One of the most annoying parts of learning to trade forex is understanding all the jargon people use.
When I first started, I had a really hard time figuring out what pips, margin calls as well as all the other terminology meant when I first started. And even today, I hear terms that I still don’t understand or have never heard before.
To make it easier for new traders to get their heads around these terms, I’ve created a glossary.
This glossary will teach you all the important trading terms in forex as well as what their definitions are.
These are the terms you’ll hear repeated over and over again in videos, articles, and guides across the web. Some of the terms are much rarer than others and aren’t exclusive to forex – like FOMO for example – but they’re still very important to know and will make it easier to understand all the education out there.
Let take a look.
Someone who analyses assets and makes buy and sell recommendations.
The time Asian traders are active in the market – 11:00 pm – 08:00 am GMT
The base currency is the first currency shown in a pair, so Euro is the base currency of Eur/Usd, as it comes first.
A term someone uses when they think the price of a currency will fall. E.g if I’m ‘Bearish’ on Eur/Usd, it means I think the price will soon fall. People who believe the price will fall are typically referred to as ‘Bears’.
A website that allows you to trade or invest in the forex market.
A term someone uses when they believe price is going to rise. For example, if somebody says they’re ‘Bullish’ on Usd/Jpy, it means they think the price of the Dollar will rise against the Yen in the near future. Bullish people are usually referred to as ‘Bulls’.
A fee charged for buying or selling an asset. Most forex brokers charge a spread (explained later on) whenever you open or close a trade, which acts as your commission for buying or selling the currency.
Another term for “closed trade”. In forex, you close a trade by using the opposite order. For example, if you buy Eur/Usd, you close the trade by selling the same amount you purchased.
One or more trades placed to offset or reduce the risk of another, typically much bigger trade.
The term used to describe an exchange rate. Eur/Usd is a currency pair as it’s the exchange rate of two currencies; Euro, Dollar.
The time UK traders are active in forex. Runs from 7:00 am – 4:00 pm GMT.
Short for “Point In Percentage”. Forex pairs are quoted to either 4 or 5 decimal places. A 1 pip move means a rise or fall in the last decimal place by 1 point. So if price fell from 1.23100 on Eur/Usd to 1.23099, that’s a 1 pip movement. A rise from 1.23000 to 1.24000, on the other hand, would be a 1000 pip movement.
The currencies you either currently trade or invest in or plan to trade/invest in in the future.
A real-time graph that visually shows how the price of a currency has changed over time and is changing right now. A variety of Price Charts exist, with each displaying the price differently or showing different information about the price.
ROI is an acronym for “Return On Investment”. It’s a measure of how much you stand to gain from an investment (or trade) relative to how much you put in, and is always expressed as a percentage.
A computer program that trades or invests on your behalf, placing orders and buying and selling without requiring any human input.
When US traders are active in forex – 7 am – 4 pm GMT.
A term used to describe how prone a currency is to suffering large fluctuations in price. Volatility can either be high or low and changes over time as a result of various market forces.
For example, when an unexpected announcement is made regarding a currency, it’s price can become highly volatile, as lots of traders and investors buy and sell per what they believe the announcement means for the future price of the currency.
The ask price is the lowest price someone is willing to sell at. When you buy a currency at its current price, you’ll be buying at the ask, since that’s the lowest price someone is selling at.
The opposite of “Ask Price”; it’s the highest price someone is willing to sell at. When you sell a currency at its current price, you’ll be selling at the ask, because it’s the highest price someone is buying at.
The Bid-Ask Spread (known more simply as “the spread”) is the difference between the ask price and bid price. The way forex brokers make money is from the spread, as everyone has to pay the difference when they open or close a trade.
The size of the spread is determined by the size of the market. Popular pairs like Eur/Usd and Usd/Jpy have a slightly lower spread than other currencies because of the economies they represent. Obscure pairs such as Usd/Rub (US Dollar/Russian Ruble) have a much higher spread for the opposite reason.
Good Till Cancelled
To buy and sell currencies you use orders (I’ll cover these in a minute). Good Till Cancelled allows you to set your order to remain open indefinitely rather than it being closed at set time/date by your Broker. You should always have this option selected when placing trades.
Good Till Date
The same as “Good Till Cancelled”, only it lets you specify a time and date for the broker to close your trade or investment.
A phrase used by someone who plans on buying a currency.
Going short is what someone says when they plan on selling currency.
A method of trading and investing where you borrow money to increase the potential profit on a position. Most forex brokers allow their clients to use substantial leverage. However, it’s a double-edged sword because it not only increases the potential profit but also the potential loss.
Make sure you always use a small amount of leverage relative to your account size.
A type of order used for buying and selling currency. A limit order allows you to set a price where a certain amount of currency will be bought or sold upon being reached. So if you wanted to buy Eur/Usd when it’s price reached 1.11000, for example, you’d use a limit order set to that price.
Limit orders come in two types:
Limit Order To Sell (often called “Limit Sell”) – an order to sell a once it reaches a specific price.
Limit Order To Buy (sometimes called “Limit Buy”) – an order to sell a once it reaches a specific price.
Describes how easy it is to buy and sell a currency without its price being majorly affected.
Another type of order you can use to buy or sell a currency. Unlike limit orders, market orders allow you to buy or sell a currency immediately at its current price.
Market Orders come in two types:
Market Order To Buy (sometimes called “Market buy”) – an order to buy at the current ask price
Market Order To Sell (often called “Market Sell”) – an order to sell at the current bid price.
What you receive if your account balance falls below the required amount to keep a leveraged trade open.
When you use leverage to increase the potential profits from a trade, you have to keep a certain amount of funds in your account for the trade to remain open – this is usually called the maintenance margin.
If your balance drops below this amount, whether from losing on other trades or withdrawing money into your bank, the broker will issue you a margin call, and you’ll have to deposit more funds to keep the trade open.
If you fail to provide more funds, the broker will close the trade to recoup its funds – they can do this even if it’s at a significant profit.
A trade or investment you currently have open at a profit or loss.
Stop Loss Order
Designed to limit the amount of money that can be lost on a trade (or investment), a stop-loss order allows you to set a price where some or all of your currency is sold upon being reached.
If I bought 1 micro-lot of Eur/Usd at 1.12000 and set a stop to sell 1 micro-lot at 1.11900 if the price fell to 1.11900, my 1 micro-lot would be sold automatically, and I’d lose a small portion of my money rather than the full amount.
This is what happens when an order to buy or sell (including stop orders) is executed at a different price to what you wanted. For example, if I placed an order to buy Eur/Usd at 1.24000 and the order executed at 1.23900, that would be slippage.
Slippage doesn’t occur that often in forex because of how big the market is – so many people are buying and selling that orders can be placed practically anywhere at any time. However, it can still happen during periods of high volatility, such as news announcements and sharp rises and declines.
Take Profit Order
A take profit order allows you to set a price where some or all of your currency is sold automatically at a profit if reached.
The amount you want to buy or sell. Trade size is usually quoted in “Lots”, with 1 lot being the equivalent to buying or selling 10,000 units of a currency.
Due to the size of the forex market, most brokers quote trade size in micro-lots and nano lots, which is equivalent to buying 1000 and 100 units of a currency respectively.
Trailing Stop Loss
A special type of stop-loss that automatically decreases risk and secures profits by moving in the same direction as price when in a profitable trade.
Strategies And Techniques
Arbitrage is a strategy based around exploiting the price difference between two brokers. A trader using Arbitrage makes money by buying a currency on a broker where its price is low and then selling it on another where it’s higher.
Arbitrage used to be a popular strategy in the very early days of forex trading. However, the growth of the industry has effectively phased it out, and nowadays, it’s a strategy only employed by the fastest trading robots.
Buy And Hold
Probably the most well-known type of strategy. Buy and hold is where you buy a currency and hold it for a long time, in the hope it’s price will rise enough for you to make a significant profit.
A fast-paced style of trading where the aim is to make money from short term price moves that last anywhere from a couple of hours to an entire day. Day traders use many of the same techniques and trading strategies as traders using other styles, only adapted for use on much shorter timescales.
A defensive strategy used by people who want to offset the risk of a trade or investment by placing a trade or investing in a currency or asset negatively correlated – i.e moves in the opposite direction – to the main currency being traded or invested in.
Similar to buy and hold, position trading is a style of trading centered around holding a currency for 6 months to a year.
A medium-term style of trading where the objective is to make money from price swings; large rises in price that last anywhere from a few days to a couple of weeks.
Trading And Investing Concepts
A type of price chart that shows price changes through bars.
A bear trap is a fake signal a currency has reversed in price. It occurs when the price, after falling during an up-trend, suddenly reverses, causing the up-trend to unexpectedly continue.
A term used to describe what happens when the price of a currency consistently falls without many large rises taking place.
A candlestick (more on these in a minute) that shows the price fell for that period of time – these are red or black on most trading platforms.
Bollinger Bands (BB)
A tool that shows how volatile a currency is and roughly when it’s price is high and low.
A candlestick that shows price increased for that period of time – these are coloured green or blue on most charting platforms.
When the price of a currency consistently rises without many large declines taking place, it’s said to be in an up-trend or bull trend.
The opposite of a bear trap. A bull trap is when the price, after consistently declining for a long time, suddenly rises before falling again.
Buy The Dip
An old phrase that comes from investing. Buy the dip basically means to buy a currency when it’s price has declined during an up-trend.
A type of chart that shows price changes through tiny bars.
Someone who uses charts and graphs to make decisions on when to buy or sell.
A type of price chart that shows price changes via small bars of information called candlesticks.
Refers to a candlestick that, upon formation, signals the price may be about to rise or fall. Candlestick patterns can either form on their own or in a sequence of two or three.
A chart pattern is a much bigger version of a candlestick pattern.
Whereas a candlestick pattern consists of 1 – 3 candlesticks, a chart pattern is made up of dozens that together form a simple shape or structure, like a triangle.
When two or more technical points meet at the same location, it’s said to be a point for confluence i.e a point where the price has a high probability of either rising or falling.
Describes what takes place when the price of a currency predominantly moves sideways instead of being in an up-trend or down-trend.
When the price of a currency is affected by the movement of another assets price, it’s correlated. Currencies can be correlated to both other currencies or other assets entirely.
They can also be correlated in two different ways:
Positive correlation – this means they move in sync with each other. E.g if Aud/Usd and Oil are positively correlated, they both rise and fall at the same time.
Negative Correlation – this means they move the opposite to each other i.e when one rises the other falls and vice versa.
Dead Cat Bounce
A sudden recovery that makes people think a down-trend is over. Ultimately results in the down-trend resuming, causing the people who bought during the recovery to lose money.
Fundamental Analysis (FA)
One of the main types of analysis people use to trade and invest in forex. Fundamental analysis is all about analyzing news, information, and events that are ‘Fundamental’ (hence the name) to the price of a currency.
A simple chart that shows price changes through a line.
The Moving Average Convergence Divergence indicator (MACD) is a tool that shows information on the strength, direction, and momentum of the current trend.
Stands for “Moving Average”. A Moving Average is a tool that shows how the average price of a currency has changed. Can be set to show how the average price has changed over different timescales.
Describes a decline that takes place during an up-trend or a rise that occurs during a down-trend.
A sustained rise in price. Can occur in both down-trends and up-trends.
Short for “Relative Strength Index”. The RSI is an indicator that gives information on the direction, strength, and momentum of the current trend, as well as whether the current price is high or low.
A price where, historically, the price of a currency has encountered significant selling pressure.
A price where a currency has historically encounter significant buying pressure.
Tools traders and investors use to get information about the price of a currency that cannot be gained easily via normal means i.e from you looking at a chart. The Moving Average, MACD, RSI, and Bollinger Band tools mentioned earlier are all common technical indicators people use when trading and investing.
Technical Analysis (TA)
The other main type of analysis traders and investors use. Technical analysis is centered around using mathematical tools (indicators) and price information to make decisions on when to buy and sell a currency.
A nickname for Aud/Usd. Sometimes known more simply as Ozzie or Oz.
An old name for Gbp/Usd. In the 1800s, the Gbp/Usd exchange rate was transmitted from the UK to the US through a cable that ran under the Atlantic ocean, hence the name “Cable”.
The Cad/Usd Pair. Other common names include Loonie or Funds.
Nickname for Nzd/Usd.
Stands for “Fear Of Missing Out”. People who buy when they see a large rise taking place often do so because they think they’re missing out on a large profit, rather than buying for a rational reason.
The nickname Usd/Chf.