Online Forex Trading

Learn the language of forex traders

Thousands of people across the globe a turning to investing in forex markets, in a bid to get better returns on their capital. Some of these are new to investing and trading. Others still have experience from other markets, such as commodities and shares. While the latter have an advantage over the total novices, there are significant difference between the forex markets and other financial markets.

language of forex traders

One of these differences is the language and terms used in the forex markets. It is therefore useful for the anyone wanting to learn about investing in forex to start by learning some of the more common and important terms. These include

Base and Quote currency. Currency on the stock market is traded in pairs. For example, one might buy United States dollars, and pay for them in Euros. The prices quoted will be displayed as USD/EUR. The first currency is the base currency. The second one is the counter or quote currency.

Ask and Bid Prices. The ask price is the price at which traders can buy the base currency. The bid price is the price at which the base currency can be sold. A trader who thinks the value of the USD will increase against the Euro will buy it at the price displayed in the ask quote, and vice versa.

Bear and bull markets. Bear markets are markets with a negative outlook, i.e, those were the prices are expected to drop. Bull markets are the opposite, with prices expected to drop. A trader who is bullish about the Sterling against the Dollar, expects the sterling to appreciate in value.

Cross Rate. Traditionally, currency prices on the forex markets were always quoted against the United States dollar. This is no longer the case, and it is possible to quote rates for currency pairs that do not include the dollar. Prices quoted in this fashion are known as cross rates.

Day Trading is a form of investing on the forex markets where an investor will exit all their trades before closing for the day. While it exists in other markets, it is particularly popular in the forex market, as the market is open 24 hours, and an investor can lose money while he sleeps as trading continues on the other side of the globe.

Fundamental Analysis is one of the two main investment strategies. It involves an analysis of the macroeconomic factors that might affect the value of a currency. As a rule, fundamental analysis tends to drive longer term investment strategies.

Technical Analysis on the other hand focuses on chart patterns and quantitative analysis of currency movements. Technical analysts argue that a currency’s future movements can be predicted by looking at past behavior. This is traditionally only true in the very short term though.

Hedging is common in the forex markets. Here, investors attempt to make trades that minimize the risk of another trade. An example is to buy a currency pair, and at the same time, buy an option to sell it at a lower, but predetermined price, therefore reducing the downside risk.

Lot. While stocks are traded in the number of shares, currencies are traded in lots. One standard lot equals 100,000 units of the base currency, a mini lot equals 10,000 units, and a micro lot equals 1,000 units.

Leverage. When forex investor leverage, they borrow money from the brokerage firm allowing them to take larger positions on the forex market. The effect of this is to amplify the potential profits and losses that they can make.

Margin. The other side of leverage, is the margin. This is the minimum cash deposit that a forex investor puts up for the transaction using money borrowed (leveraged) from the brokerage firm.

Long and Short Position. Investors that are long on a currency, have bought that currency, and are hoping/expecting that currency to appreciate in value. Those short on a currency expect its value to fall, so have sold the currency in the hope of buying it cheaper in the future.

Pip. The pip is the smallest price increment that currencies are typically traded at in forex markets. This is normally the fourth decimal place in the prices quoted. With a price of 1.5396, the ‘6′ represents the pip

Price trends. These are of particular interest to technical traders, and are the result of consistent moves of a currency price in a specific direction. Traders who can spot these trends early can make a lot of money.

While the list above is not exhaustive, it does cover the most common terms anyone wanting to learn about the forex markets will encounter.