Ben Sparham, Senior Trader Mentor at Learn to Trade
The foreign exchange market sees over $5trillion dollars traded within it every single day. Trading by individuals in this market is also growing in popularity, and we are seeing more and more people getting involved and starting to look at how they might trade themselves from the comfort of their own home.
Trading can be a complex concept, so before you start to trade the forex market, it is important to start with the basics and understand the trading jargon.
To help you follow the financial markets with ease, we have pulled together some of the most common trading terminologies that you need to know when getting started:
Ask price: This is the price at which the market (or your broker) will sell a specific currency pair to you. This is the price you can buy the base currency from your broker.
Base Currency: The first currency that is quoted in a currency pair and always has the value of 1. This is always followed by a second currency in the pair which is called the quote currency and is the amount needed to exchange into 1 unit of the base currency. For example, the Euro is considered the base currency and USD is the quote currency for the EUR/USD pairing.
Bid price: The bid is the price at which the market (or your broker) will buy a specific currency pair from you. This means that at the bid price, a trader will sell the base currency to their broker.
Candlestick: One of many visual representations of how an asset (in this case a currency pairing) value has moved over a set amount of time. It is used to denote whether its value has increased or decreased, by how much it has varied over the period (its high and low), and its open and close (the value it started and finished at) over the period of time.
Exchange rate: This is simply the value of one currency expressed against the other. For example, if EUR/USD is 1.3200, this means that 1 Euro is worth 1.3200 USD.
Forex Broker: A licensed firm that provides traders with access to a trading platform on which you buy and sell currencies
Leverage: This is the ratio of the transactions size compared to the actual investment used for margin. Using leverage allows a client to trade without putting up the full amount. For example, if a trader has £1,000 of equity in an account, you can have leverage of £100,000. In this instance they will have leveraged their account by 100 times, or 100:1, meaning they could make or lose up to 100 times more on each trade.
Margin: This is the monetary deposit required to open or maintain a position (an open trade). A margin can either be called free or used. A used margin is the amount in use to maintain an open position, whereas a free margin is the amount available to open new positions. Most brokers will automatically close a trade where a margin balance falls below the amount required to keep it open, this is called a ‘margin call’. The amount required to maintain an open position is dependent on the broker and can be 50% of the original margin required to open the trade. So for example, if your account has a balance of £1000, and 50% is your broker’s margin requirement, you can have up to £500 margin use at any one time. If it goes over this limit, the broker will usually contact you to advise you to either add more to the account or close the position.
Pip: A pip is the smallest increment of price movement a currency can make. It is essentially a measurement of a very small percentage change. A pip is always a standardised size and represents the smallest amount that a currency can change. E.g. for GBP/USD 1.34001, the 0.0001 is one pip.
Spread: The spread is the difference between the market’s current price, the buy price and sell price. To break even on a trade, your position must move in the direction of the trade by an amount equal to the spread. When trading forex, the spread will be determined by the wider market.
Stop loss: An instruction you predetermine to the brokerage to automatically buy (close the trade) when the currency value moves down to a specific price, or to sell when the currency value moves up to a specific price.
Finally, when trading forex you will always be referring to currency pairs so it’s worth getting your head around the following most popular forex pair nicknames:
- USD (U.S. Dollar) – Greenback or Buck
- GBP (British Pound) – Sterling
- GBP/USD (British Pound / U.S. Dollar pair) – Cable
- EUR (Euro) – Single currency or Fiber
- USD/ CHF (U.S. Dollar / Swiss Franc pair) – Swissy
- USD/ CAD (U.S. Dollar / Canadian Dollar pair) – Loonie
- AUD/USD (Australian Dollar / U.S. Dollar pair) – Aussie
- NZD (New Zealand Dollar) – Kiwi
- USD/RUB (U.S. Dollar / Russian Rubble pair) – Barnie
- EUR/RUB (Euro / Russian Rubble) – Betty
- GBP/JPY (British Pound / Japanese Yen pair) – Guppy or Gopher
- EUR/JPY (Euro / Japanese Yen pair) – Euppy (pronounced Yuppy)
- USD/JPY (U.S. Dollar / Japanese Yen pair) – Ninja
These are some of the fundamental and basic terms everyone needs to know before they start their forex trading journey. Once you have familiarised yourself with this trading jargon, you can begin to focus on the different trading strategies and trends in order to make a success of trading the forex market.
Above all else, it is also worth remembering that when trading, your capital is at risk. You can get help on reading the market, opportunities and risks from Learn to Trade.