To trade the forex market successfully, you need to master the market’s trading terminology. If you do not “speak forex”, you will find it hard to trade forex! Here are some terms that you will surely encounter as you enter the world of online trading.
Trading Terminology
1.Bid price
The bid price is the price at which the forex market is willing to buy the base currency of a currency pair. In other words, it is the price at which you can sell that currency. It is always on the left side of a forex quotation.For example, if the EUR/USD pair is quoted at 1.5512/1.5515. The bid price is 1.5512, meaning you can sell one euro for 1.5512 US dollars.
2.Ask price
The ask price is also called the offer price. It is the price at which the market is willing to sell the base currency of a currency pair. In other words, it is the price at which you can buy that currency from the market. It is always on the right side of quotations.In our example of EUR/USD 1.5512/1.5515, the ask price is 1.5515, meaning you can buy one euro for 1.5515 US dollars.
3.Pips
Pip stands for a point in percentage. It is the smallest unit of change in a currency pair, which is 0.0001 when the quotation is to 4 decimal places.Let us say the price of EUR/USD is quoted at 1.3487, and then the quote price changes to EUR/USD 1.3488. The price has gone up by 0.0001, or 1 pip. We can say there is a 1-pip change in price in our EUR/USD pair.
4.Spreads
The spread is the difference between the bid price and the ask price, and it is measured in pips.Continuing with our EUR/USD 1.5512/1.5515 example, the spread in this pair will be:Ask price – Bid price = 1.5515 - 1.5512 = 0.0003, or 3 pips.We can also say the EUR/USD pair has a 3-pip spread.
5.Leverage.
Leverage is an important member of the trading terminology family that describes a feature of good faith offered by brokers to enable you to deposit small security so that you can trade larger amounts of capital than you have in your account. In other words, you can use relatively small capital to control large dollar amounts and trade financial instruments that require more money than you have.Leverage is expressed in ratios, and it varies with different brokers. Depending on the type of broker, it may range from 2:1 to 500:1. Let’s say your broker requires you to deposit $200 with them in order to trade with $10,000. The leverage will be 10,000:200, which is 500:1. In trading terminology, we would say that you are leveraging $10,000 at the equivalent of $200.
6.Margin
The margin is the required collateral that your broker needs so that you can open or maintain a trading position. In other words, it is the minimum amount you must deposit with your broker so that you can use leverage.In our example above, the amount required is $200 to open a $10,000 position. So, the margin is $200.
7.Liquidity.
Liquidity is the ability of an asset to be bought and sold without any major fluctuations in its price. A currency pair has high liquidity if it has high trading volumes and can be bought and sold with ease.If a currency pair has lower trading volumes, and only a few people are interested in buying and selling that pair, it is said to have less liquidity.
8.Volatility
Volatility is the measure of price fluctuations on an asset over a given time period.If the price of the asset is unstable and changes frequently, with big spikes from time to time, the asset is said to have high volatility. On the other hand, if the price is consistent and stable over a long period, the asset is said to be less volatile.
9.Margin calls
A margin call is a demand by the broker that you deposit additional funds in your account to cover your open trade positions. It occurs when the possible losses from your current trade positions cannot be covered by the amount of money in your account.
10.Going long and going short
Going short or long is trading terminology used to indicate the direction you want your trade to take.If you “long” EUR/USD, it means that you are bullish, and you expect to make a profit in the market if the price goes up. On the other hand, if you “short” EUR/USD, it means that you are bearish, and you expect to make a profit if the price trades lower.
11.Slippage
Slippage is the difference between the price at which you expect your order to be filled and the actual price it is filled at. Slippage occurs due to execution speeds and market volatility and can work either in your favour or against you.
12.Swaps
A swap, also called a rollover, is the interest you pay or earn for a trade that you keep open overnight. It is usually the interest rate differential between the two currencies in the currency pair being traded, and it is determined based on whether your position is long or short.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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