Forex trading can be a fantastic way to make money, but getting into the market can be confusing. Some of the lingo in trading may frustrate you, but here are some of the most important terms explained.
- Forex: Forex is the foreign exchange market where businesses conduct trillions of dollars worth of trades on a daily basis. If you’ve ever exchanged money from one currency to another, you’ve participated in forex. The forex rate can change second by second based on the demand for the currency, increasing or decreasing the trade value of funds.
- Currency Pair: Currency pairs are when one type of currency is traded for another. The first currency of a pair is referred to as the “base currency,” while the second is the “quote currency.” A currency pair is a single item that is purchased when you buy the base currency and sell the quote currency simultaneously. The bid represents how much of the quote currency you’ll need for one base currency.
- PIP: PIP stands for percentage in point, which is the measure of the exchange rate movement. It’s a numeric value that measures profit and loss for the exchange of currencies. The monetary value of a PIP changes based on the currency pair being traded, the size of the trade, and the exchange rate.
- Spread: A spread is the PIP difference between the buying price and selling price of a currency pair. Watching the spread of your currency pair can help you make a profit. You make a profit when the value of your money is higher than the currency you’re trading for.
- Leverage: Leverage is the ratio of the loan amount that traders use to gain access to larger sums of trading capital. Leverage can heighten profits, but can also lead to substantial losses if the leverage isn't used carefully. Some traders put strict leverage restrictions in place to assist dealers to minimize risk.
- Margins: A margin is the amount of credit that brokers are willing to extend to lenders, and this allows lenders to trade large sums of money without investing as much themselves. The margin is often considered as the minimum collateral or deposit for a trade and gives lenders access to larger amounts of capital.
- Volume: Volume is the number of trades for a security or an entire market during a period of time. It’s an efficient way of determining investor interest and demand in the stock. Volume is calculated by recording the number of currencies traded.
- Slippage: Slippage is when there’s a difference between the price you expected and the final price when the trade is executed. It’s a very common occurrence for traders and can work positively or negatively depending on the amounts. Slippage accounts for the volatility and execution speeds in forex trading.
- Stop Loss: A stop loss keeps you from losing too much money in a single investment. If used properly, you may only lose a small amount regardless of the direction of the forex market. There are two different types of stop loss—regular and trailing. A regular stop loss will stay at a particular value permanently, while a trailing stop loss will continue with your position no matter how high it may go.
- Long vs. Short: Holding a long position in a currency means you’re keeping it for an extended period of time. This amount of time can be anywhere from a week to several months depending on the trader. A short position is a bet that a currency is going downward, and the trader will buy a currency trading against it.
