July 20, 2024

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Introduction to Forex Trading Terminology

2 min read

If you don’t know the lexicon of forex, you can’t possibly be a good trader. These things are very important, so I’ll break down some key terms for you:

Table of Contents

Currency pairs

A pair is a combination of two currencies; the first of which is the base (and underlying) currency while its value is the number of units of base currency that must be bought in order to purchase one unit of the other (quoted) currency.

Deal

The foreign exchange market is an open 24×5 market where traders buy and sell currencies against each other and make profits if one currency appreciates against another pair. This trading term is known as Forex.

A ‘flat’ market is a condition in which the prices of securities neither rise nor fall over an extended period of time, due to lack of trading volume or a lack of momentum in either direction over a specific time period, or where rising price movements on some securities are offset by falling price movements on others.

CPI stands for Consumer Price Index and represents the average of change in prices of goods and services purchased by households. CPI is the most common index of inflation, and can be calculated by adding up all prices in the basket and dividing by the number.

Four others (AUD, CAD, GBP and NZD) are major currencies on the Forex, known as ‘Aussie’ and sometimes shortened to A$ — one of the world’s most underpriced currencies.

A broker is an agent or firm involved in facilitating monetary transactions for which a fee or commission is collected. Also called a dealer.

An ‘on margin’ position means trading on borrowed funds to increase your exposure to the market and therefore get larger payoffs, but overexposure can lead to losses greater than your initial investment.

A GTC order remains open until cancelled by the trader or until it expires, which typically happens after a period of 90 days at most brokerage accounts.

The spread is the difference between the bid and ask price of a given currency pair, which differs from broker to broker, is quoted in pips, and is a vital cost of doing business; it facilitates liquidity in the Forex market.

Trading that involves short-term technical analysis, with trades that might be measured in seconds or minutes, is called scalp trading, requiring profits that can come from a small number of pips: that is, fractions of a penny.

By buying and selling the same currency pair concurrently, scalpers skim tiny holes in the tape – mere pips – hoping for a pivot smaller than a pip. Although scalping is extremely risky, if you really want to do it, you should have a plan (and stop loss orders ready and waiting if the market pivots against you): thin markets are more risky and challenging to manage than active markets.

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