What is Forex? -Forex Trading Terms

Here are some important terms when trading Forex:

 

What is a Currency Pair?

A currency pair consist two currencies that are traded one against the other. The first currency is called the Base Currency and the second is called the Quote Currency. Actually a currency pair can show how much of the quote currency must be paid in order to buy a single unit of the base currency. Here are some important currency pairs and their nickname:

■ Euro against the US Dollar : Eurodollar

■ US dollar against the Japanese yen: Dollaryen

■ British Pound against the US dollar: Cable

■ Australian Dollar against the US Dollar: Aussie

■ US Dollar against the Swiss franc: Swissy

■ US Dollar against the Canadian Dollar: Loonie

What are the Forex Majors?

The Forex Majors are currency pairs trading the US Dollar (USD) against another major currency. Forex majors are enjoying high liquidity and the tightest spreads. The most important Forex Majors are: EURUSD, GBPUSD, USDJPY and USDCHF.

What are the Forex Minors?

The Forex Minors are currency pairs which are not traded so heavily as the majors and thus they are offered in wider spreads, for example EURJPY. Even less popular Forex Currency pairs are called the Exotic pairs.

What is the Forex Spread?

Spread is the distance between buyers and sellers (bid and ask) and it is measured in pips.

What is a Pip?

A pip means Price Interest Point and it measures the change in the price of a currency pair. A pip is usually the last number of the decimal of a currency pair (0.0001).

What is a Lot?

Lot is the standard unit size of any currency transaction. There are 3 main types of lot sizes (micro, mini, and standard lot). A micro lot worth $1,000, a mini lot $10,000 and a standard lot $100,000.

■ Forex Beginners → Micro Lot Accounts Recommended

■ Semi-Advanced Forex Traders → Mini Lot

■ Advanced and Pro Forex Traders → Standard Lot

What are Trading Commissions?

Most Brokers do not charge trading commissions nowadays. Some Forex Brokers charge commissions by offering as an advantage minimal or even zero spreads. A good combination of spreads and commissions charged should for example include EURUSD spread less than 0.5 pips and commissions charged no more than $5 per standard lot ($100,000).

What is Trading Leverage?

The trading leverage is s simple way of magnifying your trading capital and that means magnifying your gains but also your loses and your trading cost. Actually leverage means opening a position by paying only a portion (margin) of its value. High leverage made Forex trading popular worldwide as you may increase your fund up to 500:1 or even more.

Which are the Main Order Types when Trading Forex?

Here are all the important Forex Trading Order Types:

1) Market Order

A Market order means buying or selling a currency pair at the current market price.

2) Limit Order

A Limit order means buying or selling a currency pair at a pre-determined (limited) price.

3) Stop-Loss and Target Profit Orders

It is explained below.

4) Limit Entry and Stop-Entry Orders

Buy or sell above and below the market at a pre-specified level.

5) OCO Order

OCO means One-Cancels-Other and according to this order if a trade is executed then another trade is automatically cancelled.

6) GTC Order

GTC means Good-Till-Cancelled and it is an order that will stay in the market active until it is filled or cancelled.

What is a Stop-Loss Order?

A stop loss order is a trading order that limits your potential loss to a desired level. For example if you sell EURUSD at 1.3700 and at 1.3715 there is an enormous resistance level, you may place a stop-loss at 1.3716. If EURUSD cross that important resistance level of 1.3715 (with strength) and reach 1.3716, then your position will be automatically closed and your loss will be limited to 160 pips (1.37160-1.3700). Always protect yourself with a stop-loss. A stop-loss is you trading shield. Important events and breaking news may lead the currency market to movements of 500-1,000 pips in a few minutes or even in a few seconds. Forex traders who forget to place stop-loss orders are burned in a matter of a few weeks or even days if they are intraday-traders.

What is a Target Profit Order?

A target-profit is an order that places a target price where your trading position will be automatically closed with a pre-determined profit. It is wise to place a target order before a major resistance level when you go long and before a major support level when you go short.

What is an ECN Forex Broker?

An ECN Forex Broker means a Forex Broker who provides access to its clients to the Electronic Communications Networks (ECNs). Based on the enormous liquidity of the ECN network, ECN brokers may provide the tightest spreads in the market.

What is a STP Forex Broker?

A STP Forex Broker (Straight Through Processing) is a similar type of broker as the ECN, instead of the Electronic Communications Networks (ECN), a STP broker uses external liquidity providers to offer his clients tight spreads.

What is a Market Maker (Agent or Dealer)?

A market maker or an agent or a dealer is a Forex company that provides Forex Trading via a Dealing Desk (offering currency trading by instantly quoting buy and sell prices).

What is MetaTrader Platform?

MetaTrader from MetaQuotes is the standard trading platform for most Forex Traders. The most commonly used and supported version of MetaTrader is the 4th (MetaTrader4). MetaTrader provides hundreds of indicators and it allows also automated trading.

What is Slippage?

The slippage on execution means the delay when executing a trading order (opening or closing a trading position). Slippage is the difference between the order price and the actual executed price, slippage is measured in pips.

What is Automated Trading and Expert Advisors?

Automated Forex Trading means opening and closing trading positions automatically using specialized software. This software is commonly called an Expert Advisor or a Forex Robot. In order to trade Forex automatically you need a trading platform that supports this type of trading. Popular platforms to trade Forex automatically are MetaTrader4 and MirrorTrader.

What is Copy-Trading or Social Trading?

Copy Trading or Social Trading means trading Forex using signals from other traders. That copying procedure happens instantly. ZuluTrade and eToro Openbook are today the most popular platforms for social trading.

Which are the three Types of Charts?

The three types of Forex charts include bar charts, line charts and Japanese candlestick charts.

What is a Japanese Candlestick?

A Japanese candlestick chart is an effective way of visualizing currency price movements over time. Most Forex traders are using this chart type as candlestick formations are able to provide trading signals in just a glance.

What is a Forex Trend?

A Trend is a price movement continuation that may appear on a daily, weekly, monthly or even longer basis. A Forex trend can be either bullish or bearish. The most common rule when trading Forex is follow-the-master-trend. You may use charting software in MetaTrader in order to quickly determine the master trend, Charting packages as the MTI 4.0 Tool.

What are Support and Resistance Levels?

Support levels are price levels where the demand is expected strong (buyers outweigh sellers) and Resistance levels are price levels where the supply is expected strong (sellers outweigh buyers).

What is Scalping?

Scalping means opening and closing positions lasting less than one minute and aiming tiny profits (2-10 pips). In order to scalp Forex there are many requirements, as for example the spreads charged must be extremely narrow, slippage on execution must be minimal and advanced technology should be available. Usually traders use Expert Advisors (Forex Robots) to optimize their scalping performance. Be aware that many Forex Brokers strictly forbid scalping. Usually ECN and STP brokers allow it.

What is the Fibonacci Sequence?

The Fibonacci sequence of numbers is very important when trading Forex. Fluctuations in the currency market are highly affected but human psychology and there is no better way to measure human psychology than the Fibonacci numbers. The Fibonacci sequence follows a simple rule; every number in the sequence is the sum

of the two previous numbers:

  • 0
  • 1=1+0
  • 2=1+1
  • 3=2+1
  • 5=3+2
  • 8=5+3
  • 13=8+5
  • 21=13+8
  • Etc..to infinity

Based on this sequence, the Fibonacci Retracement is maybe the most important technical analysis tool when trading Forex. The Fibonacci Retracement may help traders to easily define the perfect levels to place their stop-loss and target-profit orders. In addition here are the five ratio levels that are generated by the Fibonacci sequence of numbers:

(i) 23.6%

(ii) 38.2%

(iii) 50.0%

(iv) 61.8%

(v) 100.0%

 

 Forex Trading Terms

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