Unlocking the language of forex traders is the first step towards mastering the forex market. Whether you’re just starting out, or looking to sharpen your skills and know-how, understanding the key terms and concepts that drive the forex market is crucial to trading success. This guide will empower you with the knowledge and terms you’ll need to navigate the fast-paced and exciting world of currency trading.
From deciphering currency pairs, to mastering the ideas behind advanced trading strategies, every term you grasp is another tool for your trading arsenal. Dive in with these 30 essential forex terms, and get ahead of the curve as you embark on your forex trading journey.
Forex Terms
Forex Currency Pair
The foundation of forex trading, a currency pair consists of two fiat currencies, the quote currency and the base currency. You can trade currency pairs by speculating on the value of one rising or falling against another. GBP/USD is one of the most traded currency pairs, and is also known in the industry as “cable”.
Base Currency
This is the first fiat currency listed in a currency pair. It denotes the currency you’re buying or selling in a forex trade. Going back to the GBP/USD example, the base currency is Pound Sterling as the first currency listed.
Quote Currency
This is the second fiat currency listed in a currency pair. In the GBP/USD pair the quote currency is the USD, and if the pair is quoted as 1.25, this means £1 GBP is equivalent to $1.25 USD.
Exchange Rate
The price at which one fiat currency can be exchanged for another. It represents the relative value of one currency against another.
Pip
Short for ‘percentage in point’. It represents the smallest price move you can get in a forex currency pair, typically to the fourth decimal place.
Lot
A lot is a unit of measurement that details the size of a forex trade. Standard lots are 100,000 units, mini lots are 10,000 units, and micro lots are 1,000 units.
Forex Spread
The spread difference between the buy (bid) and sell (ask) prices of a currency pair. A narrower spread can mean lower trading costs.
Liquidity
Refers to how easily an asset can be converted into cash. High liquidity means trades can be executed quickly and with minimal price movement.
Leverage
Allows traders to control larger positions using a smaller amount of capital. For example, a 1:10 forex leverage would mean an exposure of $10,000 with just $1,000 of capital.
Margin
The amount of money or upfront capital that is required to open and maintain a position. It acts as the security deposit for trading.
Margin Call
A demand from the broker to deposit more funds when the account balance falls below the required margin level.
Trading Positions
Long Position
A trade where you buy a currency pair expecting the value of the base currency to appreciate against the quote currency.
Short Position
A trade where you sell a currency pair expecting the value of the base currency to depreciate against the quote currency.
Order Types
Market Order
An order to buy or sell a forex currency pair at the latest available market price. It’s the fastest order to fulfil and useful for when you’re keen to enter or exit a position fast.
Limit Order
An order to buy or sell a currency pair once the price hits a certain level. Limit orders offer more precise control over entry and exit points.
Stop Entry Order
An order to enter a trade when the price reaches a certain level, either above (buy stop) or below (sell stop) the market price.
Stop-Loss Order
An order to close a position at a preset lower price to limit potential losses.
Take-Profit Order
An order to close a position at a preset higher price to lock in gains from a trade.
Forex Market Analysis
Forex Technical Analysis
Technique used to identify trends and patterns for better informed entry and exit points. Typically based on historical price data, but can involve using technical indicators and forex trading signals which are mathematical calculations and algorithms, which are usually included in leading forex trading platform options like MetaTrader 4.
Fundamental Analysis
While some forex traders use charts and historical data to inform their entry and exit positions, others rely on fundamental analysis to trigger their activity in the market. This relies on forex traders keeping their ears close to the ground for the latest economic, social and political news relevant to the specific currencies they trade. Indicators such as inflation, unemployment rates, retail sales and industrial production can influence the price of currencies within forex pairs.
Support
Forex traders who use technical analysis to pinpoint potential trading angles will often look to their trading charts for support levels of a currency pair. Support is a price level where there’s more buyers than sellers, pushing the price upwards which creates price stability. Support levels can also be the signal for the start of a new uptrend, which is also known as a ‘bullish’ trend.
Resistance
Technical analysis is also useful for forex traders to highlight potential resistance levels of currency pairs. Resistance is effectively the opposite of support – a price level where there’s more sellers than buyers, forcing the price of a currency pair downwards. Resistance levels may indicate the beginning of a new downtrend, also known as a ‘bearish’ trend. A resistance point can also be a level where the price moves sideways, which is also known as a ‘consolidation’.
Volatility
Volatility is a gauge of how quickly and sharply the price of a forex currency pair moves. It’s an invaluable concept to understand as it can inform forex trading strategies, as well as your general risk management. There are numerous factors which influence the volatility of a base or quote currency. Illiquid forex pairs tend to have greater volatility since there’s fewer market participants looking to buy and sell. Economic and geopolitical events can heighten volatility by influencing general market sentiment.
Trading Psychology
Risk Management
One of the keys to forex trading is managing your money and your emotions. The wider term to encapsulate this is ‘risk management’. The key is to use all the tools at your disposal to minimise potential losses, preserve your trading capital and maximise potential profits. A form of risk management is defining a forex trading plan with clear entry and exit criteria, along with a risk-reward ratio that allows your trading capital to grow sustainably. This level of planning removes the need for emotional decision making such as doubling down on losing positions or revenge trading.
Candlestick Chart
Candlestick charts can help to confirm your trading plan and control your general trading psychology. They offer visual clarity on the market dynamics of a certain currency pair. Bullish candles are usually green, suggesting the closing price is higher than the opening price for that timeframe. Bearish candles are usually red, indicating the opposite.
Bar Chart
Bar charts are also helpful in making sense of forex market data and confirming your trading strategy. Instead of using candlesticks with bodies and wicks or shadows, bar charts are vertical bars showing the opening, high, low and closing price for a certain timeframe.
Additional Forex Terminology
Carry Trade
This is one of the most common forex trading strategies. A carry trade requires a trader to borrow money in a low-interest rate currency and invest it in a fiat currency with a bigger interest rate. Forex traders will aim to profit from the difference in interest rates, known as the ‘carry’.
Swap
There are two types of swaps when trading forex. An interest rate swap is based on the difference between interest rates on two currencies in a currency pair. Traders may either earn from or pay for a swap when holding open positions overnight. A next-day swap accounts for the difference between interest rates on two currencies in a pair, including weekends. Forex brokers use this to avoid settling positions, instead rolling them over to a new value date.
Forex Broker
A forex broker is an intermediary which acts as the middleman between retail forex traders and the interbank forex market. TMGM is a licensed and regulated forex broker. We’re permitted to facilitate the execution of buy and sell orders played by our clients using supported forex trading software like MetaTrader 4 or the native TMGM app.
Conclusion
All these terms and concepts contribute to a successful forex trading strategy. It’s important that you master them or, at the very least, understand them before engaging in the forex market.
Now that you’re clued in on the different terms used in forex, you might be interested in learning more terms commonly used by expert traders. Check out TMGM’s in-depth Trader's Terminology guide here.