Every financial market has its unique conditions, and individuals engaged in it use general terminology to express their positions in the market. Those unfamiliar with these terms may struggle to comprehend what traders are saying. In the case of the vast international market, such as Forex, there are specific conditions that must be considered for operating in this market. Therefore, if you are new to FX trading or just starting out, read this article to the end to become acquainted with a comprehensive list of concepts and terms in the Forex market. Understanding these conditions does not guarantee success in Forex trading, but the insights and guidelines presented are crucial for conducting safe transactions.
what is the goal of categorizing Forex market terms into basic and fundamental concepts?
The purpose of categorizing Forex market terminology into basic and fundamental concepts is to facilitate their retention and understanding. Examining these concepts in categories aims to make them more accessible.
Examining the Fundamental Concepts and Terminology of the Forex Market
Learning the meanings and fundamental concepts is considered the first step in acquiring the terminology of the Forex market. These basic terms in forex trading are essential for anyone starting to work in this market. While it may seem simple for someone with extensive experience, mastering these terms can be your initial step into Forex. Therefore, you should keep them in mind
Currency Pairs:
Experienced professionals consider familiarity with currency pairs as an introduction to understanding Forex market terminology. As you may know, currencies of different countries are traded against each other in the Forex market. The word “Forex” is short for Foreign Exchange, meaning the exchange of foreign currencies.
This market allows you to buy and sell fiat currencies of different countries in pairs. For example, consider EUR/USD, a well-known and primary currency pair in this market. In this currency pair, the first currency is the Euro, and the second currency is the US Dollar. By analyzing the chart of this currency pair, you can either buy or sell Euros or Dollars.
Major Currency Pair or Base Currency:
Another crucial term in the Forex market is major currency pairs. In the currency market, pairs traded with the US Dollar are referred to as major currency pairs. The reason for emphasizing the US Dollar is that it is currently the largest legal tender worldwide, with the most significant trading volume. The status and price of the US Dollar in the Forex market are analogous to the performance and price of Bitcoin in the digital currency market. This is why pairs involving the US Dollar are also called major currency pairs.
- Euro to US Dollar: EUR/USD
- British Pound to US Dollar: GBP/USD
- US Dollar to Japanese Yen: USD/JPY
- US Dollar to Canadian Dollar: USD/CAD
- Australian Dollar to US Dollar : AUD/USD
- US Dollar to Swiss Franc: USD/CHF
- New Zealand Dollar to US Dollar: NZD/USD
These currency pairs are major pairs in the Forex market. As you can see, some of these currency pairs consider the US Dollar as the base and primary currency, while others are quoted against the Dollar.
The concept implies that if you convert the first currency into the second one, you’ll receive a certain amount of the second currency. In other words, if the exchange rate for EUR/USD is 1.13, to calculate the equivalent in dollars, you multiply 1 Euro by the exchange rate, resulting in 1 Euro being equal to 1.13 dollars.
Cross Pairs:
By introducing cross pairs and secondary crosses, you become familiar with another aspect of Forex market conditions. According to the aforementioned definition, currency pairs that do not include the US Dollar are called secondary or cross currency pairs.
However, currency pairs composed of the six major currencies (Euro, Pound, Yen, Canadian Dollar, Australian Dollar, New Zealand Dollar, and Swiss Franc) are more popular and traded more frequently. Please note that users currently target major currency pairs for Forex trading. Nevertheless, cross pairs can be utilized for additional trading opportunities.
In total, the intersection of these seven currencies and major currency pairs, as well as gold and the US Dollar, creates 29 currency pairs. If you are new to the Forex market, it is advisable not to stray beyond these 29 currency pairs. This is because pairs such as oil and silver come with higher fees and can be challenging for initial investments.
Sell:
In addition to understanding other Forex terms for beginners, it’s crucial to grasp the meaning of “sell.” Various types of sell orders, along with various buy orders, are available in this market. Selling in the Forex market differs from selling in the domestic stock market or the digital currency market. In the Forex market, trading is conducted in the form of Contracts for Difference (CFD), allowing you to buy and sell currency pairs instantly.
Buy:
Another term in the Forex market that you’re likely familiar with is “buy.” “Buy” is used to indicate a purchase in this market. Various types of buy orders exist in the Forex market, each having its specific purpose.
Close in Forex Terminology:
Another term commonly used in the Forex market is “Close.” The term “Close” is utilized in various sections of the Forex market. This expression is often used when the market is closed. In such instances, you typically encounter the term “Market Close,” meaning the closure of the market.
This term is usually observed during official holidays and both weekend days in various Forex brokers. Additionally, “Close” is used to determine the final price at different times. It means that the last transaction price for each time frame is the closing price. In candlestick charts, “Close” indicates the closing price. Note that the final price of each candle is determined within the time frame of the chart.
CFD Trading:
CFD trading involves predicting the increase or decrease in the price of various assets in the market. If a trader expects that the price of an asset will rise in the future, they buy the asset through a CFD account. On the other hand, if the trader believes that the price of the asset will decrease in the future, they sell the asset through a CFD account. Profits and losses from CFD transactions are calculated based on the difference between the opening and closing prices of the position. CFD stands for Contracts for Difference.
Broker:
Selecting a broker in the Forex market is one of the initial challenges faced by users. A broker is essentially an intermediary company that allows small traders to engage in Forex trading. The role of a trader in this market is similar to that of a trader in the domestic stock exchange. As a trader, you need to have an account with one of the brokers to connect to the core of Forex transactions, deposit your funds with the broker, and start trading.
Demo (Demo):
Another term frequently mentioned in various articles and on different websites in the Forex market is “Demo.” A demo account refers to an account that, for registration and conducting trial transactions, does not require the deposit of real money. This account is essentially a simulation of the real market available to you. By using a demo account, you can test all trading strategies and methods in this market and, if confident, enter the real market. Demo accounts are available on various trading platforms and websites such as Trading View.
Trend:
One of the crucial terms in this section is “Trend.” Trend refers to the direction of the market. The trend of a currency pair indicates in which direction the pair is currently oscillating and moving. Usually, three different trends are identified in the Forex market.
Bullish Trend:
A bullish trend indicates that the price of a currency pair is increasing, and its chart is in an upward trend.
Bearish Trend:
Refers to a trend in which the price of the traded currency pair is decreasing, and the chart is moving downward
Neutral Range:
Refers to a trend in which the chart of a currency pair does not have a specific path, and the price is constantly fluctuating within a defined range.
Determining the trend of a currency pair should be based on time intervals. This means that the trend of a currency pair may increase on a daily basis, but decrease on an hourly basis.
Trend Line in Forex Market Terminology:
Continuing with Forex market terminology, let’s introduce another forex term for beginners in this market. A trend line is essentially a line that represents the trend of a currency pair. If you pay attention to the definition of trend in the previous paragraph, trend lines become clearer.
Upward Trend Line:
A trend line that connects the lows created by an upward trend.
Downward Trend Line:
A line drawn in a downward trend that connects the peaks of a downward trend.
Note that trend lines do not connect all the highs and lows of a trend. A trend can be formed by several trend lines, and the most effective trend line is the one that connects the highest number of peaks or troughs.
Forex Terms for beginners:
Each of these terms has its own specific meaning, and to operate in this market, you need to be familiar with all of them. As mentioned earlier, understanding these conditions does not guarantee that you will always make good and profitable trades, but it helps you trade with more confidence in this field.
Pip (Percentage in Point) in Forex Market Terminology:
If you have been involved in live or even demo trading, you are somewhat familiar with this term. In the forex market, the price of a currency pair changes in terms of units. The difference between these two prices is also expressed in pips. When you look at the exchange rate of two currency pairs, you usually see numbers with multiple decimal places.
The change in the fourth digit after the decimal point is called one pip. For example, if a currency pair has an exchange rate of 1.2345, the fourth digit after the decimal point represents one pip. If this rate reaches 1.2349, it means the price of this currency pair has increased by 4 pips.
Order
Explaining the concept of an order in the forex market, you continue to become familiar with forex terminology for beginners. An order is usually referred to as a “safari” in Persian, as it has not yet been executed as a transaction. When your order is executed in the market, it essentially becomes a trade or position.
Swap
Swap is also one of the most important terms in the forex market. If you have registered as a trader with a broker, the first thing you encounter is the concept of swap. Swap is another fee and cost in the currency market that is independent of brokers and depends on the interest rate between banks in different countries.
If a position is held open for more than 24 hours, it will be subject to swap charges. However, some brokers offer commission-free trading to attract traders. This cost is related to the difference in interest rates of each country’s currency. Swap is also referred to as the overnight rate in the forex market.
Lot
A lot determines the volume of transactions in the forex market. Each lot transaction consists of 100,000 units. This means that if you buy or sell 1 lot of the EURUSD currency pair, you are dealing with 100,000 units.
Since trading 100,000 units of a currency pair requires a significant capital, the percentage of lots used for trading is usually low.
Leverage
The use of leverage in forex trading is entirely natural. Leverage in this market means that you can trade with multiple tools. When opening an account, you first specify the amount of leverage. Different brokers currently use different leverage ratios, depending on the broker’s conditions and the type of account.
This means that you can hold positions up to 1000 times your capital in your account or divide them into various positions. Given this explanation, it can be claimed that leverage is one of the most important terms in the forex market.
Spread
Spreads play the role of commission in the forex market. One of the income sources for brokers in the forex market is the spread. For each currency pair, the spread determines the difference between bid and ask prices. This difference increases with the trading volume. The spread is deducted from the trader’s account when opening any position.
Ask Price
Continuing with forex market terminology related to the interpretation of the ask price. To understand the bid price in the forex market, it’s essential to know that different brokers use it to determine the spread. In forex, the buying price of a currency pair is usually slightly higher than the price at which it is sold. The spread, which depends on the currency pair, is the difference between these bid and ask prices. The more significant the trading volume of a currency pair and the more popular the currency pair is, the lower the spread and, consequently, the less difference between bid and ask.
Bid Price
Another common term in the forex market is the bid or ask price. Log in to the broker’s trading platform and open the chart of any currency pair to see the buying and selling prices simultaneously.
Position
Position refers to an order in the forex market. When you trade to buy a currency pair, you essentially open a buying position for that currency pair. These terms are usually used among traders and are useful for understanding their positions.
Volume
Trading volume is one of the most critical parameters in the forex market, expressed in lots. Additionally, to determine the optimal amount, you should use money management methods. Determining the transaction volume and, of course, using this volume to determine the best entry point is one of the most professional methods used by experienced users.
Instant Execution
One of the essential conditions in the forex market is instant execution or immediate transactions. In the forex market, two types of transactions are available to traders. The second type of conditional transaction is explained in the next paragraph. The first type is instant execution. In this method, after determining various trading factors such as trade volume, take profit, and stop loss, you open a position at the current market price. When you trade this option, the broker immediately opens a trade at the nearest market price.
Pending Order
Conditional contracts in the forex market are one of the popular options in this market. The conditional nature of these transactions means expressing specific conditions to the broker. Simply put, suppose you intend to buy the EURUSD currency pair. However, at the moment, the market price is far from the price at which you want to buy and start trading. In this case, you have two solutions: either wait for the price to reach this point and use a market or pending order.
Buy Stop Order
The Buy Stop order is delayed when a trader purchases a stock or asset at a price higher than the current market price. Unlike the usual scenario where a lower or minimum price is desired, this type of order is usually executed when the trader believes that the price is likely to exceed the expected buying price.
This means that if the current price of an asset is $10, and after a while, its price increases to $11.5, the trader instructs the broker to open a Buy or Long trade at this price.
Sell Stop Order
Sell Stop is another popular and practical term in forex market terminology. The sell stop order has the same conditions as the buy stop but in the opposite direction. This means that if your analysis indicates a downward trend and there is support before the downward trend, a lack of support can cause further price decline.
In such cases, if you want to enter a sell trade, you can place a sell stop below that support, and after the breakdown, enter a selling position. In this case, the broker opens a Short trade for you.
Sell Stop Order is a type of order used when selling. In this order, you place your order at a price lower than the current price of the asset. When the price of the asset reaches your price, your order will be executed. For example, if the current price of an asset is $10, you instruct the broker to open a Sell or Short trade for you when the price reaches $9.
Buy Limit Order
When the price is close to the end of a downward trend, traders try to find areas where the price is likely to reverse. With this technique, you can use the Buy Limit order to register a buying order in this section and enter a price to open a buying position. Note that this type of buy order is used for trading below the current market price.
For example, if the price of an asset is currently $10, and its price decreases to $9, you instruct the broker to open a Buy or Long trade for you when it reaches this price.
Sell Limit Order
Sell Limit is another term in the forex market used to open a selling position at a higher price than the current market price. For example, assume that the current price of an asset is $10, and after analysis, you determine that if the price reaches $11, it is suitable for a Short trade. In this case, you use the Sell Limit option.
If your analysis indicates that the bullish trend has come to an end, and you also identify an area where there is a likelihood of a downward trend, you can open a selling position by placing a Sell Limit order in the desired position. Note that this position is used at the end of an upward trend or at the beginning of an upward trend.
Stop Loss
Stop Loss is used as a technical term in the forex market to prevent trades from incurring excessive losses. All analyses may have shortcomings, meaning that when the price reaches a certain point, your analysis may be incorrect, and the trend may move contrary to the anticipated analysis. In such situations, it is essential to exit the trade at this point, even if it involves a loss. At this stage, a stop-loss is used to close the trade. In essence, using a stop-loss can help prevent significant losses in your trades.
Take Profit
“Take Profit” or profit-taking is one of the most important terms in the forex market. This term is exactly the opposite of a stop loss. In every trade, an analyst or trader is trying to achieve a specific profit. This target should not be ambiguous and must be clearly defined based on the analysis beforehand. As a trader, you should also determine your price targets.
Balance
Balance in Forex refers to the amount of assets in your trading account. If you deposit $1000 to open an account with a broker, your account balance will be $1000. Please note that the account balance fluctuates during transactions, and profits and losses are subject to these fluctuations.
After each trade, if the trade is profitable, the profit amount is added to the balance. In case of a loss, the loss amount is deducted from the account balance. In general, when you have no open trades, your balance is equal to the amount of funds you have in your account.
Equity
Equity is another term in the list of Forex market terminology. This term refers to the amount of assets in a broker’s account at a specific time. Equity in Forex indicates the current value of a trading account by calculating its profits and losses.
This means that if a trader has multiple open or active trades, their capital amount will also change. Equity is essentially equal to the sum of the balance and the floating profit or loss.
Equity=Balance+(Floating Profit/Loss)
Margin
Margin is one of the most important and sensitive terms in the forex market. In the forex market, it refers to the amount of assets blocked by a broker from open trades. Each transaction has its own specific cost, and this cost is deducted from your account. When opening a trade, the broker locks a certain amount of assets in your account as margin. This locked amount cannot be used for other transactions.
The calculation of margin depends on the volume of transactions and, of course, the leverage ratio of your account. For example, if you have $500 in your account and you trade $1,000 with a leverage ratio of 10, this trade actually requires $100. In normal conditions and without using leverage, you would need at least $1,000 in your account to initiate a $1,000 trade. However, if your account has a leverage ratio of 10, you can trade 10 times your assets, and you only need $100 for a $1,000 trade. In this case, when initiating the trade, the broker registers a margin of $100 from your $500 account as collateral.
Free Margin
Another term commonly used in the forex trading market related to user accounts is free margin. This term refers to the amount of your account’s assets that are not locked for any transaction and are completely at your disposal.
For example, if you have a $2,000 account with several open positions totaling $1,000 in margin, and assuming your trade profits are $400, your equity would be equal to the balance of $2,000 plus the profit of $400, making a total of $2,400.
To calculate free margin, subtract the margin of $1,000 from the total equity of $2,400. This means you have $1,400 in free margin that you can withdraw, open other trades, or even use to cover the losses of current trades in the same account.
Margin Level
Margin level is a term that measures the power of an account to open new trades. Please note that various parameters may be involved in calculating the margin level. However, a common method is to divide the equity by the margin and multiply the result by 100. This simple method allows you to calculate the margin level for your user account.
Margin Call
Margin call is a message that prompts a trader to either add funds to their trading account or close a portion of their open positions to free up more margin for continuing trades. Margin essentially represents the trader’s real capital and is used for securing trades. When using leverage in trades, a trader opens a position with an amount greater than their initial capital.
When losses in a trade on an exchange exceed a certain limit (usually more than 30%), a margin call occurs. In other words, if you have a Buy position and the price of the purchased asset decreases, resulting in losses exceeding a predetermined threshold, a margin call occurs. Similarly, if you have a Sell position and the price of the asset increases beyond a certain limit, a margin is created.
Brokers set a limit on the account balance for a trader, considering it as a warning level. When the account balance of a trader falls below this limit, and if they wish to maintain their open positions, the broker informs the trader to increase their balance.
This warning essentially serves as a call for the trader to increase the margin in their trading account, known as a margin call. You, as the trader, will be notified in various ways, such as phone calls, text messages, and emails, depending on the broker you are trading with.
Liquidation
Liquidation essentially means selling assets and converting them to cash. The liquidation of assets can be done either by the trader themselves or automatically by the chosen broker. However, the nature of these two approaches is different. When the price of an asset fluctuates, relevant exchanges can automatically close leveraged positions in futures markets and margin trades.
This process is referred to as account liquidation. It occurs when a trader does not have sufficient capital and budget to support their leveraged trades. In other words, the amount available in the account is so negligible that there is no way to send a margin call, and the only recourse to offset losses is to sell the user’s collateral and cash it out.
Risk Management
It is also among the terminologies of the Forex market. Risk management means utilizing various techniques to prevent significant losses in Forex trades. There are various methods and techniques for risk management when engaging in trades in this market. Through these methods, you can control the volume of your transactions and periodically review your strategies. Please note that risk management is one of the most crucial aspects of economics that you should consider when trading in financial markets. Paying attention to risk management can lead to long-term profitability and capital preservation in this market, providing the necessary foundation for your success.
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Using Forex market terminologies and learning them helps you avoid difficulties when investing in Forex and ensures that you perform all trading steps correctly. Buying, selling, risk management, margin, take profit, and stop loss are among the most common Forex market terms that every trader should be fully acquainted with.
