Terms Used In Forex

Trading Platform: This is the place or station where all trades are conducted.  Trading is executed electronically through computer program that links all the participants.  The Meta4trader is an example of a trading platform software.

Lot Size: This is the unit of trading in currency with the smallest being 0.01.

Position: This is the action you take in respect of buying and selling.  It is either long (buy) or short (sell) e.g. if you bought Euro, you will be “long” Euro and if you sold, you will be “short” Euro.

Base Currency: This is the currency at the left side in a price quote e.g. in EUR/USD, the EUR is the base currency.

Counter/Quote Currency: This is the currency at the right side of a quote e.g. in EUR/USD, USD is the counter or quote currency.

Currency Quote: This the numerical figure in which a currency is valued in relation to another e.g. EUR/USD 1.28056/1.28060

Ask: Price at which a broker/dealer is willing to sell, same as “offer”.  For example, if EUR/USD is quoted at 1.28056/1.28060, the 1.28060 is the “ask” or “offer” price.

Bid: Price at which a broker/dealer is willing to buy.  For example, if EUR/USD is quoted at 1.28056/1.28060, the 1.28056 is the “bid” price.

Pip: This is an acronym for “Price Index Point” which is the smallest price increment in a currency or the last decimal number e.g. if EUR/USD move from 1.28051 to 1.28058, it is 7 pips.

Spread: This is the difference between the buying and selling prices of a quote e.g. if a currency is quoted as 1.5134/1.5138, subtract the buying from the selling (1.5138-1.5134=0.0004) and the spread is 4.  Note that the buying price is always by the left while the selling is at the right.

Margin: This is the amount of money required in a client’s account in order to open a position or to maintain an already opened position.

Margin Call: A requirement by the broker to deposit more funds to maintain an open position.

Leverage: This is a ratio system given to a trader by the trading platform to increase his/her buying power.  This leverage ratio is of different values as follows: 400:1, 350:1, 300:1, 200:1, 100:1, 50:1 etc.  These ratios mean that for every dollar you have, the market maker allows you to trade as if you had the figure before it e.g. the ratio 400:1 means that for every $1 you have, you will be allowed to trade as if you have $400.

Cost of Carry (also “interest” or “premium”): This is the cost of holding an open position.  It may be negative or positive.

Market Order: An order to buy or sell at the current price.

Limit Order (Take Profit): This is an order issued to close a trade at a specific price to take profit.  This order is used to protect profit especially when the trader is not ready to sit and watch the charts.

Stop Loss Order: This is an order issued to close a trade at a pre-determined price to minimize or prevent loss.

Note that both orders are used in managing risk i.e. the risk of losing what you have already made and losing more than you can bear.

Liquidity: A function of volume and activity in a market.  A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.

Technical Analysis: This is analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.

Fundamental Analysis: Macro or strategic assessments of where a currency should be trading based on any criteria but the price action.  The criteria often include the economic condition of the country that the currency represents, monetary policy, political environment, natural occurences etc.

Trend: This is an overall direction in which the market is moving.  It could be uptrend, downtrend or consolidation.

Uptrend: This is a market situation that is signaled by upward waving price.

Downtrend: A market situation that is signaled by downward waving price.

Consolidation: This is a situation in which the market is indecisive of where to go and thus become stable moving in almost an horizontal line.

Bullish: The market is bullish if the most significant activity is buying thus leading to an uptrend.

Bearish: The market is said to be bearish if the prevalent activity is selling, this is signaled by a downtrend.

Currency Futures: Futures contracts traded on an exchange, most typically the Chicago Merchantile Exchange (CME).  Always quoted in terms of currency value with respect to the US dollar.  Parameters of the futures contract are standardized by the exchange.

Spot Foreign Exchange: This refers to currencies traded between two counterparties, often major banks.  Spot Foreign Exchange is generally traded on margin.  It is generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.