If you’re a beginner in forex trading, you’ll need to know the language, I mean the common words used. This is learning from scratch which will propel you to have full knowledge of the basics in forex as a beginner.
Common Terms in Forex Trading
1. Spot Forex
This form of Forex trading involves buying and selling the real currency. For example, you can buy a certain amount of pound sterling and exchange it for euros, and then once the value of the pound increases, you can exchange your euros for pounds again, receiving more money compared to what you originally spent on the purchase.
2. CFDs
The term CFD stands for “Contract for Difference”. It is a contract used to represent the movement in the prices of financial instruments. In Forex terms, this means that instead of buying and selling large amounts of currency, you can take advantage of price movements without having to own the asset itself.
Along with Forex, CFDs are also available in stocks, indices, bonds, commodities, and cryptocurrencies. In all cases, they allow you to trade in the price movements of these instruments without having to buy them.
3. Pip
A pip is the base unit in the price of the currency pair or 0.0001 of the quoted price, in non-JPY currency pairs. So, when the bid price for the EUR / USD pair goes from 1.16667 to 1.16677, that represents a difference of 1 pip.
4. Spread
The spread is the difference between the purchase price and the sale price of a currency pair. For the most popular currency pairs, the spread is often low, sometimes even less than a pip! For pairs that don’t trade as often, the spread tends to be much higher. Before a Forex trade becomes profitable, the value of the currency pair must exceed the spread.
5. Margin
Margin is the money that is retained in the trading account when opening a trade. However, because the average “Retail Forex Trader” lacks the necessary margin to trade at a volume high enough to make a good profit, many Forex brokers offer their clients access to leverage.
6. Leverage
This concept is a must for beginner Forex traders. The leverage is the capital provided by a Forex broker to increase the volume of trades its customers can make.
Example:
The face value of a contract or lot equals 100,000 units of the base currency. In the case of EUR/USD, it would be 100,000 euros.
If you use a 1:10 leverage rate and have 1,000 euros in your trading account, you can trade a currency pair with a $10,000 position size.
If the trade is successful, leverage will maximise your profits by a factor of 10. However, keep in mind that leverage also multiplies your losses to the same degree.
Therefore, leverage should be used with caution, regardless of whether we are talking bout trading for beginners or experts. If your account balance falls below zero euros, you can request the negative balance policy offered by your broker. ESMA-regulated brokers offer this protection. Using this protection will mean that your balance cannot move below zero euros, so you will not be indebted to the broker.
7. Bear Market
This is a term used to describe the stock market when it is moving in a downwards trend. In other words, when the prices of stocks are falling. If a stock price falls deep and fast, it’s considered very bearish.
8. Bull Market
The opposite of a bear market is a bull market. When the stock market is experiencing a period of rising stock prices, we call it a Bear Market. An individual stock, as well as a sector, can also be called bullish or bearish.
9. Beta
A metric indicating the relationship between a stock’s price relative to the whole market’s movement. If a stock has a beta measuring 1.5, this means the when the market moves 1 point, this stock moves 1.5 points, and vice versa.
10. Broker
A broker is a person or company that helps facilitate your buying and selling of an instrument through their platform (in the case of an online broker). They usually charge a commission.
11. Bid
The bid is the price traders are willing to pay per share. It is set against the asking price, which is the price sellers are willing to sell their shares for. What do we call the difference between the bid and the asking price? The spread.
12. Exchange
This is a place where trades are made. Two well-known stock exchanges are the NASDAQ and the New York Stock Exchange (NYSE).
13. Close
This is the at which an exchange closes and trading stops. Regular trading hours for the NASDAQ and the NYSE are from 9 a.m. to 4:30 p.m. Eastern time. After-hours trading continues until 8 p.m.
14. Day Trading
This is when traders buy and sell within a day. Day trading is a common trading strategy. However, if someone day trades, they may also make long-term investments as well (a long-term portfolio).
The following two terms only apply to share trading:
15. Dividend
A proportion of the earnings of a company is paid out to its shareholders, the people who own their stock. These dividends are paid out either quarterly (four times per year) or annually (once per year). Not every company pays its shareholders dividends. For example, companies that offer penny stocks likely don’t pay dividends.
16. Blue Chip Stocks
These are stocks in big, industry-leading firms. Many traders are attracted to Blue chip stocks because of their reputation for paying stable dividend payments and demonstrating long-term sound fiscal management. Some believe that the expression ‘blue chip’ is derived from the blue chips used in casinos, which are the highest denomination of chips.
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Related– 10 Things You Should Know Before Trading Forex