A beginner’s guide – the trading terms everyone needs to know

by Aldrin Llamas - Trading Floor Manager, at Learn to Trade

The foreign exchange market sees over $5trillion dollars traded within it every single day. But, before anyone starts to trade the forex market, what are the trading jargon and terms you need to know?

Learn to Trade have pulled together the terms you need to know to know about trading:

Ask price: This is the price at which the market (or your broker) will sell a specific currency pair to you. This is the price you can buy the base currency from your broker.

Base Currency: The first currency that is quoted in a currency pair and always has the value of 1. This is always followed by an amount of a second currency needed to exchange into 1 unit of first currency.

Bid price: The bid is the price at which the market (or your broker) will buy a specific currency pair from you. This means that at the bid price, a trader will sell the base currency to their broker.

Candlestick: One of many visual representations of how an asset (such as currency pairing) value has moved over a set amount of time. It is used to denote whether its value has increased or decreased

Exchange rate: This is simply the value of one currency expressed against the other. For example, if EUR/USD is 1.3200, this means that 1 Euro is worth 1.3200 USD.

Pip: A pip is the smallest increment of price movement a currency can make. It is essentially a measurement of a very small percentage change. A pip is always a standardised size and represents the smallest amount that a currency can change. E.g. for GBP/USD 1.34001, the 0.0001 is one pip.

Spread: The spread is the difference between the market’s current price, the buy price and sell price. To break even on a trade, your position must move in the direction of the trade by an amount equal to the spread. When trading forex, the spread will be determined by the wider market.

Stop loss: An instruction you predetermine to the brokerage to automatically buy (close the trade) when the currency value moves down to a specific price, or to sell when the currency value moves up to a specific price.

Forex Broker: A licensed firm that provides traders with access to a trading platform on which you buy and sell currencies

Leverage: This is the ratio of the transactions size compared to the actual investment used for margin. Using leverage allows a client to trade without putting up the full amount. For example, if a trader has $1,000 of equity in an account, you can have leverage of $100,000. Here this means they could make or lose up to 100 times more on each trade.

Margin: This is the monetary deposit required to open or maintain a position (an open trade). A margin can either be called free or used. A used margin is the amount in use to maintain an open position, whereas a free margin is the amount available to open new positions.

These are some of the fundamental and basic terms everyone needs to know before they start their forex trading journey. Once you have familiarised yourself with this trading jargon, people start to focus on the different trading strategies and trends in order to make a success of trading the forex market.

Above all else, it is also worth remembering that when trading, you need proper risk management. You can get help on reading the market, opportunities and risks from Learn to Trade.

Learn to Trade run a full range of forex trading courses, including a free introduction to forex seminar that they run is sessions across the country, and they have a Trading Centre of Excellence in Manila. To book onto a course or for more information visit their website.