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- There are numerous Forex trading terms that beginners should know
- Forex trading terminology is used to describe the movements in the market
- There are some acronyms and terms describing different types of concepts
- Understanding Forex trading terms can help you become a better trader
Forex Trading Terms - Everything You Should Know
It is very important to make sure you understand every little detail about the market when it comes to Forex trading. There are numerous terms and acronyms used in Forex every single day to describe the movements in the market.
On the other hand, other terms are used to describe the basic concepts of Forex trading. No matter what, by understanding the most important Forex trading terms, you can become a better trader.
To help you get started in the market and learn different types of Forex trading terms, we have prepared quick yet very detailed guides on Forex trading terms. Below, you can take a look at some of the most important Forex trading terms every trader should know.
Pip
When it comes to the most important Forex trading terms, one of the first that comes to mind is Pip. Standing for the Percentage in Point, Forex pip is the smallest possible movement in the price of a currency pair. For the majority of the currency pairs around the world, pip is the fourth number after the decimal point, meaning 0.0001. However, for the JPY currency pairs, the pip stands for the second number after the decimal point, 0.01. There also are nano pips available in the market. Nano pip for the majority of pairs equals the fifth number after the decimal point, 0.00001, while for the JPY pairs, it is the third number after the decimal point, 0.001. So, let’s say that you are trading EUR/USD currency pair, the price of which was 1.2223 and you read that the price of the currency pair has increased by 2 pips. It means that the price of the currency pair has become 1.2225. If the price decreased by 2 pips, it would be 1.2221. Understanding how pips in Forex work can be a huge help for every trader.Lot
Another very important term in Forex trading is a lot. Simply put, a lot is the size of the position that you open in Forex trading. The standard lot in Forex trading equals 100,000 units of a currency pair. In general, there are three types of lots available in Forex trading. They are known to be the most commonly used ones in the market. There is a standard lot, mini lot, and micro lot in Forex trading. However, in modern Forex trading, there are many different types of lots available. Because of the increased competition in the market, brokers around the world offer traders multiple forms and types of lot sizes. When you are saying that you are trading one lot of a currency, it means that you are trading 100,000 units of that currency pair. For example, trading one lot of USD means that you are trading $100,000. Mini lot equals 0.1 standard lots, a micro lot equals 0.01 standard lots, while nano lot equals 0.001 standard lots.Bid & Ask
When you are trading Forex, you might have already noticed that there always are two different prices displayed on the trading platform. One of these prices is used to show how much money you would have to pay to buy the asset, while the other indicates the money needed to sell the currency. In Forex trading, a bid refers to the price that is offered by a buyer for a certain asset. The bid usually represents the maximum amount of money that a trader is willing to pay to buy a certain currency. On the other hand, you have the ask price. The ask price represents the amount of money offered to the buyer of the asset. The bid is the minimum amount of money that the buyer is willing to take for the currency. Simply put, a bid is a buy price in the Forex trading market, while the ask is the selling price.Spread
Spread in Forex trading stands for the difference between the bid and the ask price of a currency pair. As we have already said, there always are two prices shown on the currency pair, the bid and the ask price. The bid is the money at which you can sell the base currency, while the ask is the price you would use to buy the base currency. So, let's say that you are trading EUR/USD currency pair, the bid price is 1.2123, while the ask price is 1.2125. Since the ask price is 2 pip over the bid price, it means that you will have to pay a spread of 2 pips. While it is true that in most cases Forex trading is associated with little to no commissions, spreads are something that every trader should keep in mind. Depending on the broker you are using, the type of spread that you might have to deal with might be different. While in most cases brokers offer you regular spreads, there are some brokers that offer traders fixed spreads which are always the same no matter the market conditions.Leverage
Leverage is another very important term that every trader should know about. In fact, leverage is among the major reasons why so many people are attracted to Forex trading. Forex offers traders access to higher leverage than other markets.
But what is leverage anyway? Essentially, leverage is the use of borrowed money for increasing the volume of positions beyond the capabilities of your actual account balance. When you are using leverage, you are borrowing a certain amount of money to open your positions.
For example, let's say that you have $1,000 dollars in your account and you want to open a position of $100,000 (which equals a standard lot). If you want to do so, you will have to use a leverage of 1:100. This way, you will be able to open a position worth $100,000 with only $1,000.
However, as much as it can be used to amplify your profits, it does come with many risks as well. Forex trading with higher leverage can be very dangerous, especially for beginner traders. As much as it can increase your profits, it can also increase the potential losses.
In fact, because of the risks associated with higher leverage, many jurisdictions have restricted brokers from offering high leverage.