Basic Forex Trading Terminologies Every Trader Should Know?

Trading and investing can be a complicated process. There is a plethora of terms to keep up with, and you need to understand what they mean in order to trade successfully. In this article, we'll go over the basic forex trading terminologies that every trader should know. After reading this, you'll be able to talk shop like a pro! The Forex market is a worldwide market that enables anyone to trade various currencies with the objective of making profits. The basic terminologies of forex can be a tough task to handle for beginners. But fear not, we have you covered. This article aims to simplify the entire process and help you understand these terms better.

Synopsis: Every forex trader must know the basic terminologies and underlying concept of trading. However, to start with, these Basic FX Terminologies can help bolster your ways of trading.

Forex Trading Terminology

Currency pairs

There are many different currency pairs to trade. When you buy one currency, you sell the other. The first currency that appears is called the base currency, and the second one is called the quote currency. For example, if you wish to buy USD/CAD, you would be buying US dollars with Canadian Dollars. There are many currency pairs that traders can try to make money from. One popular pair is the Euro and the US Dollar, which is known as EURUSD. Other popular pairs include the British Pound and the US Dollar (GBPUSD) and the Australian Dollar and the US Dollar (AUDUSD). A currency pair is the absolute value of one (single unit) currency quoted in terms of its unit of exchange against the value of another. For example, if 1 US Dollar buys 0.7543 British Pounds, then USD/GBP = 1.3084. Currency pairs are well-known for representing the relative value of one currency in regard to another. For example, if you compare the value of the euro against the United States dollar, you would look at EUR/USD.

Also read: Understanding Currency Pairs

Contract for Difference (CFDs)

In Forex trading, a contract for difference is a contract that exchanges the difference in the value of two currencies. When an investor buys a contract for difference, they are betting on the appreciation of one currency against the other. This is a type of trade where the trader agrees to buy and sell the same amount at different prices. This type of trade is based on fluctuations in prices for a certain currency. Traders use it as a way to make money from price differences. The Contact for Difference strategy is a popular trading strategy that involves a high level of risk. It takes advantage of the difference in the trading rates between one currency and another at different points in time. This is an interesting strategy to employ, but it is not recommended for beginners because it requires a significant amount of experience to execute properly.

Leverage

When trading Forex, leverage refers to the use of borrowed money to increase the pot. This is executed by making use of the lender's capital. If you are lucky, this is enough to make a profit, but if you are unlucky, it can lead to huge losses. A forex margin is the total amount of money that you will need to invest in order to open a position. When an investor takes a forex margin, they are essentially borrowing money from a broker to make a trade. The most common type of leverage in the industry is called "leverage." This is when traders borrow money from their brokers in order to make trading look more attractive by only investing a small percentage of the total asset's value.

Margin

Traders use margin to trade on leverage. This means that they only need to put up a percentage of the cost of the trade while their broker provides funds for the remaining amount. Margin is calculated as (Amount of Shares * Price of Share) / (Market Value of Position). Traders may need to use margin, which is a sum of money borrowed from a broker in order to make trades. This margin provides traders with additional capital needed to trade on leverage.

Equity

Equity is simply the value of the trader's position after any pending trades are settled. It is denoted by the symbol "EQ." A positive equity means that one has made money trading, and a negative equity means that one has lost money trading. Equity is an accounting term that refers to the percentage of ownership that a shareholder has in a company. In FX trading, equity is the total amount that you have invested in a currency pair. A Forex trade is the agreement to buy one currency for another at a fixed exchange rate, with delivery on an agreed date. Traders who want to sell

their position can do so by buying back the opposite currency. The main difference between the purchase price and the sale price forms the trader's profit or loss for that transaction.

Going Long/Short

In the FX market, a trader goes long when he buys a currency pair. He has a position that will go in his favour when the price of the underlying currency goes up. A trader goes short when he sells a currency pair. He's betting on a price drop. Many people confuse "going long" with simply purchasing a currency. But in reality, when you go long on a currency, you are actually opening up a "long position." A long position is investing money into that currency (or market) with the expectation that the value of that currency will increase to make your investment worth more. Basically, if you buy $700 worth of Euros expecting them to be worth $750 in the future, then you are going long on Euros.

Going short is another type of trading strategy. When an investor goes short, they are betting that the commodity's price will decrease overtime to make their investment worth more.

PIP

PIP stands for Point In Percentage. Basically, it is the size of the smallest change in price that your broker accepts. It's usually one-hundredth of a percent but could also be thousandths of a cent, if your broker offers that. The pip is the smallest unit of the currency in a foreign exchange. It's also called a point, but never a penny. With a currency pair, one pip is usually worth 0.0001 of the base currency in the pair. Pips are the basis of trading Forex. A pip is the smallest unit (base unit) in which you can trade Forex, and it's worth anywhere from 1-10 cents or more, depending on the currency pair.

LOT Size

A lot of shares traded in Forex is 1000. For example, one lot of AUD/USD would be 1000 AUD or 1000 USD. The lot size can be referred to as the number of units or shares you are trading in one trade. A lot size of 100 means that you are trading 100 units at a time instead of just 1 unit. A lot size is the number of units of any given currency you are trading. It's important to know what your lot size is because it allows you to trade more or less depending on your needs. For example, if you are currently trading with a 10,000 lot size, then you can trade $10 million in currency in one single trade.

Bullish and Bearish

"Bullish" is a term in Forex that describes a market in which prices are trending upwards. Bulls believe the upward trend will continue, and they buy. "Bearish," on the other hand, means a market in which prices are going down, and bears think the trend will continue and sell. A bullish market trend occurs when the price of an asset tends to increase over time. The term "bullish" is also used in a more general sense to describe people who are optimistic about the future, for example, for economic reasons. A bearish market trend is when the price of an asset tends to decrease over time.

Suggested read: What is forex trading and How does it work

Summary

Trading and investment is a risky and complicated process. It is very important to learn the basic terminologies of forex before you start trading on your own. Learn about the basics of spot forex, swap, spread, margin, market maker, and more.

The Foreign Exchange market is a global market where currencies are exchanged. Foreign Exchange trading, also called "forex" or "fx" trading, provides a global market where currencies from around the world can be traded for each other. Forex traders have been exchanging currency for over 200 hundred years, and it has grown into the largest and most prevalent financial market in the world with a daily turnover exceeding $US5 trillion. Forex trading, or currency trading to use the more accurate term, is an investment where people trade one currency for another. It can be very beneficial if done correctly, but it can also lead to heavy losses if not handled with care. Forex traders need to know certain terms in order to conduct successful trades.