Did you know more than 70% of forex traders lose their capital within every quarter? It’s because of the lack of knowledge about forex trading terms. So, it is indispensable for every trader out there to focus on every forex term before getting crumpled during their trading journey.

Moreover, trading on Forex isn’t a piece of cake; it comes with many risks. Newbie traders are vulnerable to these risks and, thus, find themselves losing extra bucks. In this article, we will highlight some vital top terms of Forex. So, read till the end to be acknowledged of all the terms.

1)Currency Pair

There is no rule on Forex to buy a single currency. There are currency pairs such as EUR/USD, AUD/USD, JPY/EUR, etc. According to Tradingview.com, there are over 2,300 forex currency pairs, but they are all illiquid, and only 115 pairs of data are provided to the traders by brokers.

In EUR/USD, EUR is the base currency, and USD is known as the counter or quote currency. There are major, cross, and exotic currency pairs on Forex.

• The major currency pairs are EUR/USD, USD/JPY, GBP, and AUD/USD, as they are the most traded ones.
• The cross-currency pairs are EUR/GBP, NZD/JPY, and CHF/JPY. USD is not included as the base or quote currency in these currency pairs.
• The exotic currency pairs are EUR/RON, USD/HUF, and USD/ZAR. These currency pairs are less traded.

2)Margin

Margin is the amount of capital a trader must have in their account to be able to open a trade. The money act as security funds for the brokerage if the trade doesn’t go in favor of the trader. With margin, traders are eligible to open larger positions in the market.

There are other key terms about the margin that you must know about:

·Used Margin

Used margin, also known as “used margin requirement,” refers to the portion of your account balance that is currently being utilized as collateral to maintain open positions in the market. This margin amount can not be used until the open positions are closed or the margin is released.

·Free Margin

In contrast, free margin is the amount that is available for new trades.

·Margin Call

A margin call is critical in forex trading when your account’s equity (the current value of your account, including open positions) falls below a certain percentage of the used margin. When this case happens, the broker will either notify you or place a margin call on your account, in which you must deposit more funds in your trading account or close some of the opened positions.

3)Leverage

Leverage is the amount of money which the trader borrows from the broker to open larger positions in the market. It allows traders to expand their buying power when trading assets on Forex. Suppose the broker is offering 100:10 leverage. It means you will have the ability to open a trade value of $100 with $10 in your trading account with the help of leverage.

4)Bid and Ask Price

It is vital for every trade to know about these terms. When a trader wills to buy a currency pair, it is known as the bid price. In contrast, when a trader wants to sell a currency pair, it is an asking price.

5)Spread

Spread is the difference between the asking price and the bid price. Most of the brokers online do not charge fees. Instead, they cover up their charges with wider spreads on currency pairs. So, it is essential for you to know about spread, as it can affect your profits at the end of the day. There are two types of main spreads such as fix and variable.

Fixed Spreads

The fixed spreads do not get affected by market fluctuations and hold the same number of pips between the bid and ask price.

Variable Spreads

In contrast, variable spreads flow according to market fluctuations. It can also be called a floating spread, which constantly changes the bid/ask price.

6)Lot Size

The lot size is the unit of measurement when you trade a currency. You can trade the standardized quantity of a financial instrument on the forex market. It is generally demonstrated in the standard lot, mini lot, and micro lot.

There are 1000,000 units in one standard lot size of the base currency. A mini and micro lot has 10,000 and 1,000 units, respectively. Furthermore, some online brokers also offer fractional lot sizes for their traders in case they have a smaller trading account or wish to trade small.

7)Bear and Bull Market

Bear and Bull market are two rudimentary terms in Forex, which describes the market sentiment.

When the currency prices are constantly declining, it is regarded as a Bear market. In this market, the investors are looking to sell currency pairs, anticipating further price downfall.

In contrast, when the currency prices are constantly moving upward, it is known as the Bull market. The traders or investors in this market are willing to buy currency pairs, expecting further prices increase.

It is important for every investor to acknowledge that the market can frequently shift between a bearish and bull market with no notice at all.

8)Interest Rates

It is critical for every trader to know about interest rates and why it is essential in forex trading. These rates determine the cost of borrowing money and play a crucial role in influencing the foreign exchange market. These are determined by the central banks of the world.

So, it is essential for you to keep an eye on interest rates before making any trading decisions. It can result in both losses and profits.

9)Technical Analysis

In forex trading, technical analysis is a technique used to assess and forecast future price movements of currency pairs based on past price data and market data. Traders who employ technical analysis, sometimes known as “technical analysts,” think that past price patterns and movements might offer important clues about the market’s future course.

The technical analysis primarily focuses on chart patterns, trends, and different technical indicators to help traders make judgments.

10)Stop Loss and Take Profit

These are also basic terms in forex trading; you must know how to utilize these features.

Stop Loss:

A trader sets a specific price for the stop loss limit to avoid potential losses during trading. The advantage of utilizing stop loss is that the trade will be automatically closed when the market moves against your trade and reaches your specified level. It will prevent further losses.

Take Profit:

It is one of the best ways to secure profits during forex trading. The trader sets a specific price level to make a profit. When the market moves in favor of the trader and reaches beyond the level of take profit, the trade gets automatically closed.

 

11)CFD

The acronym CFD stands for contract for differences. It gives the privilege of online traders to trade in the price movements of derivatives, securities, and including currency pairs without owning the underlying assets.

CFDs often offer leverage, allowing traders to control a larger position with less capital. While leverage can amplify profits, it also increases potential losses.

12)Pips

The PIP (Percentage in Point) is the fourth smallest decimal of any currency pair and the smallest movement reflected when currencies are exchanged. The PIP is equivalent to 1/100 or 0.0001.

For example, the price quote for EUR/USD is 1.5559. It means that you will get 1.5559 USD for one EUR. If the quote price increase to 1.5560, that means the price is moved by one pip.

13)Liquidity

The term liquidity in forex trading refers to the ease at which the currency pairs can be purchased or sold. It depends on the active buyers and sellers currently trading. As we have mentioned, the most traded currencies above are those with high liquidity.

Although, it is vital to note that the market liquidity is not fixed and can be shifted from high to low liquidity. As we are all acquainted, Forex is the market with the highest level of liquidity because of the significant trading activity.

Conclusion

Every forex trader must know nitty-gritty details about trading, so they can secure their accounts from potential losses. We have described some of the crucial forex trading terms, which will help you understand trading.