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9 Basic Forex Terms You Should Know Before Trading
These common terms used in forex trading are the starting point for every novice trader. They will help you understand the forex market better.
Updated June 13, 2024.
Trading in the foreign exchange (forex) market can be a daunting experience for a beginner. Forex terminology can push everybody off.
But, with a basic understanding of terms used in forex trading and concepts, you can quickly become comfortable trading fiat currencies.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should not be considered advice.
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1. Currency Pairs
Currency pairs are the two currencies that make up a currency exchange rate.
A currency pair is expressed as the amount of base currency units needed to purchase one unit of the quote currency.
They are divided into three main categories:
- Major pairs
- Cross pairs
- Exotic pairs
Major Pairs
Major Pairs are the pairs of currency that are most commonly traded.
They include:
- EUR/USD
- USD/JPY
- GBP/USD
- AUD/USD
Cross Pairs
Cross Pairs are currency pairs that do not include the US dollar.
They most commonly include:
- EUR/GBP
- NZD/JPY
- CHF/JPY
Exotic Pairs
Exotic Pairs are currency pairs that involve less commonly traded currencies.
Some examples are:
- EUR/TRY
- USD/MXN
- CAD/JPY
» Learn more about CFDs on forex currency pairs available for trading
2. Exchange Rate
An exchange rate is a price for exchanging one currency for another.
Exchange rates are determined by a variety of factors, such as supply and demand, economic conditions, and political stability.
Exchange rate can be:
- Floating
- Fixed
Floating exchange rate
The value of the currency is determined by the market.
It can change from moment to moment.
The EUR/USD has a current exchange rate of 0.97. This means that one euro is worth 0.97 US dollars.
Fixed exchange rate
The value of the currency is set by a central bank.
It remains constant.
For example, the Danish Krone is fixed to the euro at 7.4 DKK per 1 EUR.
3. Leverage
Leverage is the use of borrowed capital to increase one's buying power.
You can use leverage to trade larger amounts of currency than what you have in your trading account.
Let's say you have a trading account with a brokerage that offers 50:1 leverage.
It means that you can trade up to the value of $50 for every $1 in your account.
If you’re still a forex beginner, it wouldn't be the best idea to start using leverage.
It is safer to start with a demo account that offers leverage and practice trading without risking capital. Create a free demo account with Fortrade and start practicing now.
» Find out more: What is leverage in forex and how does it impact trading?
4. Bid / Ask Price / Spread
Bid price
The bid price is the highest amount of money a buyer is willing to pay for a currency pair.
If the EUR/USD bid price is 0.96, this means that a buyer is willing to pay 0.96 US dollars for one euro.
Ask price
The ask price is the lowest amount of money a seller is willing to accept for a currency pair.
If the ask price of EUR/USD is 0.97, this means that a seller is willing to accept no more than 0.97 US dollars for one euro.
Spread
The spread is the difference between the bid and ask price. It is typically expressed as a percentage of the mid-market rate.
However, it can vary depending on the market conditions.
In the examples we used the bid price for EUR/USD was 0.96 and the ask price was 0.97.
This results in a spread of 0.01.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of the instrument itself
» Learn how Bid-Ask spread works in forex trading
5. Long / Short Position
- Long position: When an investor opens a buy trade of a CFD currency pair, expecting its value to increase. The investor will then open a sell trade at a later point in time at a higher price. This way, they will make a potential profit.
- Short position: When an investor opens a sell trade of a CFD currency pair, expecting its value to decrease. The investor will then open a buy trade at a later point in time at a lower price. By doing this, they are making a potential profit.
» Learn more on Long vs. Short position in trading
6. Margin
A margin is the amount of money you must put up in order to open and hold a position.
It's expressed as a percentage of the total position size.
This money usually acts as collateral for the brokerage. It covers any losses if the trade goes against the trader.
Key margin-related terms
- Used margin: The amount of money used to open and maintain a position.
- Free margin: The amount of money available to open new positions.
- Margin call: The brokerage can place a margin call on the account when a trader/investor has an account that has fallen below the brokerage’s minimum margin requirement. If this happens, the investor would have to either deposit additional funds into their account, or close some of the trades they are holding.
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» Here's how to avoid margin calls
7. Pip
Pip is the smallest unit of measurement when trading currencies. It generally refers to 1/100th of 1% (or 0.0001).
If the EUR/USD exchange rate moves from 0.96123 to 0.96124 this would be considered one pip movement.
Key Pip-Related Terms
- Fractional pips/pipettes: Even smaller units of measurement, expressed as 1/10th of a pip. For example, if the EUR/USD exchange rate falls from 0.961221 to 0.961220 this would be considered a 0.1 pip, or one-tenth of a pip movement.
- Pip value: The amount by which a currency pair moves when the exchange rate changes. It is calculated by multiplying one pip (0.0001) by the amount of currency being traded. For example, if you traded 10,000 units of EUR/USD and the exchange rate moved by 1 pip, the value of this movement would be 10,000 x 0.0001 = 1 USD.
» Want to learn how to calculate pip's value in forex trading?
8. Lot size
A lot size is the number of currency units being traded in a forex position.
Types of Lot Sizes:
- Standard lot: The equivalent of 100,000 units of the base currency in a forex trade.
- Mini lot: 10,000 units of the base currency.
- Micro lot: 1,000 units of the base currency.
Brokerages can also offer fractional lot sizes. They give traders more flexibility to control the size of their trades.
For example, a fractional lot size might be 0.01 of a standard lot. This is equal to 1,000 units of the base currency.
9. Bear Market / Bull Market
Bear Market
A bear market is a market trend in which prices are falling and investors are selling off their holdings.
In the forex market, this means that the value of a currency is decreasing.
Let's say the EUR/USD exchange rate continues falling for months on end (usually 3-6 months). In this case, analysts would say that we’re in a bear market.
Bull Market
A bull market is a market condition in which prices are rising and investors are buying up assets. This leads to price increases.
In the forex market, this means that the value of a currency is increasing.
A trader could open long positions when the market is in a bullish trend, and then sell when it turns bearish.
Alternatively, they could short-sell when the market is in a bearish trend. This way, they could potentially make profits on the falling prices.
» Wondering whether you should buy or sell during bullish markets?
Using Forex Terms in Practice
The forex trading terms provided are meant to be a starting point to help you get started. With the expertise we have on hand, we wanted to make these basic forex terms and trading a smooth process.
Opening a trading account with Fortrade can help you on your path to making a potential profit.
Create Fortrade Demo Account
Practice real-time trading with virtual money.
Note: Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The above should only be considered as an example for a better understanding and clarity about investments in CFDs and in no way should constitute or be understood as investment advice.
