The Basics

Here are some of the most of the used terminologies when trading forex:

Pips

The unit of measurement to express the change in value between two currencies is called a “pip.” If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP. A pip is usually the last decimal place of a price quote. Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places). For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

Short

When used in trading, short refers to a position that makes a profit if an asset’s price decreases. Usually used in context as “going short” or “taking a short position” or “selling”.

Long

When used in trading, long refers to a position that makes a profit if an asset’s market price increases. Usually used in context as “going long” or “taking a long position“.

Bearish

The term “bearish” means a trader is pessimistic and that the price will go lower from where it currently is. If you are bearish on a market, you believe that the market is going to fall. A “bearish market” is when the price is in a downtrend, marked by lower highs and lower lows. The term is based on a bear swiping downwards with its paw.

Bullish

The term “bullish” means a trader is optimistic that the price will go higher from where it currently is. If you are bullish on a market, you believe that the market is going to rise. A “bullish market” is when the price is in an uptrend, marked by higher highs and higher lows. The term is based on a bull attacking upwards with its horns.

Ranging

A ranging market is a market where the currency pair prices move back and forth between a price range of a high price level and a low-price level. The highest price level is formed with a resistance line, whereas the lowest price level is formed with a support line.

Support

In a downtrend, prices fall because there is an excess of supply over demand. The lower prices go, the more attractive prices become to those waiting on the sidelines to buy the shares. At some level, demand that would have been slowly increasing will rise to the level where it matches supply. At this point, prices will stop falling. This is support. Support can be a price level on the chart or a price zone. In any event, support is an area on a price chart that shows buyers’ willingness to buy. It is at this level that demand will usually overwhelm supply, causing the price decline to halt and reverse.

Resistance

Resistance is the opposite of support. Prices move up because there is more demand than supply. As prices move higher, there will come a point when selling will overwhelm the desire to buy. This happens for a variety of reasons. It could be that traders have determined that prices are too high or have met their target. It could be the reluctance of buyers to initiate new positions at such rich valuations. It could be for any other number of reasons. But a technician will clearly see on a price chart a level at which supply begins to overwhelm demand. This is resistance. Like support, it can be a level or a zone.

Stop-Loss

A stop-loss order is a type of order used by traders to limit their loss or lock in a profit on an existing position. Traders can control their exposure to risk by placing a stop-loss order. Stop-loss orders are orders with instructions to close out a position by buying or selling a security at the market when it reaches a certain price known as the stop price.

Limit Order

A limit order is an order placed to either buy below the market or sell above the market at a certain price. This is an order to buy or sell once the market reaches the “limit price”. You place a “Buy Limit” order to buy at or below a specified price. You place a “Sell Limit” order to sell at a specified price or better. Once the market reaches the “limit price” the order is triggered and executed at the “limit price”.

Lot Size

A Lot in Forex trading is the size of trade/position that you will open. 1 Lot in standard Forex trading on a currency pair is the equivalent of 100,000 units of the base currency of the pair. If we look at EUR / USD, this means that opening a trade in USD would mean the trade size is $100,000. EUR being the base currency. 1 standard PIP is worth $10. This means a 10 PIP incremental movement in a buy trade, this would represent a $100 gain.

Margin

Margin is the initial capital that a trader needs to put up in order to open a position. Margin also gives a trader the opportunity to open a larger position size. When trading with margin, the trader only needs to put forward a percentage of the full value of a position in order to open the trade. Margin opens the door to leveraged trading but, be wary, margin magnifies both profits as well as losses.

Spread

Forex brokers will quote you two different prices for a currency pair: the bid and ask price. The “bid” is the price at which you can SELL the base currency. The “ask” is the price at which you can BUY the base currency. The difference between these two prices is known as the spread. Also known as the “bid/ask spread“. The spread is how “no commission” brokers make their money. This spread is the fee for providing transaction immediacy. This is why the terms “transaction cost” and “bid-ask spread” are used interchangeably. Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade.