Lesson 4: Forex Trading Terms
Summary
Foreign exchange (Forex) trading involves a plethora of terms that can be baffling for newcomers. Grasping these terms is essential for any trader looking to navigate the forex market effectively.
This article provides a comprehensive overview of the commonly used forex trading terms.
Pips
A ‘pip’ stands for ‘percentage in point’ or ‘price interest point.’ It represents the smallest price move that a currency pair can make. For most currency pairs, a pip is the fourth decimal place (0.0001). For example, if the EUR/USD moves from 1.1050 to 1.1051, it has moved one pip. However, for pairs involving the Japanese Yen, a pip is the second decimal place (0.01).
Spreads
Buy/Sell
In forex trading, ‘buy’ and ‘sell’ refer to the direction of a trade. A ‘buy’ (or ‘long’) position means the trader expects the currency pair’s price to rise. Conversely, a ‘sell’ (or ‘short’) position means expecting the price to fall.
Leverage
Leverage in forex allows traders to control large positions with a relatively small amount of capital. It’s expressed as a ratio, such as 50:1. This means that for every $1 in the trader’s account, they can control $50 in the market. Leverage can amplify profits, but it also increases the potential for substantial losses.
Margin
Margin is the amount of capital required to open and maintain a leveraged position. It’s like a good faith deposit with the broker. There are two types of margins: ‘used margin’ is the amount currently used for open positions, and ‘free margin’ is the amount available for opening new positions.
