Forex Trading Dictionary – Key Terms To Know
- 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.
STP Execution
There are many different types of executions in Forex trading. One of them is the STP execution, also known as the Straight Through Processing execution. STP is actually a very popular execution type around the world for several reasons.
STP Forex brokers offer traders the ability to directly send their orders to the market without the need for the orders to pass the dealing desk. Because the positions are directly sent to the interbank exchange houses or liquidity providers, STP is very transparent and offers traders numerous advantages.
ECN Execution
Electronic Communication Network, simply known as ECN, is another very popular execution type. This digital system is able to match buyers and sellers around the world and allow brokers and investors in different geographic areas to trade without the involvement of a third party.
In a sense, ECN is very similar to STP, however, there are some key differences. Although ECN is very popular and has many advantages, it does also come with several drawbacks. For example, it is mostly associated with higher fees.
ECN works in a very simple way, once you open a position, it directly goes to other market participants. While trading, you are seeing the best available bid and ask quotes from multiple market participants, after which, your order is automatically matched and executed.
NDD Execution
No Dealing Desk is an execution type that offers traders access to the interbank market rates of exchange without the involvement of any third party.
Thanks to the No Dealing Desk execution type, there is no need for a third party, and the traders are directly connected with the interbank rates. Both of the trading execution types that we have discussed above, ECN and STP, are No Dealing Desk execution types.
Although there are many advantages that this type of execution has, there also are several disadvantages associated with NDD execution. For example, there might be additional fees and commissions charged by NDD brokers which can increase the costs of Forex trading.
Long Positions
There are many terms used in Forex trading every single day, and one of them that you will come across very frequently is going long. To go long on a certain currency is to buy the asset and hold it for a specific amount of time.
The main idea behind going long is that you believe that the price of it is going to increase in the near future. So, to make a profit, you are going long (meaning buying) the asset at a lower price and holding it until the price increases.
A very interesting thing about the Forex trading market is that you are at the same time going long and short when you open a trading position. The reason for this is that when you trade Forex, you are buying one currency, while at the same time, selling the other.
Short Positions
While taking a long position in Forex trading means buying an asset, going short means selling it. Once you buy an asset in hopes of it increasing in price and your prediction proves to be successful, you can go short.
Going short means selling an asset. Traders usually go short when they think that the price of something is going to drop. By going short, they are selling the asset at a higher price before the crash.
Simply put, to short a currency means to sell the underlying currency in the hopes that its price will go down in the future. If your prediction is correct, you can buy back the currency you shorted at a lower price, and if you think that the price is going to increase, you can hold again.
Arbitrage In Forex
Arbitrage in Forex trading refers to a process when traders aim to purchase a currency pair for a cheaper price while selling it for a higher price. Forex trading arbitrage is known in the market as a very low-risk trading strategy and the main aim of it is to purchase a cheaper version of expensive currency.
There are different types of Forex arbitrage available in the market, such as statistical Forex arbitrage, triangular Forex arbitrage, and so on. The triangular arbitrage is one of the most popular arbitrage trading strategies in the market and involves opening positions with 3 currency pairs. These opportunities in Forex trading tend to be very rare and only traders with advanced computers, programs, and knowledge use this strategy.
Margin In Forex
Margin in Forex trading refers to the minimum capital that you are required to have to open and maintain a trading position. It represents a portion of traders’ account balance that is put aside for trading.
But, what does margin really mean in trading? To better understand Forex trading margin, let’s discuss an example. If you are trading a position of a standard lot, meaning 100,000 units of a currency and the broker requires a 1% margin.
This means that you will need to have at least 1,000 units of that currency to be able to open the position. A margin call occurs when your account balance falls below the margin required by the broker.
Equity In Forex
Equity is another very important term in Forex trading and refers to the actual value of your trading account. There are two ways to calculate your account equity. If there are no open positions by the trader, the account equity usually equals the actual account balance.
However, if you have open positions, things get a little confusing. When a trader has open positions, the equity is calculated according to several parameters. Click here to learn more about equity in Forex trading.
What Did We Learn From This Forex Dictionary Article?
- There are numerous Forex trading terms in the market that every trader should know
- While some of the Forex trading terms describe the movements in the market, there are others that describe different concepts
- Understanding Forex trading terms can help you become a better Forex trader
- Among some of the most important Forex trading terms are those like leverage, margin, spreads, and many others