Lesson 2: Key forex terms

Published 22.07.2014 at 11.33 AM.

I’ve received a lot of requests to tell about forex terms I use in my articles. Though I try to put it simply and write in layman’s terms, sometimes I resort to trader’s terms. For example, when a car mechanic diagnoses a trouble with a cardan drive shaft, they will definitely tell you so rather than saying there is a trouble with a detail coupling a gearbox and wheels. Usually, only another car mechanic will understand them.

Therefore, to understand each other, we need to speak the same language. Until you find your own ‘Grail’ strategy, you will have to rely on forecasts of other traders. And your trading decisions and profits will depend on correct understanding of an outlook.

Bull is a market participant who is sure about price growth; a speculator, trader or investor who goes long.

Bear is a market participant who goes short.

Base currency is the first currency in a currency pair that a client wants to buy or sell for the quote currency. For example, the US dollar is the base currency in the USD/JPY pair.

Currency pair is an instrument of a conversion operation based on changes in one currency exchange rate against another. For instance, EUR/USD is a currency pair.

Long and short positions. To ‘go long’ means to buy a base currency in a pair, while ‘going short’ means selling a base currency. If a trader buys 100 euros for US dollars, you can say the trader went long on the euro, or opened a long position.

BUY 100 EURUSD – to go long on the euro

SELL 100 EURUSD – to go short on the euro

Pip stands for a percentage in point or price interest point. A pip is the smallest unit of change in a currency price. Most quotations of currency pairs are specified up to the fourth number after the dot.

Spread is the difference between the ask (sell) and bid (buy) prices.

Take Profit is an order to fix profits. If the market moves alongside your position and your TP level is reached, your deal is closed automatically.

Stop Loss is an order to fix losses. If the market moves against your position and reaches your SL level, the deal is closed automatically.

Trend is a definite price movement in a particular direction. A trend can go either upwards or downwards.

Consolidation indicates resumption of the previous trend.

Flat (sideways). If the price is trading flat, it means it is neither rising nor falling.

Divergence is a situation when a price hits a fresh peak, but a technical indicator does not. It points to a trend reversal.

Breach (break) is a situation when a price breaks support or resistance.

Gap is a situation when the high of the previous day turns out to be lower than the low of the current day, or vice versa. A price range with no quotes makes a gap.

Volatility is an indicator for changes in the market price. It makes up $5 ± $5 in absolute, or 5% ± 5% of the initial value.

Support is a price level where a lot of buyers are expected to enter the market or where a lot of buy orders are concentrated.

Resistance is a price level where a lot of sellers are expected to enter the market or where a lot of sell orders are concentrated.

Hedging is a policy of neutralizing risks through making opposite deals so that potential profits and losses are offset.

Cut losses means to fix a losing position.

Swap is the difference between two currency rates over the same time period. Swap can be positive or negative. For example, when you hold long positions on AUD/USD, you will receive a daily swap (except for weekends). From Wednesday to Thursday, a triple swap is credited/withdrawn. Swap may be called a sort of a payment for rollover (holding a position overnight).

Margin is the funds a trader uses when making transactions. The higher the leverage is, the larger margin a trader has 

Margin call is a situation that occurs when a trader lacks funds on their account and receives a demand asking them to deposit funds or close positions. The client is usually informed of this via email or a trading platform. If the demand is not met, the broker has the right to close all or several positions of the trader.

Next time, I’ll tell you about alternative names of currency pair.

Good luck and stay away from margin calls.{#angel}

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