Trading Definitions - Glossary of Forex Trading
After learning about the Forex market and how to trade currencies, along with the basics of how to interact with it, in this article, we present the essential keys needed to understand Forex in general. These are the concepts and terminology used in this field, which will help you grasp the thread that leads to mastering it. You will need these during your journey of learning Forex, so this article will serve as a constant reference for you. We have divided the terms and concepts related to currency trading into several points:
Below is the breakdown of Forex market concepts or Forex trading:
Key Terms in the Forex Market
These are the primary terms, starting with what Forex is, to understand the market from the beginning, its origin, currencies, currency pairs, and the mechanisms of the Forex market and how to interact with it.
Forex: The Arabic translation of the abbreviation for "Foreign Exchange," referring to the Forex market. It is sometimes symbolized as FX.
Financial Markets: These markets allow the investment or trading of assets or securities such as stocks, bonds, currencies, futures contracts, and others.
Over-the-Counter Markets (OTC): These are decentralized markets without specific geographical boundaries, where transactions are conducted electronically through modern communication networks like phones and computers.
Swap System: An old trading system where goods, services, or assets are exchanged between individuals to meet their needs without using cash in the transaction. The Forex trading system is similar to this.
Bretton Woods Agreement: An international agreement established after World War II, which fixed currency exchange rates against the U.S. dollar, equating to $35 per ounce of gold.
Currency Floatation: The opposite of fixing the exchange rate of a currency, meaning allowing the exchange rate to be determined based on supply and demand.
Interbank Market: The foundation of Forex trading, where major investment and commercial banks set the supply and demand for currencies, making currency exchange between them the heart of the Forex market.
Major Currencies: In Forex trading, there are 8 major currencies considered the strongest and most traded in the world. These include the U.S. dollar, Euro, British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar.
U.S. Dollar (USD): The currency of the United States of America, the largest reserve currency in the world, and the reference pricing currency for most of the world's primary and traded commodities.
Euro (EUR): The currency of the European Monetary Union, and the second most important currency after the U.S. dollar, in terms of trading and use.
Japanese Yen (JPY): The currency of Japan and the third most traded currency globally after the U.S. dollar and Euro. It is also considered a safe-haven currency.
British Pound (GBP): Known as the British Sterling, it is the currency of the United Kingdom and one of the oldest and strongest currencies in the world.
Swiss Franc (CHF): The currency of Switzerland, considered the only major currency not part of the European Monetary Union, and also a safe-haven currency for investors in times of economic crises.
Canadian Dollar (CAD): The currency of Canada, ranked the seventh most traded currency globally, and is considered a commodity currency due to its linkage with oil.
Australian Dollar (AUD): The currency of Australia, the fifth most traded currency globally, and a commodity currency linked to the country's rich natural resources, including gold and iron ore. It also has strong trade ties with Asia, especially China.
New Zealand Dollar (NZD): The official currency of New Zealand, supported by a major global economy. It is an important commodity and trade currency, with strong links to Asia and Australia.
Currency Pair System: Forex trading operates through pairs of currencies, where one currency is bought against the other. It works similarly to a swap or exchange system. Each pair consists of two currencies: the first currency on the left is the base currency, and the second is the quote currency.
Major Currency Pairs: These currency pairs include the U.S. dollar and another major currency.
Cross Currency Pairs: These are currency pairs where the U.S. dollar is not involved. Most commonly, one or both currencies are major currencies.
Exotic or Rare Currency Pairs: These are available for trading in Forex and include currencies from emerging markets. These pairs are generally less liquid and traded with lower volumes compared to major pairs, often against the U.S. dollar or the Euro.
Buying: This refers to the process of buying the base currency and selling the quote currency in the pair, also known as "Long."
Selling: This refers to the process of selling the base currency and buying the quote currency in the pair, also known as "Short."
Bulls: A term for buyers, likened to how a bull attacks, from the bottom up. A buyer looks for the lowest price to buy a commodity with the expectation of price rising and then selling at a higher price for profit.
Bears: A term for sellers, likened to how a bear attacks, from the top down. A seller looks for the highest price to sell a commodity with the expectation of price falling and then buying back at a lower price for profit.
Ask Price: The price at which buy orders are executed.
Bid Price: The price at which sell orders are executed.
Spread: The difference between the bid and ask prices, representing the profit margin for the entity executing the transaction, such as a bank or a brokerage.
Lot: A unit used to measure the size of a trade, representing the quantity of the base currency in a currency pair. In Forex, trading is done in fixed lot sizes.
Standard Lot: Represents 100,000 units of the base currency.
Mini Lot: Represents 10,000 units of the base currency.
Micro Lot: Represents 1,000 units of the base currency.
Pip: A measurement of price movement in Forex, representing the fourth decimal place in the currency pair exchange rate.
Trading Platform: The software provided by the brokerage company through which the trader executes trades in the Forex market.
Leverage: A facility provided by brokerage companies allowing traders to trade with positions much larger than their account size, through the margin system determined by the brokerage.
Used Margin: The amount reserved by the broker to execute a trade and provide leverage, which is returned to the account after the trade is closed.
Usable Margin: The amount remaining in the account after the used margin is deducted. It represents the available margin for further trades and the potential loss in existing positions.
Margin Call: A notification from the broker when the available margin is close to being exhausted due to increasing losses in open positions, giving the trader a chance to add funds to their account or close the losing trades.
Stop Out: A command to close open positions when the margin is exhausted and the losses have reached a critical point. This happens after a margin call, and if the trader does not intervene.
Spot Market: The market where trades are executed immediately, meaning that the trades are completed at the current price, with immediate entry or exit.
Forex Trading Platform Terms
These are the concepts and terms related to the trading process itself. Most of these terms are found in trading platforms and software, and it's essential to understand them before starting actual trading.
Buy Order: A market order to execute an immediate buy transaction at the current ask price.
Sell Order: A market order to execute an immediate sell transaction at the current bid price.
Close Order: An immediate order to close a buy or sell position either in profit or loss at the current price.
Sell Limit Order: A sell order used to execute a sale at a price higher than the current market price.
Buy Stop Order: A buy order used to execute a purchase at a price higher than the current market price.
Sell Stop Order: A sell order used to execute a sale at a price lower than the current market price.
Buy Limit Order: A buy order used to execute a purchase at a price lower than the current market price.
Cancel Order: An immediate order to cancel any pending order, whether for entry or exit.
Take Profit Order: A pending order used to automatically close a position when a predefined profit level is reached.
Stop Loss Order: A pending order used to automatically close a position when a predefined loss level is reached.
Trailing Stop Order: An order used to move the stop-loss level by a certain amount when the market moves in favor of the position.
Hedge Order: An order used to open both a buy and a sell position for the same currency pair at the same time.
FIFO (First In, First Out): A Forex trading term that means the first opened trades must be closed first. This rule was implemented by the National Futures Association (NFA) in the U.S. in 2009.
OCO (One Cancels Other): A Forex order set up so that when one order is executed, the other is automatically canceled.
Economic Terms
Fundamental analysis plays a crucial role in predicting currency exchange price movements in the Forex market, and its terminology is essential to understanding the factors affecting the economic condition of the currency's country, which directly influences the currency price movements. Below are the most commonly used terms in the world of economic analysis, which are frequently used by many economic analysts to describe the economic condition and predict its future trends. You will primarily find these terms in the economic calendar.
Fundamental Analysis: The study of the core factors influencing market movement, whether economic or financial, and the reasons behind market behavior. It examines various economic, political, and social factors that impact supply and demand and cause price movements.
Economic Indicators: Tools used by fundamental analysts to measure the improvement or decline in the economic condition of a country. These are a set of statistics issued by government or private entities to measure the performance of different economic sectors.
Economic Calendar: A tool that contains all the news releases, economic indicator announcements, their timing, impact, and results, along with scheduled reports, speeches from key decision-makers, and meeting minutes.
Central Bank: The authority responsible for the monetary policy of a country. It aims to control inflation rates, stabilize interest rates, and manage currency exchange rates to foster economic growth.
Supply: The availability of a specific commodity within a given period.
Demand: The desire and need for a specific commodity within a given period.
Economic Business Cycle: The different phases of economic activity, beginning from peak, followed by recession, trough, recovery, and then expansion. A complete cycle is counted when it ends at the same stage it began.
Peak: The point at which economic growth reaches its highest level, after which economic indicators begin to decline.
Recession: The period following the peak of economic activity when the economy starts to slow down, and most economic indicators turn negative.
Trough: The lowest point of the economic downturn, marked by the worst performance of economic indicators.
Recovery: The phase after the economy hits the trough, during which economic indicators begin to improve gradually.
Expansion: The phase following recovery, where economic indicators show significant improvement, and the economy grows rapidly.
Interest Rates: The return on borrowing money, or the rate set by central banks to determine the cost of borrowing money from commercial banks, as well as the interest paid by the central bank for deposits from commercial banks.
Expansionary Monetary Policy: A policy enacted by a central bank to increase the money supply to stimulate economic growth during a period of recession or economic contraction.
Contractionary Monetary Policy: A policy enacted by a central bank to reduce the money supply to curb inflation during periods of economic growth.
Inflation: The rise in the general price level of goods and services, resulting in a decrease in the purchasing power of money, meaning less quantity of goods and services can be bought for the same amount of money.
Federal Reserve (FED): The central bank of the United States, responsible for setting monetary policies and interest rates for the U.S. dollar.
European Central Bank (ECB): The bank responsible for setting the monetary policies of the countries in the European Union, or the Eurozone, with the goal of supporting price stability and economic growth.
Bank of England (BOE): The central bank of the United Kingdom, responsible for monetary policies and supporting the economic stability of the British pound.
Bank of Japan (BOJ): The central bank of Japan, responsible for setting monetary policies and stabilizing the country's economy and currency.
Swiss National Bank (SNB): The central bank of Switzerland, responsible for managing monetary policies and stabilizing the Swiss franc in line with economic trends, inflation control, and economic growth.
Concepts of Currency Price Analysis
These are the essential concepts and terms for reading charts of currency price movements, related to technical analysis principles.
Technical Analysis: The study of price movements using charts to predict the future direction of the market.
Line Chart: The simplest and oldest type of chart, which connects closing prices over a specific time period. It is used to determine the general trend of currency pair price movements without detailed information.
Bar Chart: One of the most common types of charts, where price movements are represented by bars. A bar goes up if the closing price is higher than the opening price, and it goes down if the closing price is lower than the opening price.
High Price: The highest price reached by a currency pair during the time period.
Low Price: The lowest price reached by a currency pair during the time period.
Open Price: The price of a currency pair at the start of the time period.
Close Price: The price of a currency pair at the end of the time period.
Japanese Candlestick Chart: The most widely used chart type in Forex, showing the same data as the bar chart. It represents the opening and closing prices, as well as the high and low prices. The candlestick body represents the open and close prices, while the upper shadow represents the high price and the lower shadow represents the low price.
Peak: A technical term for a bar or candlestick where its top is higher than the two preceding and following bars or candlesticks.
Trough: A technical term for a bar or candlestick where its bottom is lower than the two preceding and following bars or candlesticks.
Up Trend: A situation where the currency pair price gradually increases, indicated by the formation of rising peaks and troughs.
Down Trend: A situation where the currency pair price gradually decreases, indicated by the formation of falling peaks and troughs.
Sideways Trend: A situation where the currency pair price remains relatively stable, indicated by peaks and troughs forming at close horizontal levels.
Support: A price level below the current market price where traders expect buying power to exist, and the price is expected to rebound upwards after a previous downward movement.
Resistance: A price level above the current market price where traders expect selling pressure to exist, and the price is expected to reverse downwards after a previous upward movement.
Upward Trend Line: A sloping line drawn on the rising bottoms of the price movements, defining the upward trend and helping generate buy signals to capitalize on the price increase.
Downward Trend Line: A sloping line drawn on the falling tops of the price movements, defining the downward trend and helping generate sell signals to capitalize on the price decline.
Technical Indicators: Graphical tools and oscillators built using price data that assist in analyzing price movements. Some of these indicators are drawn on the price chart, while others are displayed in a separate window attached to the chart.
Chart Patterns: Patterns or shapes formed by price movements that indicate potential reversals or continuation of the price movement. As these patterns repeat, traders can use them to predict the market's reaction based on the pattern's meaning.
Japanese Candlestick Patterns: Patterns or shapes of one or more candlesticks, typically indicating a reversal of price movements. Traders use these patterns to anticipate the market's next move based on the pattern's indication.
Forex Brokerage Concepts
These are terms related to Forex brokerage companies, used to understand how to deal with them.
Forex Brokerage Firms: These are intermediaries that allow individual traders to trade Forex by buying large quantities of currencies from investment banks or the interbank market and then breaking them down for retail traders.
Market Makers: Brokerage firms that buy currencies from banks and price providers and sell them to investors.
Electronic Communication Networks (ECN): Brokerage firms that match buy and sell orders automatically, providing clients with the best available bid and ask prices.
Swaps: The difference between the interest rate of the base currency and the quote currency in a currency pair.
Real Account: An actual trading account with real money in the Forex market.
Demo Account: A simulated trading account with virtual money used to practice market conditions and test trading strategies.
Regulatory Bodies: Official entities responsible for regulating financial markets and overseeing financial institutions and brokers offering trading or investment services in financial markets to protect clients from fraudulent activities that harm their interests.
CFTC: The Commodity Futures Trading Commission, a U.S. government agency responsible for regulating futures and options markets.
NFA: The National Futures Association, a self-regulatory organization in the U.S. that specializes in futures contracts and has recently gained authority over the Forex market.
FSA: The Financial Services Authority in the UK, which oversees and regulates financial markets and services.
SFBC: The Swiss Federal Banking Commission, responsible for protecting investors and ensuring the efficiency of financial markets in Switzerland.
ASIC: The Australian Securities and Investments Commission, which plays a key role in maintaining the reputation of the Australian economy.
SFC: The Securities and Futures Commission in Hong Kong, responsible for regulating securities markets.
Forex trading involves buying and selling currencies in pairs within the foreign exchange market. The goal is to profit from fluctuations in the exchange rates between different currencies.
Currency pairs are divided into major pairs (like EUR/USD), cross currency pairs (like EUR/GBP), and exotic pairs (like USD/TRY), with major pairs involving the US Dollar and being the most traded.
A Forex broker acts as an intermediary between retail traders and the larger Forex market. They provide platforms and tools to execute trades and access currency pairs.
A PIP (Percentage in Point) is the smallest unit of measurement for currency price movements in Forex trading. It represents the fourth decimal place in most currency pairs, except for JPY pairs where it’s the second decimal place.