Zealand dollar), EUR/USD (EUR stand for the euro), and the USD/CNY (Chinese yuan).

Market order

A market order is an order to buy or sell a currency immediately at the current market price or at the best available price.

Open position

Open position refers to a trade that has not been closed yet and which is subjected to a profit or loss.

Overbought

In forex trading, overbought is a term used to describe a period in which the price of a currency pair has significantly and consistently risen more quickly than usual without much pullback. Overbought is the opposite of oversold.

Overnight position

Overnight position refers to a strategy in which a trader keeps his/her trading position open overnight and carries it over to the next trading day.

Oversold

Oversold is the opposite of overbought. Oversold is a term that describes a period in which there has been a considerable and consistent downward move in the price of a currency pair without much pullback.

Pegged exchange rate

See Fixed exchange rate.

Pending order

Pending order in forex mandates a forex broker to automatically purchase or sell a currency when it reaches a defined future price.

Pip

Pip is the acronym for percentage in point or point in price. It reflects the smallest price movement in an exchange rate on a currency pair. In most currency pairs, a pip is the fourth decimal on the price quote. The exception is the USD/JPY currency pair, where the pip corresponds to the second decimal number.

Position

See Long position and Short position.

Profit-taking

Is to close a position to generate a profit.

Profit/Loss calculation

To calculate a profit or loss on a transaction, the pip value is multiplied by the pip movement.

For example, the EUR/USD increased from $1.1050 to $1.1070. A trader traded in 2 standardised lots, a total of 200 000 units. He/she generated a profit of $400 (200 000 x 0.0020).

Quote currency

The quote currency is the second currency listed in a currency pair. The quote currency shows how much of the quote is needed to buy one unit of the base currency.

Resistance

Resistance in forex refers to a price level where the price of a currency finds it difficult to break above. It is a price level where selling pressure exceeds buying pressure.

Resistance is the opposite of support.

Risk management

Risk management is to mitigate the risks involved in the trading of currencies. It involves the implementation of strategies such as stop-loss orders that minimise maximum losses.

Scalping

Scalping is a trading strategy that involves short-term and high-frequency trading, benefitting from small movements in currency prices.

Short position

A short position refers to a situation where a trader sells a currency with the expectation that its price will fall, with the intention to repurchase it at a later stage at a lower price.

A short position is the opposite of a long position.

Slippage

Slippage is the difference between the requested price of a currency and the actual market price. Typically, slippage is caused by volatility in the market.

Soft currency

A soft currency is a type of currency that is unstable, depreciates against other currencies, is sensitive to economic and political events, and fluctuates erratically.

Examples of soft currencies are the Syrian pound (SYP), the Venezuelan bolivar (VEF), and the Zimbabwe dollar (ZWD).

Spike

A spike refers to a sudden and abnormal movement (upward or downward) in the price of a currency.

Spot price

In currency trading, the spot price is the current market price of a currency, available to be bought or sold immediately.

The spot price is sometimes referred to as the spot rate or spot exchange rate.

Spread

Spread is the difference between the ask and bid price of a currency pair.

Stop-loss order

A stop-loss order also called a stop order, allows a forex broker to close a position when it reaches a predetermined price. These orders are used to limit a loss on a position.

Support

Support, the opposite of resistance, refers to a price level where buying pressure beats selling pressure, making it difficult for the price of a currency to break below.

Take profit order

A take profit order, T/P order for short, enables a trader to close a profitable position once a currency price reaches a specific predefined price level.

A T/P order is used to prevent a loss when an unanticipated price reversal occurs before the trader can close the position.

Trade

Trade in forex occurs when a forex trader sells one currency and buys another.

Trader

See Forex trader.

Trading account

A trading account also called a foreign exchange account or forex account is a type of account that a forex trader opens with a retail forex broker to buy and sell currencies. To open a trading account, a deposit is required as well as the personal information of the trader.

Trading platform

A trading platform refers to software provided by a forex broker (companies or individuals) to clients, enabling them to open, close, and manage trading positions electronically. A trading platform provides, inter alia, live market prices, charting tools, and news feeds.

Trading session

A trading session is a period when trading activity takes place in a financial market, from when it opens until it closes.

As a global electronic market, the forex market allows trading around-the-clock, due to the fact that the forex market is separated into the following three major trading sessions, covering four major forex exchanges:

Used margin

Used margin refers to the amount in a trader’s trading account required to maintain all current positions.

Volatile market

A volatile market, commonly called a wicked market, is one that is often exposed to volatility due to wide/extreme fluctuations in the prices of certain currencies.

Volatility

In forex trading, volatility refers to the extent of the upswings and downswings in the prices of currency pairs. Volatility is usually caused by a lack of liquidity in the market.