Mastering Forex Trading Jargons

When you want to enter the forex market, one crucial skill you must master is the forex language.  

The forex market is like a different world for every beginner. By familiarizing yourself with its language, you’ll tackle the market complexities and take on various opportunities to grow your investment. 

For this lesson, I’ve prepared all the essential forex trading jargon. Remember, knowing these trading terms will save you from the paralyzing shock that the market might bring you. 

 

1. Ask Price

Also known as the offer price, the ask price represents the price point at which the liquidity provider or the broker (if Market Maker). This is the price level at which you buy the base currency.  

In the conventional formatting of currency pairs, the ask price is placed on the right side of the quotation.  

Assume the broker quoted the EUR/USD at 1.2391/1.2394. The ask price here is 1.2394. Essentially, you’re using 1.2394 USD for one unit of EUR.  

Note: To spot the ask price easily, simply look at the highest quote among the two prices. 

 

2. Bid Price

The bid price tells you the highest price that the liquidity provider or the broker is willing to buy your assets. The bid price represents the point at which you willingly sell the base currency.  

The conventional position of the bid price is on the left side of the quoted prices.  

Suppose the EUR/USD is quoted at 1.2391/1.2394. The bid price here is 1.2391. In other terms, you’re using 1.2391 EUR to buy one unit of USD.  

 

3. Currency Pair

You never trade a single currency when you buy and sell in the forex market. It should always come in a pair, known as the currency pair. Essentially, you run at potential profitable returns by speculating on the exchange rate movement of the currencies within the pair.  

The currency pair is the price quotation of two different currencies. It shows the value of a currency when quoted against another one in the pair. 

Forex traders classified currency pairs into three different categories;  
 

1. Major Currency Pairs: The major pairs always include the USD in the equation. You should pair it with other currencies of major economies.  

2. Minor Currency Pairs: Minor pairs are also known as major crosses. Here, the major currencies are traded against one another (aside from the USD). 

3. Exotic Currency Pairs: Exotic pairs cater to pairs that include the currency of the emerging market. These exotic currencies shall be paired with other major currencies to provide volatility. 

 

4. Major Currencies

The major currencies are from countries with strong, healthy, and stable economic backgrounds. With these traits, forex traders tend to trade these currencies because of the liquidity and volatility they provide.  

The major currencies include;  
 

USD	American Dollar
EUR	Euro
GBP	British Pound
JPY	Japanese Yen
CHF	Swiss Franc
AUD	Australian Dollar
CAD	Canadian Dollar
NZD	New Zealand Dollar

 

5. Base Currency

When you look at a currency pair, the first currency you see is the base currency.  

Assume you want to open a buy (long) position. The base currency is the one that you’re buying with your quote currency. Conversely, if you’re opening a sell (short) position, the base currency is the one you sell in exchange for the quote currency.  

Note: The USD is normally the base currency for most currency pairs. The primary exceptions for this are the EUR, GBP, and NZD.  

 

6. Quote Currency

Contrary to the base currency, the quote currency is typically placed second in the pair order. The quote currency is also known as the counter currency.   

When you open a buy (long) position, you sell the quote currency for the base currency. However, you buy a unit of a quote currency with the base currency in the case of a sell (short) position. 

 

7. Lot size

When you trade forex, your brokers require you to trade in lots. This represents the number of units you must trade in a single transaction.  

Here are the usual lot sizes that forex brokers offer; 
 

1. Standard lot: 100,000 units 

2. Mini lot: 10,000 units 

3. Micro lot: 1,000 units 

4. Nano lot: 100 units 

Remember, your position size (or lot size) must depend highly on your account size and risk appetite. If you have a small account, opening a standard lot is not advisable because it can destroy your whole trading account.  

 

8. Long Position

Conventionally, forex traders refer to buying a position as going long. Essentially, this depicts the direction of your trade.  

Going long means your position will stay in the market for a specific time. When you open a long position, you expect the currency pair to rise in value while in the market.  

 

9. Short Position

When you open a short (sell) position, you intend to sell your asset and buy it after a period, ideally once the price becomes cheaper.  

It involves borrowing the currency pair before you sell it and then buying it back when the price depreciates. This way, you can repurchase the pair at a lower cost.  

 

10. Forex Orders

The forex orders are your instruction to your broker to perform a trade execution at a certain price limit. This can be done either manually or automatically.  
 

1. Market order: When you place the order, the broker immediately executes your trade at the current market price.  

2. Limit order: You can use limit order when you want your trade executed at a specific market price. Essentially, your broker automatically executes the order when the market reaches the limit you set.  

3. Stop-loss order: Stop-loss (SL) order is an ideal risk-management technique because it automatically exits your position when the market crashes against your position. When setting an SL order, you must place it below your position’s entry point.  

4. Take-profit order: The take-profit (TP) order automatically and effectively secures your trade’s profit once the market reaches your TP level. When you set this order, the TP level must be above your position’s entry point to secure your profit.  

 

11. Pip

When you trade forex, you can generate profit through the market movement—whether it appreciates or depreciates. But more specifically, through the Point in Percentage or pip.  

Pip represents the one decimal-point movement of the currency pair value. One decimal movement equals one pip value.  

Assume you open EUR/USD at 1.2000 but exit your position when it reaches 1.2100. This means that the market has experienced an upward 100-pip movement. 

 

12. Margin

Margin is like the forefront marketer for forex trading. You can access a relatively higher position with only capital or the required margin with margin trading.  

But how’s that possible?  

Your broker leverages your trade by lending you the remaining amount needed to open the position. This way, you amplify the profitable opportunities for your positions. However, you should know that this also opens you to magnified risk.  

 

13. Leverage

The leverage is the buying power your broker bestowed upon you. This is normally expressed as a ratio to show the difference between the amount you can trade with it and the money you have (margin).  

Here are the common leverage ratios that forex brokers offer to their respective clients:  
 

100:1

50:1

25:1

20:1

10:1

But leverage doesn’t only benefit the traders. By offering leverage, forex brokers also got to;  
 

1. Increase their trading volume 

2. Generate income through interest rate 

3. Attract new clients 

Now, you’ve learned all the basics of the forex market. In the next course, we’ll explore the world of cryptocurrency trading and find ways to profit from that financial market.