What Are the Terms Used in Forex?
We will outline the most important Forex lingo one by one as we unwrap them and help you understand them.
1. Currency Pair
This is the quotation of a currency against another. Currency pairs are usually expressed in short forms. For instance, USD stands for US dollar, and JPY is Japanese Yen. Combining two currencies like USD and JPY is what makes a currency pair (USD/JPY). The first currency in a pair is the base currency, while the second is the quote currency.
A currency pair is traded based on its performance. For example, if you buy USD against JPY, you are speculating that USD will outperform JPY.
Currency pairs are divided into three major groups:
- Major pairs. The eight common currency pairs that contain USD as the base or counter currency, and any of these – GBP, CAD, EUR, AUD, NZD, JPY, CHF.
- Cross Pairs. Currency pairs that contain major currencies without the USD as the base or counter currency, such as EUR/ CAD, NZD/CAD, and GBP/AUD.
- Exotics. Currency pairs containing a major currency and another from emerging or developing markets like the South African Rand, Polish Zloty, and Hungarian Forint.
2. Leverage
Leverage is borrowed money from a forex broker to enable you to trade big lot sizes without spending much money. High leverage is a perfect asset, especially for beginners, as it helps you invest a small amount but gain bigger profits.
The amount of leverage you can get highly depends on your broker and your account type. Using high leverage may be great for maximizing profits, but it can also cause huge losses if used carelessly. So, always pick leverage that you can easily control because any losses will be deducted from your actual account balance.
No negative protection is a major factor that you must consider when looking for a broker. This feature ensures your open positions are automatically closed when you lose all the capital to prevent them from running, which would leave you owing money to the broker.
A good example of leverage is 1:500. This means that your capital is multiplied by 500. Therefore, if you deposit $260 in your trading account, you can control $130,000 in the market.
3. Lot
In forex, you trade using lots, which refers to the position size you open. You can trade standard, mini and micro lots. A standard lot is usually 100,000 units, mini lot 10,000, and micro 1,000 units of the base currency in any pair.
The lot size you can use is mostly determined by your account balance, but you should also use proper risk management to minimize losses. Brokers allow you to trade many lots. For example, you can trade three micro lots (3000 units), or five mini lots (50,000 units), or 10 standard lots (1,000,000 units).
These lots have different values, so the amount of money you can make trading one mini lot is not the same for a micro lot.
4. Pip (Percentage in Point)
This is the smallest price change in a currency pair’s exchange rate, which is used to measure value. A pip is usually the 4th decimal on your pair’s price quote. So, if a currency pair such as GBP/USD moves from 1.2650 to 1.2651, that’s a one pip movement.
A pip’s value varies with the lot size you pick. For instance, one pip is worth $10 in a standard lot, meaning you gain a profit of $100 in a 10-pip increment.
Most currency pairs have four decimal points except the Japanese Yen, which has two (USD/JPY=80.51). For JPY pairs, the second decimal place (1) is usually the pip.
5. Margin
Margin is the deposit you put up to open a position. It is usually a percentage of the actual position size. The margin also helps you use leverage to open bigger position sizes. Therefore, you must deposit this margin for a broker to provide the leverage you want.
For instance, to open a $200,000 position, your broker might ask for a $500 deposit (margin). This amount is also called the required margin.
7. Going Long/Short
Going long on any currency pair means you are buying the base currency and hoping its price will increase.
Going short means selling the base currency, hoping its price will decrease.
When you go long on a pair like AUD/USD, you expect AUD to strengthen more than USD, hence earning you profit. On the other hand, if you go short, you expect the AUD to weaken compared to USD.
8. Bullish/Bearish
When analyzing the forex market, you’ll realize that the price is mostly going either up or down. Forex traders depend on these changes to make money. When the prices are increasing, the market is referred to as bullish. However, if the prices are depreciating, the market is bearish.
9. Support
Support is a vital concept in the forex market as it helps determine key zones to look out for. Support is a level where the price reaches before going back up without breaking it.
Many traders wait for the price to reach this level to buy as there is a high chance of the price moving up. To identify support on a chart, look for previous lows that price hits after going down but can’t get past it.
10. Resistance
Like support, resistance is also a crucial level that price does not get past. Resistance tracks previous highs that price faces difficulties breaking above. Most traders wait for the price to get to this point to go short as they are confident that the resistance level is strong. Previous resistance levels are usually more effective than old ones.
10. Resistance
Like support, resistance is also a crucial level that price does not get past. Resistance tracks previous highs that price faces difficulties breaking above. Most traders wait for the price to get to this point to go short as they are confident that the resistance level is strong. Previous resistance levels are usually more effective than old ones.
11. Slippage
Slippage refers to the slight difference between the price you expected and the actual price that your order was executed with. This happens quite often to most traders and can be both a good and bad thing. Slippage can help you land a better price, hence more profits, or force you into worse prices.
12. Equity
Equity is the total amount of cash in your account, including profits and losses. So, if you had deposited $4000 in your trading account and made a profit of $500, your equity is $4500. The opposite applies to losses.
13. Used Margin
Used margin is the amount of money a broker locks to ensure your open positions stay open without leading to a negative balance. You can’t use this margin to open other positions because it is already occupied in other positions.
14. Free Margin
This is the amount of money in your account that you can freely use to open other positions. To determining your free margin, take your equity and deduct the used margin. Therefore, if your equity is $10,000 and the used margin is $2000, your free margin is $8,000.
15. Margin Call
If you have blown a trading account before then, you’ve likely experienced a margin call. A margin call is a notification a broker sends you when your equity drops below a certain level. This level varies with brokers. If your trade goes sideways and you no longer have the required margin to continue with the trade, the broker notifies you to close the position or top up your balance. If your account does not have enough money to keep the positions open, then they are automatically closed.
A margin call can be an actual call or an email.
Conclusion
As aforementioned, the forex market is huge and needs proper understanding to guarantee both short-term and long-term success. Hopefully, this article has helped you understand some of the major forex terms for beginners that you need to know. However, keep researching as understanding these terms is not enough to help you make money trading, but it is undoubtedly a great start.
