Forex trading glossary

ATR

ATR , short for Average True Range, is an indicator used to measure the volatility of a currency pair's exchange rate (price) based on the 14 most recent units of time, which is typically 14 days. 

Base currency

The first currency which is shown in a currency pair. 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 currency pairs. The value of one currency is quoted against the other. For instance, when one refers to the exchange rate of the EUR to the USD, one quotes the 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 payments (and sometimes capital) in one currency for another currency. The swap is based on a set amount of money and for a set amount of time.

Financing rate

A financing rate or overnight rate is charged when you hold a leveraged position for more than a day. 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

A gap is a are sharp break in the price of a financial asset (i.e. stock or currency pair) that occurs in between periods of trading. For example, if an opening trading price in the morning is much lower than the previous day's closing price, the difference is called the gap. 

Indicator

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

Leverage

Leverage means using borrowed money to increase the potential return of an investment. ln retail trading, it refers to a loan that the broker gives the trader to increase the size of the capital with which the trader enters the market. Leverage can significantly increase attainable 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. The standard lot is 100,000 currency units. 

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 is the process in which the trader sets the number of units of a currency pair that he/she wants to buy or sell.

Quote currency

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

Short

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

Stop-loss

Stop-loss is an order type designed for minimizing losses. When you make a stop-loss order, you set a price (stop prioce) at which your broker will close your trade in order to minimize the loss of that trade. Stop-loss orders are very useful when the market goes against the direction of your trade.  

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 (i.e. currency pair) will reach.

Time frames

TIme frames refer to 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. A trailing stop order will close the order if the price moves in the wroing direction by a predermined precentage or amount. The trailing stop  will keep the trade open as long as the price is moving in the investor’s favor. 

Volatility

Volatility is an indicator used to measure 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!

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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 is no such thing as the single "best" forex trading strategy that works 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 profit can be achieved with a number of forex trading strategies if the conditions and timing are right and the forex trader makes the right decisions at the appropriate time.

Is forex trading profitable?

Forex trading can be highly profitable, but certainly not for everyone and not all the time. 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). 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. However, the forex trading universe is ripe with scams and unreliable brokers. Pay particularly close 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.