Forex Trading basic concepts and terms

Forex trading is the business of buying or selling the currencies of different countries. Where as equity traders trade the stock market, currency traders trade the currencies of individual countries against each other in units called currency pairs. The currency market processes over $4 trillion transactions every day and is larger than all equity markets combined, which handle around $25 billion transactions per day. This makes the currency market the most liquid of all traded markets.

In the process of learning to trade the forex market, forex traders must become familiar with the following forex terms, on the elementary level, before moving on to use more advanced trading concepts. Here are the basic terms and concepts that every forex trader must be familiar with:

Currency pairs - All currency transactions are executed or traded in pairs. A currency pair is a trading instrument comprising two separate currencies, such as the Euro and the US dollar, which make up the eur/usd pair. The first currency listed is usually referred to as the base currency (transactions currency) and the second as the quote currency (payment currency, settlement currency). The currency pair is a way of stating the cost of converting one unit of the base currency for the counter currency. Using the eur/usd as an example, if the current rate of the eur/usd is 1.5000, it would cost US$1.50 to buy one Euro. Below is a list of the most popular currencies along with their symbols and nicknames:

Symbol Country Currency Nickname
USD United States
EUR Euro members Euro Fiber
Great Britain Pound
CHF Switzerland Franc
Dollar Loonie
AUD Australia
NZD New Zealand

Trading Hours - The currency markets is open 24 hours from 3pm EST on Sundays, when the Australian market opens, to 3pm EST on Fridays, when the US market closes. There is generally no price movement on Saturdays.

Lot size - A lot size is the standard unit size of a transaction. A standard lot is equal to 100,000 units of the base currency, a mini lot is 10,000 units and a micro lot is 1,000 units. However, some brokers will allow trade sizes as low as 1 unit.

Leverage – Leverage is a loan facility that is offered by your broker to allow forex traders to trade multiples of what their account balance could normally buy. For example, using a leverage of 100:1 on an account with a $2,000 balance could finance a trade worth $200,000. Leveraging allows forex traders to multiply their profits but it also works in reverse to magnify trade losses.

Margin Call – Margins calls occur when a forex brokers closes all open trades on a leveraged trade account. They do this when the net asset value of an account falls below a certain percentage of the trading capital. In many case this will cause a 40% or greater loss to the trading account. In other words, if the trades go negative by greater than 40% of the account balance, the brokers will close all open trades to ensure that they (the broker) doesn't loose any money.

Carry Trade – The carry trading is a forex trading strategy by which a trader seeks to profit from the difference in interests of two currencies. To do this, the trader buys the currency with the higher interest rate and sells the one with the lower rate.

Fundamental Analysis - Currency traders who speculate on the direction of a currency pair based on their interpretation of economic data, geopolitical, and natural events, are using fundamental analysis.

Technical Analysis – Is a trading style that analyses price charts and technical indicators to determine the likely price direction of a currency pair trade.

Market Regulators
– Market regulators set rules under which brokers operate. The major regulators in the forex market are the National Futures Association (NFA), the Commodity Futures Trading Commission (CFTC) and the Financial Service Authority (FSA). Be sure to check that a broker is registered with one of these entities before you start doing business with them.

Short position – A short position is a bearish trade position, or one that expects the market or trade instrument to go down.

Long position – A long position is a bullish trade position, or one that expects the market or trade instrument to go up.

Market Order – This is an order to buy or sell at the current market price.

Limit Order – This is an order to buy or sell at a pre-determined price that the market is expected to reach some time in the future.

Stop-Loss Order – A stop loss is an order that restrict losses by exiting a bad trade once it reaches a pre-determined.

A Trailing Stop-Loss – This is also a stop loss but the objective of using a trailing stop is to lock in profits on a trade that is already positive.

Limit Entry Order – A Limit entry order is an order to buy below the market or sell above the current market price at a pre-determined price. This entry strategy is used if it is believed that the price will reverse direction at the pre-determined price.

Stop-Entry Order – This is an order to buy above the market or sell below the market at a pre-specified level. This entry strategy is used when it is believed that the price will continue in the same direction.

OCO Order/One Cancels Other - An OCO order is an order that cancels another pending order if it is executed.

A Pip - A pip is the smallest unit of movement that is made by a currency pair. For example, if the aud/usd moves from 1.8800 to 1.8900, the currency pair is said to have moved 100pips.

Spreads – A currency spread is the cost of entering a trade on that currency and is reflected in the difference between the 'bid' and 'ask' prices of a currency pair.

Bid and Ask Prices - There are always two prices quoted to a trader, a bid and a ask price. If the trader buys a currency pair, he will be entered using the 'ask price' or the 'bid price' when a currency pair is sold.