Forex Jargon: The Ultimate Guide
The world of foreign exchange, or forex, is rife with jargon that can be daunting for newcomers and even traders with previous experience. Understanding this language is essential to navigate the forex market effectively. In this guide, we will decode some of the most common forex jargon, in order to help you if you're new or just refresh your memory if your'e looking to get back into the game.
Major Pairs and Crosses
- Major Pairs: These are currency pairs that include the US Dollar and another major currency. Examples include EUR/USD (Euro/US Dollar) and USD/JPY (US Dollar/Japanese Yen). They are known for high liquidity and lower spreads.
- Crosses: These are currency pairs that do not include the US Dollar. Examples include EUR/GBP (Euro/British Pound) and AUD/JPY (Australian Dollar/Japanese Yen). They can be less liquid and have wider spreads but offer diverse trading opportunities.
Pips, Lots, and Leverage
- Pip: A pip (percentage in point) is the smallest price move that a currency pair can make. For most pairs, it is 0.0001 of the quoted price.
- Lot: In forex, a lot refers to the size of a trade. A standard lot is 100,000 units of the base currency, but there are also mini (10,000), micro (1,000), and nano (100) lots.
- Leverage: This allows traders to control large positions with a relatively small amount of capital. It amplifies potential profits but also increases the potential for significant losses.
Bid and Ask
- Bid Price: The price at which a trader can sell a currency pair. It’s the lower of the two prices in a quote.
- Ask Price: The price at which a trader can buy a currency pair. It’s the higher price in a currency quote.
Margin and Margin Call
- Margin: This is the amount of capital required to open and maintain a trading position. It's essentially a good-faith deposit required to keep trades open.
- Margin Call: If your account falls below the required margin level due to trading losses, you’ll get a margin call, requiring you to deposit more funds or close positions.
Bull and Bear Markets
- Bull Market: A market where prices are rising or are expected to rise. A ‘bull’ trader believes prices will go up.
- Bear Market: A market where prices are falling or are expected to fall. A ‘bear’ trader believes prices will go down.
Stop-Loss and Take Profit
- Stop-Loss Order: This is an order placed to sell a currency pair if it reaches a certain price, helping to limit potential losses.
- Take Profit Order: This is an order to close a position once it reaches a specific level of profit.
Technical and Fundamental Analysis
- Technical Analysis: This involves analyzing historical market data, primarily through charts, to forecast future price movements.
- Fundamental Analysis: This is the study of economic, social, and political factors that may affect currency prices.
Currency Pair Nicknames
Several major currency pairs have nicknames:
- Cable: GBP/USD, named after the transatlantic cable used to transmit the exchange rate between the US and the UK.
- Fiber: EUR/USD, a newer term reflecting the Euro’s material and modernity.
- Aussie: AUD/USD, referencing Australia.
- Loonie: USD/CAD, named after the loon bird on the Canadian one-dollar coin.
Common Forex Strategies
- Scalping: Making multiple trades to profit off small price changes, usually over very short time frames.
- Day Trading: Opening and closing positions within the same trading day to avoid overnight risks.
- Swing Trading: Holding positions for several days or weeks to capitalize on expected upward or downward market shifts.
- Position Trading: A long-term strategy focused on fundamental factors, holding positions for weeks, months, or even years.
- Drawdown: This refers to the reduction of one’s trading capital after a series of losing trades.
- Risk/Reward Ratio: This ratio is used to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. In forex, a common strategy might involve a risk/reward ratio where the potential profit is twice the potential loss.
- Hedging: This involves opening multiple positions to offset potential losses in another. For example, if you have a long position on EUR/USD, you might hedge against potential losses by opening a short position on the same pair.
- Volatility: Refers to the frequency and extent of price movements. High volatility means prices are moving rapidly in a short period, while low volatility indicates minimal price movement.
- Liquidity: This term describes the ease with which an asset can be bought or sold in the market. A highly liquid market, like the forex market, means large quantities of currencies can be traded quickly without significantly impacting the exchange rate.
- Overbought/Oversold: These terms are used in technical analysis to describe when a currency pair has been traded to such an extent that its price has significantly risen or fallen and is expected to reverse. This is often determined using indicators like the Relative Strength Index (RSI).