Learn the forex jargon: your guide to the most common forex terms and expressions

Trading forex involves learning complex concepts, wading through price charts and making sense of various fundamental indicators, but your first step should be to come to terms with the language of forex and the most used terms of the forex vocabulary.

Learn the forex jargon: your guide to the most common forex terms and expressions

Learn the forex jargon: your guide to the most common forex terms and expressions

Trading forex involves learning complex concepts, wading through price charts and making sense of various fundamental indicators, but your first step should be to come to terms with the language of forex and the most used terms of the forex vocabulary.

 

Forex or currency trading is an exciting platform with an abundance of opportunities for new and seasoned investors. However, as in every beginning, things tend to get a bit confusing when you aren’t familiar with the basics.

We made a list of the most widely used jargon and terms that might pop up during your journey into the financial markets and you can look at the definitions below to better understand what they are all about.

 

Forex

Since this is about the basics, it makes sense to start at the very beginning. We won’t get into the history of the forex market, but it’s good to know that forex is actually a combination of the words foreign (as in currency) and exchange.

The forex market is made up of all the financial institutions, major banks and currency traders that buy and sell currencies or even speculate on their exchange rates in order to make a profit.

 

Currency pair

Forex trading provides exciting opportunities, because it allows you to speculate on the movement between the exchange rate of two currencies with incredible profit potential in case your predictions prove correct.

Dealing with exchange rates, however, requires trading two different currencies. We can’t determine how the US dollar is performing without comparing it with another currency and even then, it’s performance against one currency may be entirely different when compared to that of another.

Therefore, trading currencies on the forex market is done in pairs which are expressed by their symbols. The most popular currency pairs which are traded more actively are called the majors and these are: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD.

It may be more helpful if you consider these currency pairs as a single investment asset similar to a stock. Instead of buying Google stocks, however, you can buy (or sell) EUR/USD and make a profit if the exchange rate between these two currencies goes up or down.

 

Base currency and quote/counter currency

The first currency in a currency pair is referred to as the base currency while the second one is known as the quote or counter currency. When you are buying a currency pair, EUR/USD for example, you are effectively buying the (EUR) base currency while selling the quote or counter currency (USD).

Therefore, as a buyer, you would be hoping that the EUR would increase in price against the USD and that the exchange rate between them would go up.

It’s important to know that, in forex, you can also sell currency pairs and realize positive returns even when the exchange rate of a currency pair is falling. For example, if the EUR is performing badly while the US economy shows signs of improvement, it means that the exchange rate of the EUR/USD is going to drop, and a sell order is the best plan of action.

By selling the EUR/USD currency pair, you are actually selling EUR while buying USD. Since the exchange rate is going down due to the weak performance of the EUR, you will realize a substantial profit according to the amount of points the exchange rate of the currency pair drops.  

 

Pips and pipettes

The value of the exchange rate movements in a currency pair is measured in pips. Exchange rates don’t move by a very large margin during a trading session so it helps to know even the slightest change and as such, on your trading platform, the prices for buying and selling each currency pair are usually quoted in 4 or 5 decimal places.

For EUR/USD, for example the current buying price is 1.10475. The fifth decimal place is the smallest price movement in the market, and these are referred to as the pipettes which are just a fraction or one tenth of an actual pip.

Pip is an acronym for Percentage in Point and since currency traders aim to profit from the movement in the exchange rate of currency pairs, its makes sense that they usually measure their profits/losses in pips as well.

 

Spreads

As you will soon find out, even trading costs are measured in pips. Admittedly, forex trading is so active that opening orders in the market is extremely competitive with minimal charges and usually no commissions.

That being said, the forex broker, who facilitates your trades will charge a fee for each trade, which depends on the current supply and demand of the traded currency pairs.

In fact, since you can both buy or sell a currency pair according to the direction you believe its exchange rate will move, it’s understandable that there will be a difference between the buying price (Bid) and the asking price (Ask).

The difference between these two prices makes up the spread, which is measured in pips and is usually quite small. It’s good to know that popular currency pairs i.e. the majors listed above, are the most active and therefore enjoy the lowest and most favorable spreads.

 

Lots

Positions on the market are measured in trading lots. 1 standard trading lot is equal to 100.000 units of currency while mini lots and micro lot are equal to 10.000 and 1.000 units respectively.

As already mentioned, exchange rate movements are usually quite small and therefore the larger the size of your position, the larger the profit potential.

However, beginner traders with small accounts need to carefully consider their position sizing and ensure that they have risk management rules in place to protect their traders from downside risks.

 

Slippage

Slippage refers to orders that aren’t executed at the price requested, but at a slightly worse or more favorable price instead. This is not a common phenomenon, but there are instances where the market moves too rapidly and there isn’t enough supply to meet the demand.

Consequently, orders may not be executed at the price you expected, but it can sometimes be beneficial and therefore not something you should worry about unless it becomes a common occurrence with your broker.

 

Head over to our Education section to access more educational resources such as training videos, webinars and other tutorials, or refer to your trading specialist for further guidance or any questions you may have about the markets.

 

Register for an account with CM Trading now and start learning how you can start your forex trading journey today!

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on whatsapp
WhatsApp
Share on email
Email

Recent .

Dogecoin is going to the moon… literally!

Dogecoin is going to the moon… literally!  While the cryptocurrency markets have been put through the mill the past few weeks, Dogecoin managed to steal the spotlight …

Read More →
Stock of the Week: Apple in huge demand, beats estimates by billions.

Stock of the Week: Apple in huge demand, beats estimates by billions. Apple beat estimates for quarterly earnings by billions of dollars. We look at …

Read More →
Stock of the week: Facebook makes CEO Mark Zuckerberg $8 billion in just one week!  

Stock of the week: Facebook makes CEO Mark Zuckerberg $8 billion in just one week!   It has been a momentous week for Facebook CEO Mark Zuckerberg who …

Read More →
Big Tech earnings roll in – Huge profits for Google, Microsoft and more! 

Huge profits for Google, Microsoft and more! Major big tech companies have released their quarterly earnings. We look at how some of the world’s biggest businesses performed so far this year!     Google, …

Read More →
MetaTrader 4 vs MetaTrader 5 – which is the better platform?
Bitcoin bounces back: Is buying the dip worth the risk?

Bitcoin bounces back: Is buying the dip worth the risk?  Bitcoin has recovered some of its losses following its fall from a record high of $65,000. Considering the crypto king’s astonishing performance in 2021, should …

Read More →
Oil summit: Waste of time
Oil market outlook: bumpy ride ahead?

2020 has been disastrous for the oil markets, however, it appears that oil has recovered most of its losses and is now hovering near pre-pandemic levels. In today’s article we will take a look at oil’s recent performance and explore the opportunities that may lie ahead.

Read More →
˄