Forex trading keywords for beginners
Let’s start with a fun fact: Forex is a portmanteau between foreign currency and exchange!
Foreign exchange means changing one currency into another for several reasons: trading, tourism and commerce.
A unique aspect of the foreign exchange market is that it does not have a central marketplace.
Trading currency is conducted through electronic over-the-counter software, meaning all transactions occur through computer networks between all traders worldwide.
So if you’re looking for the best forex trading software, there are many options available online.
What is the forex market?
So, the foreign exchange market is where currencies are traded, and they need to be traded if you want to do business.
The market trades for 24 hours a day for five and a half days per week and covers almost all time zones. The major financial centres include Tokyo, Sydney, Hong Kong, Singapore, Zurich, Frankfurt, Paris, London and New York.
This means when the day ends in the US, it just begins in Tokyo.
The forex market is always buzzing with activity which means prices are ever-changing.
As a beginner, let’s break down some of the jargon used in the market to understand what everything means!
Forex dictionary
Below is a brief explanation of some Forex terms to help you understand the words they use when trading.
Spot forex
This involves buying and selling real currency.
If you buy some GBP and exchange it for EUR, you can wait until the value of GBP increases and exchange it again – receiving more money than what you initially spent.
CFD
CFD stands for ‘Contract for Difference’. Simplified, this means that you don’t have to buy or sell currency to take advantage of the price movements – you don’t have to own anything physically to trade it.
CFDs are available for stocks, bonds, cryptocurrencies and more, so if you are a keen trader and want to keep track of all your assets, always find the best forex trading software for you.
Pip
Pip is the word used to call the base unit in the currency pair’s price (e.g. USD/GBP). This means that if the bid price between the pair changes, e.g. from 1.15422 to 1.15432, there has been a difference of 1 pip.
Spread
Spread refers to the difference in the purchase price and the sale price of a currency pair.
Popular pairs such as GBP/USD or EUR/GBP usually have low spread, and less common couples have a higher spread.
A forex trade is profitable when the value of the pair finally exceeds the spread.
Margin
The money in the account you are trading from when you open a trade is called the Margin.
Alas, the average trader, especially a beginner, doesn’t have a high enough margin to make trades to make a profit; therefore, many brokers offer leverage.
Leverage
Leverage is the most crucial concept for beginners in Forex trading.
Leverage is the capital provided by a Forex broker to their client, which allows them to increase the number of trades they can make.
You have to remember that leverage will maximise profits from successful trades to the same degree it will multiply your losses should the trade not go well.
So when making trades using leverage, you must be careful with taking risks as that can set you back.
There are contingencies in place – ESMA regulated brokers offer negative balance policies which means your balance can’t fall below zero. As a result, you won’t owe any money to the broker.
Conclusion
To summarise, this little dictionary guide offers more straightforward explanations for a few terms used in the Forex trading market.
When reading beginner guides on entering the trading market, you will understand what they are talking about and apply what you learn when creating your trading strategies.
Don’t forget to check out the best forex trading software to make things easier for yourself and have all the trading information you need in one place.
Author Bio:
Kornelija Dedelaite is a writer and researcher who lives in London. She is working for Pearl Lemon Placements. When she is not writing, she can be found clutching onto her camera or planning her next big trip abroad.
