Essential Forex Trading Terminology
Updated: March 21, 2013 at 11:51 AM
Like many specialized professional fields, the forex market has developed and commonly uses a set of brief terms or phrases that together form the set of forex trading jargon terms.
Some of these special jargon words are also commonly used among dealers trading in other financial markets, while some are pretty much unique to foreign exchange trading.
The following two sections define an essential set of forex dealing jargon terms. They are broken down into two groups. The first contains those terms in use among professional traders, while the second contains those terms that pertain more often to retail forex traders that use online forex brokers to execute transactions.
Professional Forex Trading Terminology
Other important forex jargon terms commonly used in professional forex dealing situations include the following:
Bid - The exchange rate that the market maker is willing to purchase the base currency in a currency pair at.
Going Long - This term means to purchase a currency pair, which involves buying the base currency and selling the counter currency.
Going Short - The opposite of going long, going short involves selling the base currency and buying the counter currency.
Offer - The exchange rate that the market maker is willing to sell the base currency in a currency pair at.
Pip - Literally stands for "Percentage in Point" and represents the minimum price fluctuation possible in a forex transaction. A pip is typically the last decimal of a currency pair's quoted exchange rate and is equal to 0.0001 for most currency pairs. Also sometimes called a "point".
Spread - The spread consists of the difference between the bid or purchase price and the offer or sale price provided by a market maker. The tighter the bid-offer spread made by the market maker, the better the price usually seems to their customer.
Retail Forex Trading Terminology
In addition to using most of the terms that professional forex dealers employ, smaller retail forex speculators trading through online forex brokers will probably also come across the following retail forex dealing jargon terms:
Leverage - The ratio of the amount of money on deposit you need for a given transaction size. Leverage is usually quoted as a ratio such as 1:50 which means that you will need $100 on deposit to control a trading position of $5,000.
Lot Size - The minimum trading unit for a forex broker account. The lot size is usually 100,000 base currency units for Standard accounts, 10,000 base currency units for Mini accounts and 1,000 base currency units for Micro accounts.
Margin - The amount of money you need to have on deposit with a forex broker to make a forex trade in a certain amount. If your leverage ratio is 1:50 then you need to have $100 of margin on deposit to trade a forex position with a $5,000 notional amount.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.