Are you new to trading and unsure about some of the terminology you see? Familiarising yourself with key forex terms is a crucial aspect of your trading education. The challenges that are attached to trading may seem difficult enough without the use of industry jargon thrown into the process.
We explain 8 of the key forex terms you may come across which will help you to build your trading knowledge.

1. Pips and Pip Value

Pips and pip value are fundamental concepts in trading, especially for beginners. A pip, short for 'percentage in point,' represents the smallest unit used to measure changes in the value of an asset.

In Forex trading, prices are often quoted with four decimal places. Each movement in the fourth decimal place signifies one pip. For example, if the price of the EURUSD currency pair moves from 1.9010 to 1.9015, it indicates a change of 5 pips. Some platforms may even display fractional pips, known as pipettes, meaning the price can move by, for instance, 5.2 pips.

When you initiate a trade, your profits or losses are influenced by both the pip value and the number of pips the price moves. Let's say you open a trade valued at $10 per pip. If the price moves in your favor by 50 pips, you would earn a profit of $500 (50 pips * $10).

2. Bid, Ask, and Spread

These are the most basic trading terms that you must know. As you may have noticed, price quotes in online trading are usually expressed in pairs. The Bid is the first price in the quote, whereas Ask is the second price.

  1. Bid: The bid price is the highest price a buyer is willing to pay for a currency pair at a given moment. It represents the demand for the currency and is always lower than the ask price.

  1. Ask: The ask price, also known as the "offer" or "sell" price, is the lowest price at which a seller is willing to sell a currency pair. It reflects the supply of the currency and is always higher than the bid price.

  1. Spread: The spread refers to the difference between the bid and ask prices of a currency pair. It represents the transaction cost incurred by traders and is typically measured in pips. A narrower spread indicates higher liquidity and lower trading costs, while a wider spread suggests lower liquidity and higher costs.

For instance, if an asset has a spread of 2 pips, and you open a trade position with a pip value of $10, then your trading cost will be $20.

3. Lot Size

When forex is traded it is done in amounts called lots, which refers to the number of units you are going to buy or sell. When you place an order on the trading platform it will be quoted in lots. The standard lot size is 100,000 units of currency. There are also mini, micro and nano lots which are 10,000, 1,000 and 100 units respectively.

4. Major, Minor and Exotic

In forex trading, currencies are categorized into three main groups: major, minor (also known as cross currency pairs), and exotic pairs.

Major Currency Pairs

There are six major currency pairs. They are known as major currencies as they are the most heavily traded. These include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD.

Minor Pairs (Cross Currency Pairs)

Minor currency pairs, also known as cross currency pairs, do not include the US dollar. Instead, they consist of two major currencies, excluding the USD. While these pairs may have less liquidity and wider spreads compared to major pairs, they still offer trading opportunities. Examples of minor pairs include: EUR/GBP, EUR/AUD, GBP/JPY, AUD/JPY, EUR/CAD, GBP/AUD

Exotic Currency Pairs

Exotic currency pairs involve one major currency and one currency from an emerging or smaller economy. These pairs have lower liquidity, higher spreads, and may exhibit higher volatility compared to major and minor pairs. An example of an exotic pair is the EUR/TRY (Euro / Turkish Lira).

5. Leverage and Margin

Leverage is a powerful tool in online trading, allowing traders to control larger positions with a smaller amount of capital. Essentially, it's like borrowing funds from the broker to amplify your trading potential.

Margin, on the other hand, represents the percentage of your own capital required to open and maintain a leveraged position. At Kumo Markets, traders can access leverage up to 500:1, meaning they can control a $100,000 position with just $200 of their own funds, resulting in a margin requirement of 0.2%.

While leverage can enhance potential profits, it's important to use it cautiously, especially for beginners. This is because it can also increase the magnitude of losses. For instance, in the scenario above, losses on a trade could exceed the initial $200 investment.

6. Support and Resistance

Like in any market, prices of financial assets are determined by the forces of demand and supply. In online trading, it is support and resistance levels that highlight important areas where the forces of demand and supply interact.

Support refers to a price level at which a stock or currency pair historically struggles to fall below. It acts as a floor for the price, as buying interest typically increases when the price approaches this level. Traders often see support levels as opportunities to enter long positions or to place stop-loss orders to protect existing positions.

Resistance, on the other hand, is the opposite of support. It represents a price level that a stock or currency pair has difficulty breaking above. Resistance levels act as a ceiling for the price, as selling interest tends to increase when the price approaches this level. Traders often view resistance levels as potential areas to take profits or to initiate short positions.

Support and resistance levels are not fixed values but rather dynamic zones that can shift over time. They are identified through the analysis of historical price data, including peaks and troughs, as well as through the use of technical indicators such as moving averages, trend lines, and Fibonacci retracements.

The logic is always to buy at support and sell at resistance. Support and resistance levels are very important in trading range-bound markets (prices don’t change much) and even breakouts (prices rise or fall substantially). When a support level is broken, it turns into resistance, and when a resistance level is broken, it turns into support.

7. Going Long and Going Short

Going long is buying an asset with the expectation that prices will rise.

Traders opt for long positions in specific market scenarios such as:

- Favorable news or data has been released, positively impacting the asset.

- The market is in bullish mode (a market where prices are generally expected to rise).

- Prices are positioned within a support area and expected to rise.

On the other hand, going short is selling an asset with the expectation that prices will fall. Traders may opt for short positions under the following circumstances:

- The market demonstrates bearish mode (a market where prices are generally expected to fall).

- Prices are situated within a resistance area and expected to fall..

- Negative news or data has been disclosed, negatively impacting the asset.

8. Bull and Bearish

If you see the terms bullish and bearish it normally refers to the market sentiment. If the price of a certain financial asset is going up then the market is recognised as being bullish as there are more buyers. Buying during this period means you are going ‘long’ as you are hoping to profit by selling the asset in the future once the asset’s price has risen. Being bullish also refers to the traders own sentiment as it highlights that the trader thinks the asset will rise and therefore opens a position. When the price of an asset is going up it is known as an uptrend.

If the asset’s price is going down then the market sentiment is bearish, as there are sellers present. You are known to be bearish as you go short in the hopes of making a profit once the asset’s price has fallen and you can sell.

Final words

To practise trading with an award-winning broker, open a free demo trading account today. If you’re ready to enter the world’s financial markets check out Kumo Markets’s account types here and open a trading account with us in three easy steps.

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