Currency trading terminology is a broad topic, encompassing everything from unusual phrases to complex acronyms. We will cover the most important and most common terms to give you a better understanding.
- Forex – ‘Foreign Exchange,’ which refers to exchanging one currency for another. It includes buying, selling, and trading currencies between countries and is a global market that involves nearly every country in the world, 24 hours per day.
- Currency Pair – A currency pair can be the price of one country’s currency compared to another country’s currency.
E.g., USD/JPY – United States dollar versus the Japanese Yen.
- Exchange Rate – The exchange rate is the price that one country’s currency trades compared to another and can vary at any given time.
E.g., EUR/USD exchange rate is 1.8976 – This is an abbreviation that stands for ‘EURO’ compared to the “United States Dollar’. In this case, 1 EURO is equal to 1.8963 US Dollars. Therefore, if you were to buy Euros, you will have to pay 1.8963 USD per Euro.
- Bid Price/Ask Price – The Bid price is the value at which the currency pair is bought. The price at which a currency pair is sold is the Ask price.
- Spread – The ‘Spread’ is the difference between the bid and ask price of a currency pair and can be a significant consideration when deciding which trade to enter. Lower spreads are preferred as it allows for higher profitability.
- Pip – A ‘Pip’ is the minor change that you can have on your Forex chart, and an increase or decrease of one pip represents a change in the price of 1/100th of 1%.
An example of calculating pips for a trade position:
EUR/USD was bought at 1.0661; the trade position is closed at 1.0680
The number of pips = 1.0680 – 1.0661 = 0.0019 or 19 pips
Therefore, the price has moved up by 19 pips
The above image displays spread calculation, bid/ask price and pip.
- Lot Size
In forex trading, a lot size is the number of units of a particular currency either bought or sold in a single trade. There are three types of lot sizes when trading: “standard”, “mini”, and “micro”.
A standard lot is 100,000 units of the base currency in a forex trade.
A mini lot is the equivalent of 10,000 units of the base currency in a forex trade.
A micro lot is the equivalent of 1,000 units of the base currency in a single trade.
- Long / Short
The term long in forex is used when a trader intends to place a buy order of a particular currency pair. Going short refers to selling a currency pair.
- Bullish / Bearish
Bullish refers to an uptrend in a particular currency pair; in this case, a trader will be looking for buying opportunities. Bearish refers to a currency pair’s downtrend; traders will be looking for selling opportunities in this instance.
- Margin – This is the amount of money required to keep your trading positions open or running. This amount varies depending on the currency pair traded as well as the broker that you are using.
- Margin Call – A margin call is a notification that you are at risk of losing an amount of money from a trade position, in which case you must deposit more money into the account to avoid further losses.
- Leverage – Leverage is borrowed from the broker to increase your trading position. Traders use leverage to profit from small changes in price in currency pairs. Leverage helps inflate your profits, but it can also boost the losses should a trade go badly.
- Hedging – In forex trading, hedging is a strategy in which a trader tries to minimize the risk of adverse price movements in the underlying position. A trader will open selling and buying positions on the same or different currency pairs to reduce the trade losses.
- Broker – A broker refers to an individual or organization that acts as a middleman between the seller and the buyer of a currency pair.
- CFD – CFD stands for “Contract for Difference”, which is traded on financial markets as well as over-the-counter (OTC). The contract allows a buyer to exchange the difference between the opening and closing price of a security. CFDs typically represent shares, indices, commodities, or currency pairs.
- Futures – A futures contract is an agreement between the buyer or seller of a specific instrument to be bought or sold at a predetermined future date.
- Options – An Option contract allows the holder to buy or sell an asset at a specific price on a certain or prior to a certain date.
- Derivatives – A derivative contract is between two or more parties, the value of the contract being based on an agreed financial asset. These underlying assets include commodities, currencies, market indices, stocks, and bonds.
- Stock market – The stock market is a collection of markets that allow ownership of shares in publicly held companies traded between buyers and sellers. The terms used in the stock market are determined by the exchange on which the shares trade. The price for buying or selling shares depends on supply and demand.
The figure shows the major stock markets globally and their market capitalization.