Discover the Forex Dictionary. What are the Forex Terms? Learn FX Terms. Stop Loss, Take Profit. What is Lot?
Forex is the global foreign exchange market and is the largest market where financial instruments are traded. Forex trading involves the buying and selling of currency pairs and it is important to understand the terms used in this transaction. Here are some of the terms commonly used in the Forex world:
Pip: The unit that represents the smallest price change in Forex trading. It is usually four decimal places for currency pairs. For example, the change from 1.1200 to 1.1201 in the EUR/USD currency pair is 1 pip.
Lot: A unit that indicates the size of Forex trades. A standard lot is 100,000 units. A mini lot is 10,000 units and a micro lot is 1,000 units.
Leverage: The borrowing ratio that traders use to take larger positions. For example, leverage of 1:100 means that a trader can open a $100 position with $1 of equity. Leverage can increase profits, but it also increases risk.
Spread: The difference between the bid and offer price. The spread generates a broker’s profit. For example, if the bid price for the EUR/USD currency pair is 1.1200 and the ask price is 1.1202, the spread is 2 pips.
Margin The minimum amount of collateral a trader must have in their account in order to open a trade using leverage.
Stop Loss: This is the level that traders set to limit their potential losses. The position is automatically closed when the price reaches this level.
Take Profit: A level set by traders to stabilise their profits at a certain level. The position is automatically closed when the price reaches this level.
Technical analysis: A method of predicting future price movements by analysing past price movements. Technical analysis is carried out using charts and indicators.
Fundamental Analysis: A method of predicting future price movements by analysing the impact of economic, financial and political factors on currency prices.
Parity: The ratio that shows the value of two different currencies in relation to each other. For example, EUR/USD parity shows how many US dollars are worth 1 euro.
Long Position: A strategy of buying a currency in the hope that it will rise in value. For example, buying EUR and selling USD in the EUR/USD pair is a long position.
Short Position: A strategy of selling a currency in the hope that it will depreciate. For example, selling EUR and buying USD in the EUR/USD pair is a short position.
Swap: Interest charged when positions are left open overnight. Swap rates are different for each currency pair and can be positive or negative.
Trend: The tendency of the market to move in a particular direction. An uptrend is a period of rising prices, a downtrend is a period of falling prices and a sideways trend is a period of flat prices.
Volatility: A measure of how much the market fluctuates. High volatility means that prices make rapid and large movements.
Liquidity: The degree to which the market is able to execute large transactions without a significant impact on the price. The Forex market is known for its high liquidity.
Hedging: A transaction made to minimise risk. It is when an investor opens a position in the opposite direction to stabilise their current position.
Arbitrage: A strategy to make profit without risk by taking advantage of price differences of the same asset in different markets.
Broker: The intermediary organisation used to execute Forex transactions. Brokers offer trading platforms and trading services to investors.
Support and Resistance Levels: The support level is the level at which the price shows a pause and recovery trend in its downward movement. The resistance level is the level at which the price shows a pause in its upward movement and a downward trend.
These terms are important to understand the basics and concepts of trading in the Forex market. To become a successful Forex trader, it is necessary to develop both technical and fundamental analysis skills and have a good understanding of market dynamics.
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