Forex Key Terms for Beginners
Updated: Dec 6, 2021
Trading Forex is overwhelming by itself, adding to that having to learn technical terminology, it can be very intimidating. Therefore, I gathered a list of the most important and common Forex terms that all beginners deal with, read or hear in Forex classes and tutorials.
Going Long: is the act of buying when the trader believes a currency pairs price if going to rise.
Going Short: is the act of selling when the trader believes a currency price will fall.
Currency pairs: there is two currency pairs in the exchange rate that traders trade on. For example, (USD/EU) The USD is the base pair and the EU is the quote pair. Put together makes the base and quote pair, the base pair is the currency the trader is buying when trading a Forex pair and the quote currency is the currency the trader is selling. Trading in the Forex market means simultaneously buying on currency and selling another.
Pips: is the way movement is measured in the Forex market, which is Point in Percentage. When counting Pips it is best to focus on the second to last digit as it is the most important digit.
Bid: the price trader can sell the bas currency
Ask: the price trader can buy the base currency
Spread: the difference between Bid and Ask price, counted in Pips. Count the pips from the second to the right digit.
The size of the Spread reflects:
1) Liquidity: the availability of the currency, the more available the currency is available the smaller the spread
2) Size: the bigger the deal the wider the spread because the broker is making more risk
3) Time of day: spread open up when markets are closed, for example if trading EURO to USD during the Asian session it is going to be a larger spread.
Lot Size: is the position size. Currencies are traded in lots batches of currency used to standardize forex trades in forex trading a standard lot 1.0 is 100 thousand units of currency alternatively you can trade smaller in mini or micro lots worth 10,000 or 1000 units of currency respectively.
Forex Broker: forex broker is a financial services company that provides traders access to a platform for buying and selling foreign currencies.
Forex Mentor: A Forex mentor is an individual – or an entity, in case of a mentor Forex broker – with the necessary knowledge and experience to assist a beginner Forex trader with various aspects of financial trading.
The most trusted FOREX MENTOR since 1990's
Leverage: is using a small amount of money to control a large amount of money. Less to mean more basically. It is expressed as a ratio from 1 to 100 (1:100), meaning for every dollar the trader puts into their account the broker is going to give the trader $100 of purchase power. Leverage is a great way to increase exposure to the financial market without having to commit large capital.
When trading with Leverage traders don’t have to pay the full value for the trade upfront instead they put down a deposit known as margin. When the trader leveraged position the profit or loss is based on the full size of the trade this mean that leverage can magnify trader’s profits but it also can bring on more risk and amplify the losses including losses that can exceed the trader’s initial deposit and that's why it scares people leverage trading therefore it makes it extremely important to learn how to manage risk properly going very closely with leverage is margin.
Margin: is the term used to describe the initial deposit the trader puts up when opening and maintaining a leveraged position when trading Forex with margin remember that the margin requirement will change depending on the broker and how large the trade position is the amount of money that the trading is putting with the broker is the good-faith deposit to open that position
Stop Loss Level: is the price at which the trader would be out of position because it’s moving against them. It can be set as soon as the position is taken or trade is entered. It’s a crucial step. When Going Long, the stop loss is going. Going Short the stop loss is above the entry price.
Take Profit Level: is the price where the position will be closed in profit. It is a crucial step as well. Going Long, Take Profit is set above the entry price as opposed to Going Short.
Risk Reward Ratio (R – Multiple): is calculated by dividing the rational reward in pips by the risk the trader is going to have to place to get that potential reward. Its crucial in trading because trader does not want to get into trades where the risk ratio is less than one. Having a solid Risk Reward Ratio 1.5.
Equity: is the account balance plus the floating profit or loss of the trader’s open position so that all the money that the trader can have of if the trader is losing that they don’t have.
Balance: is the total amount of money not including the open positions
Gaps: are the spaces left on the chart where price had jumped whether it was from global events or just because it’s the weekend, Gaps are where price jumped because there could not be any order filled in that gap because it moved to quickly
Volatility: is the amount of risk or uncertainty in the size of the change of a currency pairs price. For example, is it is a very volatile pair trader can see it move 90, 100 or 200 pips in a day but if it’s not volatile trader will see it move 20, 30 or 40 pips a day.
Volume: is the amount of buyers or sellers in a specific period of time.