Forex Trading Terminology

Traders have their own language. They use words that might confuse a “newbie” or a non-trader. Trading lingo is almost a type of secret handshake that lets other traders know that you’re a member of the trading community.

There is a method to the madness of trading terminology. Many of these terms allow a trader to express a concise thought in one or two quick syllables. In any discussion involving trading, you’ll often hear the terms long, short, and flat. In fact, every trader is always long, short, or flat. What do these terms mean?

Going Long. When a trader says he is “going long”, he is placing a trade that will become profitable if the exchange rate rises.

Selling Short. When a trader says he “going short”, he is placing a trade that will become profitable if the exchange rate falls.

Flat. When a trader says he is “flat”, he is neither long nor short. This trader has no open position in the market.

What is a Pip?

A pip is the smallest increment of price in the forex market. It is an acronym for the phrase “percentage in point”.

The reason why this is a more precise representation is that it allows us to show the smallest possible increment of change in the exchange rate. For example, suppose the exchange rate of “U.S. dollar/Canadian dollar” rises from 1.1000 to 1.1001, we could say that the exchange rate rose by one pip – the smallest increment of change possible.

The Major Currencies

Below is the list of some of the actively traded currencies and their currency codes.

  • EUR = Euro
  • GBP = Great Briton Pound
  • USD = U.S. Dollar
  • JPY = Japanese Yen
  • CHF = Swiss Franc
  • CAD = Canadian Dollar
  • AUD = Australian Dollar
  • NZD = New Zealand Dollar

Nicknames

Many of these currencies possess nicknames. Traders like to use slang, so you need to know these nicknames in order to understand what they are saying. Here are some examples:

  • U.S. Dollar                     “greenback”
  • British Pound                “cable” or “sterling”
  • Euro                                “single currency”
  • Swiss Franc                   “swissy”
  • Canadian Dollar           “loonie”
  • Australian Dollar         “Aussie”
  • New Zealand Dollar    “kiwi”

Popular Currency Pairs

Below are some of the popular currency pairs:

  • EUR/USD     Euro-U.S. Dollar
  • USD/JPY       U.S. dollar-Japanese Yen
  • GBP/USD     Great Briton Pound-U.S. Dollar
  • USD/CHF     U.S. Dollar-Swiss Franc
  • AUD/USD     Australian Dolar-U.S. Dollar
  • USD/CAD     U.S. Dollar-Canadian Dollar
  • NZD/USD     New Zealand Dollar-U.S. Dollar
  • EUR/JPY      Euro-Japanese Yen
  • EUR/GBP     Euro-Great Briton Pound
  • GBP/CHF     Great Briton Pound- Swiss Franc
  • EUR/AUD     Euro-Australian Dollar

Forex Trading Terminology

Bid-Ask Spread

Thе difference bеtwееn thе bid (trader’s sale price оr thе dealer’s cost price) аnd thе ask (trader’s cost price оr thе dealer’s sale price) іѕ called thе spread. Thе bid аnd ask аrе quoted іn pairs. Fоr example .709474-71 EUR/USD wоuld mean thаt .709474 іѕ thе bid price аnd .709471 іѕ thе ask price. Market makers quote bоth bid аnd ask prices аnd profit frоm thе bid ask spread.

Lots

In the forex market, traders buy and sell “lots.” Tha smallest position a trader can take in the forex market is “one lot.”

Each lot consists of 100,000 units of currency. So if you are lone lot of the EUR/USD currency pair, in reality you are long 100,000 units of base currency and short 100,000 units of counter or quote currency. Therefore, a trader who is long one lot of the EUR/USD currency pair is actually long 100,000 Euros, and simultaneously short an equivalent amount of U.S. dollar.

Entry

The entry or entry point is the point at which a long or short position opened. This is where the trader begins.

Stop or Protective Stop

A stop order is an order that is placed to exit a trade if the exchange rate makes an unfavourable move. This is done to keep losses minimal and under control.

Target

A target is placed to exit a position if the exchange rate makes a favourable move. It is also referred to as “take-profit” order.

Spot Market

The spot price is the value of an object or item right now, or “on the spot.”

Liquid

A liquid or “thick” market is a market in which selling and buying can be accomplished with ease. This is because there are more buyers and sellers in a liquid market like forex. A market with few buyers and sellers is referred to as “illiquid.”

Leverage

Leverage is the ability to control a large amount of capital with a comparatively small amount of capital.

For example, one lot of a currency pair has a value of 100,000 units of currency-100,000 Euros or 100,000 U.S. Dollars, and so on. Do we need to posses 100,000 Euros or U.S. Dollars in order to trade one lot of EUR/USD currency pair?

No, we can control one lot with a little as 1/200 th of that amount. We could say that a person who controls one lot in this fashion is using 200:1 leverage. The amount of leverage used by traders varies based on their individual needs and their “comfort zone.”

Support

Support is a point on the chart where the exchange rate has shown a tendency to stop falling. Support is not a exact price point, but a area. Think of support as floor beneath you.

Resistance

Resistance is a point on the chart where the exchange rate shown a tendency to stop rising. Like support, resistance is an area, not an exact price level. Think of resistance as the ceiling above you.

Breakout

A breakout occurs when the exchange rate moves breaks beneath support or above the resistance.

Trend

A trend occurs when the rate moves consistently in one direction, either higher or lower.

Range

A range occurs when the exchange rate has no clear direction and is contained within visible support and resistance levels.

Consolidation

A consolidation occurs when the exchange rate is trapped in an ever narrowing area. Consolidation often leads to breakouts.

Volatility

Volatility is measure of the amount by which a currency pair is expected to fluctuate over a given period. A volatile currency pair tends to make rapid, forceful moves, while a pair that lacks volatility tends to trade in a more predictable fashion.