7 Terms in Forex You Should Know Before Starting to Trade

Forex trading is an exciting and potentially lucrative investment opportunity, but it can also be daunting for beginners. One of the most important things to understand before entering the market is forex terms. In this article, we'll cover 7 key terms you need to know before you start trading. 

 

1   1. Currency Pair

A currency pair is a combination of two currencies that trade against each other in the forex market. For example, the most commonly traded currency pair is EUR/USD, with the Euro as the base currency and the US dollar as the quoting currency. Other popular currency pairs are GBP/USD, USD/JPY and AUD/USD. 

2.  2.  Bid Price and Ask Price

The bid price is the price at which a buyer is willing to buy a currency pair, and the ask price is the price at which a seller is willing to sell a currency pair. The difference between the bid price and the ask price is called the spread. The tighter the spread, the more liquid the currency pair. 

 

3.   3. Spread 

The spread is the difference between the bid price and the ask price. This is the cost of trading forex and is usually measured in pips. For example, if the EUR/USD pair has a bid price of 1.2000 and an ask price of 1.2005, the spread is 0.0005 pips. 

   

4   4. Pip 

A pip is the smallest unit of price movement in forex trading. It's usually the fourth decimal place in a currency pair's price quote, except for pairs that include the Japanese yen, where it's the second decimal place. For example, if the EUR/USD pair moves from 1.3000 to 1.3005, that's a movement of 5 pips.

 

5.   5. Leverage

Leverage is a tool that allows traders to increase their profits by borrowing money from their broker. This allows traders to manage positions larger than their account balance. However, leverage can magnify both your gains and losses, so it's important to use it sparingly. 

   

6.  6.  Margin 

Margin is the amount a trader must hold in an account to maintain a position. This is a kind of security that protects the broker from loss. When traders use leverage, they are essentially borrowing margin from their broker. 

   

7.   7. Stop-Loss Order 

A stop loss order is an order that allows a trader to automatically close a position if the market moves in the opposite direction. This is how you limit potential losses and manage risk. For example, if a trader buys his EUR/USD pair at his 1.1000 and sets a stop loss order at his 1.0980, the trade will automatically close when the price drops to his 1.0980, thereby causing the trader's Loss is limited. 

   

These are just some of the most important forex trading terms you will encounter. Understanding these terms and what they mean will help you make informed trading decisions and navigate the forex market with confidence.