When you begin trading foreign exchange, you may be curious about what all the little abbreviations, and forex trading terminology mean. For that reason, you will find this easy to use page that outlines the key terms you will want to know.
Forex Trading Terminology
Forex trading, like many other financial markets has its own unique terminology. Knowing these will help speed up your ascent to forex trading success, and endear to trading communities. Below is a list of common forex trading terms and their definitions.
Bid: The bid is the price at which the market is willing to buy a currency pair.
Ask: The ask is the price at which the market is willing to sell a currency pair.
Spread: The spread is the difference between the bid and ask price.
Pips: A pip is the smallest unit of price movement in a currency pair.
Leverage: Leverage is the ratio of exposure to actual investment. For example, if you have $1,000 in your account and you use 100:1 leverage, you have $100,000 in exposure.
Margin: Margin is the amount of money required to open a position.
Position: A position is the amount of a currency pair that you have bought or sold.
Long position: A long position is a position that is bought with the expectation that the price will rise.
Short position: A short position is a position that is sold with the expectation that the price will fall.
Stop loss: A stop loss is an order to sell a currency pair when it reaches a certain price. This is used to limit losses if the market moves against you.
Take profit: A take profit is an order to buy or sell a currency pair when it reaches a certain price. This is used to lock in profits if the market moves in your favor.
Limit order: A limit order is an order to buy or sell a currency pair at a certain price. This type of order ensures that you get the price you want, but it may not be filled if the market does not reach that price.
Market order: A market order is an order to buy or sell a currency pair at the current market price. This type of order will be filled immediately, but you may not get the price you want.
Candlestick: A candlestick is a type of chart that shows the high, low, open, and close prices for a currency pair.
Chart: A chart is a graphical representation of price movement over time.
Technical analysis: Technical analysis is the study of price movement using charts and other tools. See detailed technical analysis guide.
Fundamental analysis: Fundamental analysis is the study of economic factors that can affect the price of a currency pair. See detailed fundamental analysis guide.
Support: Support is a level where the price has difficulty falling below. This may be due to demand at that price level.
Resistance: Resistance is a level where the price has difficulty rising above. This may be due to supply at that price level.
Trend: A trend is a general direction that the market is moving in. Trends can be up, down, or sideways.
Breakout: A breakout is a move of the price through an area of resistance or support.
Correction: A correction is a reversal of a trend. Corrections are typically smaller than the previous move in the trend.
Bull market: A bull market is a market that is rising. This is usually due to optimism about the future.
Bear market: A bear market is a market that is falling. This is usually due to pessimism about the future.
Volatility: Volatility is a measure of how much the price of a currency pair moves up and down. It is typically measured by the standard deviation of price movement.
Risk/reward ratio: The risk/reward ratio is the amount of profit you expect to make for every unit of risk. For example, if you expect to make $100 for every $1 you risk, then your risk/reward ratio is 100:1.
Position size: Position size is the amount of a currency pair that you buy or sell. This is typically measured in lots.
Lot: A lot is a standard unit of currency. There are different types of lots, but the most common type is the standard lot, which is 100,000 units of currency.
Micro lot: A micro lot is 1,000 units of currency.
Mini lot: A mini lot is 10,000 units of currency.
Pip: A pip is the smallest unit of price movement in a currency pair. It is typically equal to 0.0001 for most currency pairs.
Spread: The spread is the difference between the bid and ask prices of a currency pair. The bid price is the price at which you can sell a currency pair, and the ask price is the price at which you can buy a currency pair.
Swap: A swap is an interest charge for holding a position overnight. This charge is either added to or deducted from your account.
Margin: Margin is the amount of money you need to put up to open a position. Margin is typically a percentage of the total position value.
Free margin: Free margin is the amount of money in your account that is not being used to maintain an open position.
Equity: Equity is the value of your account minus any open trade losses.
Drawdown: Drawdown is the peak-to-trough decline in an account’s value.
Recovery: Recovery is the return of an account’s value from a drawdown period back to its previous peak.
Slippage: Slippage is the difference between the price you expect to pay for a trade and the actual price you pay. Slippage can occur when there is low liquidity in the market.
Trading plan: A trading plan is a set of rules and guidelines that you use to trade. Your trading plan should include your entry and exit criteria, your risk management rules, and your overall strategy.
Trading journal: A trading journal is a record of your trades, including your entry and exit points, your reasons for taking the trade, and your results. Keeping a trading journal can help you to improve your trading performance.
Risk management: Risk management is the process of managing your risks so that you can protect your capital and avoid excessive losses. Risk management includes setting stop-losses, using limit orders, and diversifying your trading.
Diversification: Diversification is the process of spreading your risk across different markets and different asset classes. Diversification can help you to reduce your overall risk and improve your chances of making a profit.