Forex trading terms

Forex trading terms

Note that you ll often see the terms: FX, forex, foreign-exchange market, and currency market. These terms are synonymous and all refer to the forex market.

Forex Trading Glossary, Learn About Currency Trading

To reduce the risk of trading, hedging involves purchasing opposite positions in the market by buying one currency pair at one position and selling at another to minimise the risk involved. While it is a good strategy to minimise risk it can lead to zero profits unless the second trade is executed at the right time.

Forex Trading Glossary, FX Terminology, Currency Trading Terms

The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash market is called the counter or quote currency.

Forex Trading Terminology: 15 Most Important Forex Terms

They place their buy orders around those levels, as they believe that the price will again fail to break below. This is how support levels are formed. In other words, a support level is a previous low at which the price has a large chance to retrace and move up.

Forex Trading - 8 Basic Must Know Terms

Likewise, the term “bear market” describes a time when stock prices have been falling as a whole. A bear market is dominated by widespread pessimism which causes a self-sustaining negative sentiment. As investors become more and more pessimistic amid expectations losses will extend, they continue to sell and fuel further sell-offs.

The very first step most new traders will want to take from the get-go is to dive into the market, and immediately enter into their first Forex position as quickly as possible. Having understood the majority of basic terms and how to enter a position, a beginner trader should also be aware of the risk management aspect of their trading idea.

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Each time you enter into a trade, you have the pay transaction costs for that trade. While most brokers don’t charge commissions and fees on placing trades nowadays, the bid/ask spread remains the main cost to Forex traders. When bulls buy at the ask price (the price at which sellers are willing to sell), their position is immediately in a loss that equals the bid/ask spread.

The blender costs $655 to manufacture, and the . firm plans to sell it for €655—which is competitive with other blenders that were made in Europe. If this plan is successful, the company will make $55 in profit because the EUR/USD exchange rate is even. Unfortunately, the USD begins to rise in value versus the euro until the EUR/USD exchange rate is , which means it now costs $ to buy €.

If you’re a day trader or scalper, you need to pay attention to the bid/ask spread since it can eat a large portion of your profits at the end of the day. Swing traders and position traders who have a longer-term approach to trading are less affected by the spread as they open a smaller number of positions and have relatively higher profit targets.

The Forex market comes with its very own set of terms and jargon. So, before you go any deeper into learning how to trade the Fx market, it’s important you understand some of the basic Forex terminology that you will encounter on your trading journey…

An example of a currency pair is the EUR/USD pair. When we buy the EUR/USD pair, we’re actually buying the euro and selling the US dollar. Similarly, when we sell the EUR/USD pair, we’re actually selling the euro and buying the US dollar.

To accomplish this, a trader can buy or sell currencies in the forward  or swap markets in advance, which locks in an exchange rate. For example, imagine that a company plans to sell .-made blenders in Europe when the exchange rate between the euro and the dollar (EUR/USD) is €6 to $6 at parity.

Bull markets are characterized by strong investor confidence, optimism and sentiment that the strong performance will continue. “Bullish” investors, lured to the market as momentum picks up, charge in and buy assets amid expectations that prices will continue to rise and they can later resell those assets at a higher price, profiting from the difference.

Taking a short position means you are betting that prices will drop and you are selling. Basically, when going into a short position, you borrow, for example stocks, from a broker and you sell them on the market. Later, you have the obligation to return what you have borrowed by buying it from the open market and you will profit, if prices have dropped. The idea is to sell something you have borrowed now for a certain amount of money and later refund the broker by buying the same thing at a lower price.

In most cases, there are seven major currencies being traded. These currencies include the ones mentioned above, as well as Australian and Canadian dollars and Mexican pesos. However, since there are over a dozen different currencies available in the Forex market, there are dozens of different currency pairs one can trade.

The statistical measurement of the dispersion of returns for a security or market index, in this case Forex currency pairs. High volatility indicates higher risk.

The problem the company faces is that while it still costs $655 to make the blender, the company can only sell the product at the competitive price of €655, which when translated back into dollars is only $675 (€655 X 66 $675). A stronger dollar resulted in a much smaller profit than expected.

Just like other assets, the forces of supply and demand determine the value of a currency relative to another currency. Increased supply of a currency sinks its value, while increased demand pushes its value up.

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