Forex trading is a special realm of expertise. Traders communicate in their own language, and every rookie must learn the basic concepts before trading with real money. Here are the most fundamental terms in a trader’s vocabulary.
The Most Important Forex Terms
Do not expect to succeed if you are not familiar with these key concepts and indicators. Here is our crash course on Forex trading – the basics explained in simple terms. We are confident that these forex terms will help you when trading on the Olymp Trade platform
The ‘percentage in point’ is one of the most basic Forex terms. It is used to measure price movement, and it is the smallest denomination. For most pairs, it is defined as the fourth digit after the decimal point. For example, if the price drops from 1.6768 to 1.6766, this is referred to as a drop of two pips.
2. Central Bank
This is the key financial regulator of any country. The state entity has many roles: regulation of money supply and inflation, control of GDP, etc. It sets the national interest rate, which affects the flow of capital into the country and the value of its currency. This is the most important function for any Forex trader.
This system allows clients of a Forex brokerage to delegate trading to an expert. Copied traders, often called strategy managers, may be chosen using special rankings by performance. As part of the scheme, the client’s account is connected to that of their expert. All present and future trades of the strategy manager are replicated in the client’s account – hence the name.
4. Mirror Trading
This concept is very similar to copy trades, but it is automatic. Mirror traders connect to a number of various auto-trading and signal services.
5. Trading Signals
These are designed to alert about the best moment for a trade. Signals may be sent as text messages, emails, or push notifications in trading apps.
This abbreviation stands for Contract for Difference. These are popular derivatives in the FX market. Through CFDs, traders may speculate on a wide range of assets without owning them. Common examples include CFDs on commodities like crude oil or natural gas, CFDs on cryptocurrencies like Bitcoin, CFDs on market indices like FTSE100, and CFDs on stocks of the largest US corporations. Basically, these are agreements between holders and their brokers on the subject of price change. You will come across this Forex term very often.
7. Spread Betting
Spread betting is a peculiar type of Forex trading, which is mostly used in the United Kingdom and Ireland. This form of speculation is tax-free. Traders bet on the direction of their chosen market but do not have to own the asset in question.
This is the most fast-paced type of FX strategy. Scalpers dip in and out of the market several times per day. They aim to capitalize on a series of minor changes. Each trade may last seconds or minutes. They are extremely short-lived.
9. Demo Account
This type of account is provided to rookie traders for educational purposes. The login and password unlock their trading terminal in a simulation mode. The system mimics real market conditions, but no actual profit or loss is made.
These are intermediaries that connect retail traders and the global currency market (or other financial markets). A brokerage registers trading accounts, provides clients with the necessary software and educational opportunities. It should also guarantee efficient customer support.
This is the gap between the Ask and Bid prices for the same instrument. It is one of the most basic Forex terms. Spread is a major source of profit for traders classified as market makers. Clients look for tighter spreads, as they work in their favor.
12. Win-loss Ratio
This proportion shows how many of your trades fail, and how many bring a profit. For instance, if the rate is 2:3, the trader has made a profit twice and lost three times. If consistent, this ratio shows that their strategy may need to be changed.
A technical trader should never rely on a single indicator. Confluence is where two factors meet, pointing in the same direction. For instance, an increase in price is supported by rising volume.
14. Fundamental Analysis
This is one of the two main systems of analysis in the FX market. Fundamental traders look at such drivers as interest rates, GPD, trade deficit, unemployment, etc. They make decisions based on political and economic factors.
15. Technical Analysis
Technical analysts make forecasts based on special indicators. They use multiple price charts with different timescales to identify patterns and consider historic data. Unlike fundamental traders, they base decisions on the premise that nothing is random.
This tool is used to measure a certain aspect of the market – e.g., its volume. Indicators serve as a basis for trading decisions. Two indicators pointing in one direction form a sufficient basis for a trade.
Your portfolio is the set of instruments you use. For example, aside from currencies, you may profit from stocks, Bitcoin, and derivatives like CFDs. The more different markets are covered – the lower the overall risks. This is why diversification of portfolios is perceived as a risk management strategy.
This is the direction in which a price is moving. The FX market sees upward and downward trends, and it may also fluctuate or go sideways. Successful traders keep an eye on string trends that may work to their advantage.
19. Market Cycle
This term describes the special sequence of stages which the FX market experiences continuously. These are low range – rise – high range – fall.
20. Bull Market (Bullish)
This term describes a market in which prices are on the rise, and traders have more reasons to buy an instrument, rather than sell it.
21. Bear Market (Bearish)
This is the opposite of a bull market. Here, prices are falling, and participants are likely to sell.
22. Ranging Market
This term describes the situation when neither falls nor rises are strong. A ranging market may not be classified as bullish or bearish. It is in an intermediate stage.
23. Price Action
This term describes the movement of currency pairs registered over time.
24. Stop Loss
This feature of trading platforms allows users to limit potential loss for every position. If the price falls too low, the stop loss is triggered, and the trade is executed automatically.
25. Take Profit Order
This order type is the opposite of a stop loss. It is a feature of all popular trading terminals. The tool allows you to collect a certain amount of profit and automate execution. Your trade is closed once a particular level of price is triggered.
26. Major Pair
These are the most commonly traded combinations of currencies in the FX market. Majors are highly liquid, and they include the American dollar. Popular pairs are EUR/USD, CAD/USD, etc.
27. Minor Pair
Like majors, minors are also liquid and represent strong economies. However, they do not include the USD. A popular example is EUR/GBP.
28. Exotic Pair
These combinations include currencies of the so-called emerging (or developing) economies like Thailand or South Africa. These are usually valued against the US dollar, for instance, USD/ZAR.
29. Trading Strategy
This is your course of action or roadmap you follow in the FX market. It is a detailed plan of trades, which is designed to ensure consistency. Although strategies vary, you cannot succeed without one. Every strategy should consider the volatility and liquidity of the market, the acceptable entry and exit prices, risk management limits, etc.
30. Candlestick Chart
This type of visuals first appeared in Japan. Today, it is one of the most popular charts for FX analysis worldwide. Candlesticks contain a significant range of data, including the opening and closing price, and the scope of changes.
31. Economic Calendar
This useful feature of a trading platform/app is indispensable for fundamental traders. The calendar condenses the most relevant financial news, informing them of key events that may sway the rates.
32. Trading Psychology
This broad subject examines the mindset of traders and shows the connection between their mental state and results. Knowledge of psychology allows them to remove mental blocks and avoid impulsive decisions.
33. Trading Platform
This is the software environment where FX trades are executed. Platforms also include analytical tools like charts and economic calendars.
This term describes the ease or difficulty of finding a counterparty for a trade. For instance, majors are the most liquid currency pairs, so there are no delays in trade executions. Buyers and sellers may connect instantly.
This term refers to the scope of changes for the price of an instrument. For instance, a highly volatile pair sees dramatic ups and downs more often than other instruments.
Basic forex & economic term, inflation describes a rise in the price of products. The faster the inflation – the weaker the currency. For instance, at $10 now, you can buy much less than 50 years ago.
37. Carry Trade
This system allows traders to benefit from changes in international interest rates. They borrow a currency at a lower rate and use it to invest in another currency at a high rate. Similar Forex terms are used by professional traders
Read more: How Carry Trade Works
38. Managed Accounts
These accounts are opened for delegation. Their holders delegate trading to their account manager. Some types provide more control than others.
39. MetaTrader 4 (MT4)
This is one of the most popular software systems for FX trades. The terminal may be used as a desktop platform, a web-based system, or an app. MT4 has been the leading solution for two decades. Even today, it is recommended by many brokers around the world.
40. Trading Journal
This journal contains details of all decisions a trader makes in the market. Keeping a diary is advisable, as it makes progress review easier. You can see what works for you and what doesn’t, and adjust your strategy accordingly.
Trading on leverage, also known as trading on margin, allows you to use a portion of your broker’s funds. For instance, a 1:100 ratio means a trader may initiate a position worth $100,000 with just $1,000 on their account. This system boosts purchasing power, but it also magnifies risks. Responsible brokers always stress the importance of caution in leveraged trading.
This described the portion of your own funds that go into a leveraged trade. The margin is temporarily blocked by the broker until execution. This guarantees you have sufficient capital to cover the trade.
43. Day Trading
This is one of the most popular trading styles. As the forex terms suggest, all trades must be opened and closed within the same trading day, so no positions are left open overnight.
44. Swing Trading
This is a long-term strategy, and it involves overnight positions. A trade may last for several days, weeks, or months before it is finally closed. This style is more suitable for traders who cannot monitor the markets throughout the day.
The term refers to a special line drawn on the price chart. This is the lowest level a currency pair drops to within a certain period.
This is the opposite of support. The resistance level on a price chart is the line corresponding to the price that is not exceeded over a certain period.
47. Naked Trading
This term describes trading without the use of any indicators. Instead, players look at resistance and support levels to make decisions.
48. Quantitative Easing
This described the situation in which a central bank releases more currency into the money supply. The effectiveness of the measure is arguable, but it does raise liquidity in the FX market.
This abbreviation stands for ‘Gross Domestic Product.’ It is a basic economic indicator that reflects the overall strength of an economy and the sum of products and services produced in it.
50. Dealing Desk Broker – Forex terms
Such companies are also known as market makers. They determine their own pricing and get profit from the spreads. Unlike ECNs, they do not charge a commission, although overnight fees are common.
51. No Dealing Desk Broker
Such brokers are also known as ECNs or electronic communication networks. they broadcast ‘real’ market quotes, and charge a commission per trade.
52. Market Maker
This is another term for a broker with a dealing desk. Market makers set their own prices, and they also act as providers of liquidity.
This term describes brokers without a dealing desk. Their key source of revenue is commission per trade.
‘Straight Through Processing’ describes the way the FX market may be accessed. It is only possible through an ECN.
55. FOMO – Forex terms
The ‘Fear of Missing out’ describes the mindset of a trader who opens positions for fear of missing out on profitable moments. It often leads to flawed decision-making on the spur of the moment. Traders may enter too early and neglect confluence.
This effect is observed when the closing price of your trade differs from your expectations. This commonly happens in highly volatile markets.
57. Mobile Trading
As the term suggests, this type of trading is facilitated by tablets and smartphones. Today, traders are no longer tied to their PCs or laptops. They may easily work on the go using powerful and versatile apps. Most popular trading platforms have mobile versions for iOS and Android. Of course, mobile trading is not always suitable for complex decisions.
58. Analysis Paralysis
Sometimes, traders receive so much information that they are unable to act. This paralyzes their analytical abilities. Typically, this is caused by the use of too many indicators.
59. Trading Bot
This is a special computer program for automatic trades.
60. Risk Management Strategy
This is your plan for the limitation of potential losses. In Forex, losses are inevitable, and traders may aim to keep them under control. A risk management strategy usually includes rules for stop loss and portfolio diversification.
These are the most important terms every trader should know. Unless you know them, you are not fit for live trading yet. Develop a solid understanding of these and other definitions related to currency exchange. This will allow you to share the experience with peers and build a solid strategy for success.
If you are only starting your career, make sure you practice in the demo mode as long as necessary. The education stage is mandatory. Without it, you will only lose your deposit.
Forex is a colossal marketplace where trillions of US dollars circulate daily. Learn how it works and choose currency pairs you are most familiar with. Remember that there is no single recipe for success. Traders pursue different strategies based on their personal traits and resources.
Some of the terms in our list are applicable to other instruments. When you are ready to diversify, the transition will be easier than learning from scratch. For instance, you may choose stock or cryptocurrencies to engage in a number of unrelated markets.