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Forex trading glossary

Forex trading means the buying and selling of currency pairs. You are basically buying one currency while selling another in the hopes of closing the position later with a profit. Forex trading can seem quite complex at first glance, with plenty of jargon. 

To make it more accessible for you, we have compiled a glossary of the most common forex terms.

Forex trading glossary
Glossary

ATR

This is an indicator called Average True Range. It measures the volatility of a price based on the 14 most recent periods of time, which is typically 14 days. 

Base currency

The first currency which is shown in a foreign exchange quotation, or currency pair. For example, in the case of USDEUR, USD is the base currency and EUR is the quote currency.

Candles

Candles are a type of bar chart used in technical analysis that display the high, low, open and closing prices for a specific period.

Correction

A correction is a price movement that goes against the prevailing main trend.

Counter-trend

A counter-trend is a trend moving against the main trend.

Currency pairs

Forex trading involves exchanging one currency for another, therefore currencies come in twos, in so-called trading currency pairs. A pair is the quotation of two different currencies, with the value of one currency being quoted against the other. For instance, when one refers to the exchange rate of the EUR to the USD, one quotes the relationship, or exchange rate, as EUR/USD. The first listed currency is called the base currency, and the second currency is called the quote currency. 

Currency swap

A currency swap is an agreement between two parties to exchange their periodic interest-rate payments based on a set amount of money, for a set amount of time, but in different currencies.

Financing rate

A financing rate or overnight rate is charged when you hold a leveraged position for more than a day, as for example in a forex trade. A leveraged position means you borrow money from the broker to trade. For this borrowed money, you have to pay interest (or in certain cases, can also receive interest). This is the financing rate.

Gap

These are sharp breaks in price between periods of trading. For example, if a opening trading price in the morning is much lower than the previous day's closing price, the difference is the gap. 

Indicator

A mathematical calculation that allows you to analyze a currency pair.

Leverage

Leverage is an investment strategy of using borrowed money, or debt, rather than fresh equity, to increase the potential return of an investment. lt is a loan that the broker gives the trader, which works as a multiplier not just for your gains, but losses as well. 

Lot

A lot is the number of units of a financial instrument that is traded on an exchange. For stocks, a round lot is 100 share units, while forex is traded in micro, mini, and standard lots.

Long

When you go long buy in forex trading, you are buying the base currency and selling the quote currency.

Margin

The margin is a portion of your funds that your forex broker sets aside from your account balance to keep your trade open and to ensure that you can cover the potential loss of the trade. Buying on margin is the act of borrowing money to buy securities. The practice includes buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or broker. The broker acts as a lender and the securities in the investor's account act as collateral.

Margin call

A margin call is when your broker notifies you that your margin level has fallen below the required minimum. Brokers use a margin level to determine whether a forex trader can take a new position or not. A margin level of 0% means that the account currently has no open positions, and a margin level of 100% means that account equity is equal to the used margin.

Market maker

A financial intermediary that stands ready to buy or sell assets. This is done by continuously quoting bid and ask prices that are accessible to other traders or registered participants of a trading platform.

Pip

The pip is a unit of measurement for price movements in forex.

Position sizing

This concerns setting the number of units to buy or sell a currency pair.

Quote currency

The second currency shown in a foreign exchange quotation. For example, in the case of USDEUR, EUR is the quote currency and USD is the base currency. 

Short

When you go short buy, you are selling the base currency and buying the quote currency.

Stop-loss

An order type designed for minimizing your losses. Once your market or limit buy order is executed and you have an open position, you'll probably want to both secure your profits and minimize your losses, depending on how the market turns. 

Swap

The interest that you either earn or pay for a trade that you keep open overnight.

Slippage

Forex slippage occurs when a market order is executed or a stop-loss closes the position at a different rate than set in the order.

Target price

This is the price you set as a target that you expect the instrument will reach.

Time frames

Any designated unit of time in which trading takes place. One candle can involve for example one month of information, or one day, one minute (MN, W1, D1, M1), etc.

Trailing stop

An order type designed to lock in profits or limit losses as a trade moves in a favorable direction. Trailing stops only move if the price moves favorably.

Volatility

A measure of the frequency and extent of changes in a currency's value.
 

 

Feeling confused? Check out our educational articles on forex trading

You can also dive into our broader glossary explaining all the exotic terms of the financial world.  If you want to try forex trading, here is our list of best forex brokers!

Still unsure? Use our broker finder to pick the best broker for you.

Forex trading glossary
FAQ

What is forex trading?

Forex trading means the buying and selling of currency pairs. You are basically buying one currency while selling another in the hopes of closing the position later with a profit.

What is the most successful or profitable trading strategy?

There are no single "best" forex trading strategies that fit or work for everyone all the time. Forex traders have to find the best strategy for their specific level of expertise, experience and commitment, which may involve combining various aspects of several different strategies. Success and profits can be achieved in any trading strategy if the conditions and timing are right and the forex trader makes the right decisions at the appropriate time.

Is forex trading profitable?

It can be, but it’s certainly not for everyone. The European Securities and Markets Authority (ESMA) requires brokers to emphasize what percentage of retail investor accounts lose money trading CFDs (through which a significant part of forex trading is done). Depending on the broker, this figure is usually between 60-90%.

What drives forex markets?

In general, it can be said that liquidity and market flow dictate short-term price movements on currency markets, while economic fundamentals shape longer-term trends.

Is forex trading legal? 

Forex is a perfectly legit form of trading, in itself, you shouldn’t have any concerns. However, it is recommended to pay careful attention to the broker you use. If it is not regulated, you might experience stuck withdrawals, unhelpful customer service, and worse. Be suspicious if you’re offered forex trading services that promise massive gains in a short period of time.

 

Further reading:

 

Author of this article

Krisztián Gátonyi

Author of this article

Krisztián has 15 years of experience in proprietary trading, mainly in the interbank currency market as a foreign exchange risk manager. He received his MSc degree in International Business from the University of Middlesex. He is interested also in real estate and dividend growth investing. His purpose is to help people find the best investment provider.

Krisztián Gátonyi

Senior Broker Expert

Krisztián has 15 years of experience in proprietary trading, mainly in the interbank currency market as a foreign exchange risk manager. He received his MSc degree in International Business from the University of Middlesex. He is interested also in real estate and dividend growth investing. His purpose is to help people find the best investment provider.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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