You will learn a lot of new words when you take up forex trading. Some are easy to grasp, while others may take longer to become familiar.
In this lesson, you’ll learn more about the terms you’ll commonly encounter when trading forex. You will probably already know some of these from previous lessons. Still, it wouldn’t hurt to have a refresher course, would it?
Read below and start learning!
Lesson Highlight
- Learning the various terms commonly used in forex can help you understand complex trading concepts more easily.
Ask Price
The ask price refers to how much sellers are willing to accept as payment for the currencies they are selling.
When you look at exchange rates price lists, you’ll usually see the ask price on the right side of currency quotes. Typically, the ask price will always be higher than the bid price.
Suppose you’re looking at a USD/CAD price quote and see it listed as 1.3325/1.3327. If you go with the definition above, you’ll see that the ask price for the USD/CAD is 1.3327.
Base Currency
The base currency is one of the two currencies that make up a currency pair. It is the first one that appears in a pair. For instance, in the USD/CAD currency pair, USD is the base currency.
When trading forex, the base currency is generally considered the domestic currency; that is, it is the currency you are buying.
Bid Price
Contrary to the ask price, the bid price is how much you, the buyer, are willing to pay for a currency pair. In our earlier example, USD/CAD 1.3325/1.3327, the bid price is 1.3325. The bid price is listed on the left side of price quotes and is generally always lower than the ask price.
Broker
Forex brokers are financial service providers. They provide platforms where traders like you can buy and sell currencies.
Buy/Buying
In forex, buying means you are opening a buy order; that is, you are entering a trade. For example, if you buy the USD/CAD currency pair, you are opening a trading position and expecting the USD to increase in value.
Cross-Currency Pair
Cross-currency pairs are any currency pairing that doesn’t use the U.S. dollar as either the base or quote currency.
Examples of cross-currency pairs are:
- GBP/EUR
- EUR/CHF
- CAD/JPY
- AUD/JPY
- GBP/THB
- JPY/KRW
Currency Pair
Currency pairs are any two currencies that you trade on the forex market. It is comprised of a base and quote currency. These pairs serve as the basis of all forex trades.
Downtrend
Downtrends refer to the downward movement of prices over a certain period. These trends are easily identifiable by the sustained descent of prices, where the peaks of highs don’t break the previous low’s valley.
Exotic Currency
Exotic currencies are any currency from emerging economies. Generally, these currencies are relatively illiquid and have a lower trading volume. The combination of illiquidity and lack of available traders make these currencies volatile.
Examples of exotic currencies are:
- South African rand (ZAR)
- Namibian dollar (NAD)
- Turkish lira (TRY)
- Indonesian rupiah (IDR)
- Botswana pula (BWP)
Fundamental Analysis
Fundamental analysis is a market analysis strategy. You can use this strategy to predict future price movements using economic indicators.
Examples of economic indicators include:
- GDP growth
- Inflation rate
- Employment/unemployment levels
- Political stability
This analytical method also factors market sentiment in determining future price movements.
Going Long/Short
The terms going long or short refer to your trades’ direction. Going long means buying an asset and expecting its price to go up. In contrast, going short denotes that you sold an asset and foresee that its price will fall.
For instance, you can go long on the USD/CAD if you predict that the USD will gain strength over the CAD. Conversely, you can go short on the pair if you expect the USD to weaken.
Hedge/Hedging
Hedging is a trading practice to reduce your potential losses.
In forex, you can “hedge” by opening positions in different currency pairs that have a negative correlation. This way, you can cut your losses in one currency pair with gains from another.
For example, you may take a long position in USD/CHF and a short position in USD/JPY. If you do this, you can offset losses from your long position with gains from your short position, and vice versa.
Quote Currency
Also known as the counter currency, the quote currency accompanies the base currency in a currency pair. To spot a quote currency, you simply look at the second listed currency in the pairing.
When you trade forex, you buy a unit of the base currency with the value of the quote currency.
Sell/Selling
Selling in forex means you are closing your position or exiting a trade. For example, selling the USD/CAD means you are closing a long position in the said pair. It can also mean you are selling the USD for CAD if you expect the Canadian dollar to gain strength over the U.S. dollar.
Support and Resistance
Support and resistance are regions or levels in charts that indicate where price movements tend to start changing direction. These levels are not static; there can be multiple support and resistance levels in a day, an hour, or even a minute.
Technical Analysis
Technical analysis is another strategy for analyzing markets. This technique uses past data on price movements and trading volumes to predict future trends. In this analytical method, you will rely on tools called technical indicators instead of economic factors.
Technical Indicator
Technical indicators are tools for conducting technical analysis. These indicators rely on mathematical calculations and formulas to help traders determine future price movements.
There are four primary types of technical indicators:
- Trend following
- Oscillators
- Volatility
- Support/Resistance
Specific types of technical indicators include:
- Bollinger Bands
- Moving Averages
- Fibonacci Retracement
- Stochastic Oscillator
- Moving Average Convergence/Divergence (MACD)
Uptrend
Uptrends are the opposite of downtrends. These are characterized by sustained upward price movements, where each swing high’s peak is higher than the previous swing high peak.
Now that you’ve become a bit more familiar with forex terms, you can head on to the next lesson and start learning about forex orders!
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