Foreign Exchange Terminologies Every Trader Needs to Know

In Forex, it’s essential to know the commonly used set of brief terms or phrases that together form the set of Forex Trading jargon terms. Some are used among dealers trading in financial markets, while some are unique to Foreign Exchange Trading. 

Let us define some of these terms to understand Forex more profound before beginning Forex Trading. They are broken down into two groups. The first is consists of those terms that are more related to retail forex traders who use online forex brokers to execute transactions, while the second are those terms used among professional traders.

Retail Forex Trading Terminology

  1. Margin – is the minimum collateral or deposit you need to have with a forex broker to make a forex trade. This margin allows you to effectively take a ‘loan’ or access to a more significant amount of capital. To protect the brokers from clients not being able to pay them back when their clients’ losses exceed their initial investments from using leverage, they put margin calls.
  2. Leverage – is the ratio of the amount of money that traders are allowed to use to gain access to large sums of trading capital. It can boost both profits and losses and should be used wisely.
  3. Lot Size – is the minimum trading unit for a forex broker account. For individual investors, their standard lot is 100,000 units. To enable market makers to supply liquidity more quickly, they use standard trade sizes.

Professional Forex Trading Terminology

  1. Spread – is consists of the difference between the bid or purchase price and the ask price of an underlying asset. The price usually seems better for the customer if the bid-offer spread made by the market maker is tighter.
  2. PIP – stands for Percentage in Point and represents the minimum price fluctuation possible in a forex transaction. In Forex, a pip is simply .0001 or 1% of 1%.
  3. Offer – the exchange rate that the market maker’s willing to sell the base currency in a currency pair at.
  4. Bid – the price that the market will pay for a currency. Usually, the bid price is lower than the ask price.
  5. Ask – is the price at which you can buy currency or the amount that the market is willing to sell it.
  6. Going long – means to purchase a currency pair, which involves purchasing the base currency and selling the counter currency.
  7. Going short – is the opposite of going long. It consists of selling the base currency and buying the counter currency.

These are just some of the many terminologies you need to know before entering the world of Forex trading. Understanding these terminologies will help you understand Forex more.

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