Understanding the Forex terms

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Finance is a broad term encompassing many different aspects of economics and investing, including the foreign exchange market. Also referred to as FX or forex, this is an international marketplace in which investors can buy and sell currencies.

Some standard forex terms

Here are the most commonly used terms in forex that new investors should be familiar with before trading in forex.

Currency pair

It is a type of trade between two currencies, i.e. EUR/USD.

Short position

This is when a trader sells a security that they do not own to buy it later at a lower price, then sells it back for a profit.

Long position

A long position is when a trader buys security that they do not own to sell it at a higher price later, then returning it to the owner and making a profit.

Pip

A pipeline is used to measure how much one currency in a particular trading pair moves relative to another currency traded against it, i.e. if you buy EUR/USD. There’s a rise in the EUR price by 0.1%; this would be called one pip movement in forex terms.

Slippage

This term refers to when traders place orders but execute at unfavourable prices because of changing market conditions. Traders will sometimes avoid this by using a stop-limit order instead of a market order.

Currency strength

Currency strength refers to the relative price performance of a particular currency or which currencies are traded most in forex. Generally speaking, currencies that perform better over others will be strengthened while those that do not weaken.

Basis points

Essential points are the calculation for small changes in percentage terms, i.e. if USD/JPY rises from 100 to 100.1, then it has increased by ten basis points as opposed to forex traders who would call this one pip movement.

Pip spread

The number of pips by which the Ask is higher than the Bid price, e.g. if EUR/USD is currently 1.3530-1.3531, this means that the Ask price is at 1.3531 and the Bid price is at 1.3530; therefore, there is a spread of one pip.

Lot

The standard unit by which traders measure position sizes and profit and loss (for every 100 units traded, a trader will make or lose X amount of money).

Margin

This refers to how much capital you borrow from your broker to open a trade. For example, if you wanted to buy GBP/JPY worth $500, then you would only be able to borrow $400 as this would be considered as an 80% margin requirement because GBP/JPY has a leverage of 4 :1.

Offsetting

Closing a trade with an opposing trade to reduce exposure and bring the number of open positions down to zero, i.e. buying 100 BTC/USD and selling 100 BTC/USD at the same time

Liquidity

It refers to how easily a trading pair can be bought or sold depending on its popularity. Highly liquid pairs such as USD/EUR will have buyers and sellers waiting around all day, so no delay. In contrast, pairs that are less frequently traded will usually take longer because fewer people want to buy or sell them at that particular moment in time.

Scalping

A type of trading strategy involving making many trades over a short period, e.g. if you wanted to scalp GBP /USD, you would buy when the price is low, sell it when it goes up slightly to make a few pips, then repeat this pattern.

Range bound

The distance between the Bid price and the Ask price in the case of a trading pair being ‘stuck in one place, i.e. EUR/USD at 1.3530-1.3531, which means that there is minimal movement on either side of this level because both traders want to take advantage of any possible movements before they occur, so they don’t move from their respective prices

In conclusion

New investors should use reputable online brokers and be familiar with the terms used in forex trading. You must know all about the factors involved in determining currency price and forex trading.

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