10 important forex terms all new traders should know
The forex market has its own terminologies which can be hard for a beginner to get his head around. Not knowing what a particular word means can create hindrance in your learning. This is why in this blog, we will take a closer look at 10 commonly used forex terms so you can build a strong trading knowledge. Let’s get started:
1) Currency pair
In forex, we exchange one currency for the other. This means in order to buy one currency, you have to sell another. Since the buying and selling takes place simultaneously, the prices are always quoted in pairs. For example, if EUR/USD is equal to $1.34, then it means that one euro can be exchanged for 1.34 US dollars. Moreover, there are two more terms that you can learn from this example which are base currency and quote currency. Base currency is the first currency, that is EUR in the pair EUR/USD and quote currency is the second currency that is USD.
A pip, which stands for “percentage in point” or “price interest point” is the smallest unit of measurement and represents the smallest variation in the price of a currency pair. It is one hundredth of a percentage point, which is 0.0001. The pip value of a currency pair is calculated by multiplying the number of pips by the base currency and adding it to the quoted currency. This term is commonly used by traders to talk about profits and losses.
3) Bid/Ask price
Each currency has two exchange prices: the bid price and the ask price. The bid price is the price at which a trader buys a pair, and the ask price is the price at which a trader sells a pair.
The spread in forex is the difference in the bid and ask price. As the ask price is always higher than the bid price, the spread is calculated by subtracting the bid price from the ask price. Spread is the main trading cost that you have to pay to your broker every time you make a transaction. Therefore, if you are new to the market, you should pay special attention to it and always choose low spread brokers to meet your profit targets.
Leverage is the money that you borrow from your broker. It is a kind of a loan that helps you trade bigger positions and amplify the potential returns of an investment. It also amplifies the effect of a small change in exchange rates on a trader’s position which is why it is also known as a double edged sword and should be used carefully.
6) Lot Size
The lot size in forex is a measure of the number of units traded. There are four sizes of lots: standard, mini, micro, and nano. In forex, a standard lot is equal to 100,000 currency units. A mini lot in forex is worth 10,000 currency units, the size of a micro forex lot is 1000 currency units and a nano lot is equal to 100 units of currency.
7) Bull market
A bull market refers to a market that has been constantly growing and follows an uptrend. When there is a Bull market, it means there are more buyers than sellers, which means there is an increased demand. Bull market allows a good opportunity for traders to sell as the price is at its highest price and make a reversal.
8) Bear market
A bear market refers to a market that has been constantly declining and looks like a downtrend. This market indicates that there are more sellers than buyers which offers a good opportunity for traders to buy currencies at low prices.
9) Forex analysis
Forex analysis refers to the study of the market so that traders can predict the future of the price movements. There are two types of forex analysis: fundamental and technical. Technical analysis typically examines currency price movement on graphs to check for patterns to locate entry and exit points, whereas fundamental analysis investigates the state of a country’s economy by keeping track of news and global/ national events that can impact the currencies.
A broker is a company that acts as an intermediary between the buyer and seller of a product, usually securities. Brokers are typically paid in spreads and commission for each executed trade, rather than by the hour. As such, brokers are incentivized to place trades quickly and accurately.
New traders should be aware of basic forex terms before planning to step into the market. We have discussed the 10 important forex terms in the blog that you must be aware of if you want to get started with forex trading. Hope it will help you in your learning process. Good luck!
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