Foreign exchange, also known as Forex and FX, refers to the exchange of one currency for another, e.g. EUR/USD (Euro - US Dollar), USD/JPY (US Dollar - Japanese Yen) and GBP/USD (British Pound - US Dollar). Unfortunately, it is not always that straightforward and can be quite complex at times. Therefore, before considering trading on currency pairs you'll want to familiarise yourself with some of the common terms used in the world of FX. Understanding these terms is the first step towards developing your own trading strategy.
Basic Forex Terms
Here is a list of basic terms you will often hear within the FX trading industry:
- Pip - Generally the lowest increment in which a currency pair is priced. Pips are used to measure movement in a forex pair.
- Bid - The price at which the market maker/broker is willing to buy the currency pair.
- Ask - The price at which the market maker/broker is willing to sell the currency pair.
- Spread - The difference between the Buy/Sell (Bid/Ask) prices, offered to traders on the trading platform. When a CFD provider offers lower spreads than its competitors, this means traders can enjoy a smaller difference between the Buy and Sell price of the underlying FX trading pair.
- Base - The first currency in a currency pair, also referred to as the nominator (or top number).
- Quote - The second currency in a currency pair, also referred to as the denominator (or bottom number).
- Leverage - The means of gaining exposure to larger amounts of currency without having to pay the full value of your trade upfront. It effectively allows you to trade larger amounts with less capital. For example, a leverage of 1:50 means you could use $200 to open a trade valued at $10,000. This means that both profit and losses are magnified.
Market Trading Terms
To help you get a better understanding of the many concepts and technical terms, we’ve compiled below a summary of the main market terms to keep in mind:
- Bear Market - A market on the decline, where traders expect prices to fall, which indicates there is going to be more short selling (or traders ‘going short’).
- Bull Market - A market that is appreciating, where traders are eager to increase their long trading activity (also known as ‘going long’).
- Broker - An intermediary for traders and financial institutions to go through for executing transactions.
- Federal Reserve - The official centralised bank for the regulation of economic activity in the USA. Often abbreviated as the ‘Fed’.
- GDP (Gross Domestic Product) - The total sum of the economic activity of a country.
- Inflation - The rate of increase in the price of goods and services in a national/state economy.
- Interest Rates - The rates of interest charged for lending money from a bank or credit provider. Generally, central banks control the levels of interest rates, which is critical to the strength or weakness of a currency.
- LIBOR (London Interbank Offered Rate) - the rate at which banks lend money to each other in the London Interbank market, and is a commonly used benchmark interest rate.
- Foreign Exchange Volatility - The level of fluctuation of a currency pair, or a measure of how dramatic/unpredictable its price movement can be. This is generally an indicator of how risky a currency pair can be to trade.
Indicators & Reports
Chart indicators and economic reports can have an impact on various assets, like currencies and commodities. You can find all of the key data releases on the economic calendar and many different charting tools available on our platform. Here are the main ones you should be familiar with:
- RSI (Relative Strength Index) - An indication of whether an asset is overbought or oversold. It is expressed between 1 - 100.
- CCI (Commodity Channel Index) - A measure of the statistical variation from a defined average, from -100 to +100.
- MACD (Moving Average Convergence/Divergence) - A trading indicator that identifies moving averages and helps to potentially represent a new upward/downward trend in the market.
- Correlation - The mutual relationship between two assets, indicating similar (or dissimilar) they are to each other. Correlations range between +1 and -1.
- CPI (Consumer Price Index) - A common inflation measurement that helps to track the price of goods and services.
- PMI (Purchasing Managers Index) - An indicator on the relative strength of the manufacturing industry.
- QE (Quantitative easing) - The process of injecting money into the market to help the wider economy avoid recession.
Additional Terms Related to Forex
The list below includes the main terms you will find on trading platforms.
- Stop Loss - A market order used to close a losing position once it has reached a certain level.
- Take Profit - A market order used to close a profitable position once it reaches a certain level.
- Fundamental Analysis - Relies on wider economic and political data to predict which way a currency pair will move.
- Technical Analysis - Relies on chart patterns (of past performance) to predict which way a currency pair will move next.
- Major Pairs (or Majors) - A list of the most traded pairs of currencies in the world. They constitute the largest share of the foreign exchange market and all are priced and traded against the USD.
- Minor Pairs (or Minors) - Currency pairs that are not as heavily-traded, nor as liquid as the Majors. Sometimes also referred to as Exotics.
- Cross Currency Pairs (or Crosses) - Currency pairs that do not involve the USD. Popular crosses include Euro to Pound (EUR/GBP), Euro to Swiss Franc (EUR/CHF) and Australian Dollar to Japanese Yen (AUD/JPY).
These are just some of the basic terms that you need to understand before trading forex currency pairs. There are thousands more, and some will be more relevant to you than others; this all depends on what currencies you want to deal with and what types of trade you are executing. If you wish to trade forex CFDs, Plus500 offers a sophisticated, yet user-friendly platform where you can trade on forex and thousands of other instruments using CFDs.
This article contains general information which doesn't take into account your personal circumstances.