The key terms in forex trading can be complex to understand at first. You may have seen an ad about trading forex on a website and became very interested in the opportunity to earn within the largest traded market in the world. You obviously knew you had to learn how to trade however when you started to learn how to do forex trading you probably came across some terms you never heard of and maybe thought it might be impossible to learn. Some of the key terms in forex trading you should be familiar with are currency pairs, leverage, pips, indicators, trading strategy.
Currency Pairs - A currency pair is a set of currencies grouped together. For instance USD/GBP is the US Dollar paired with the British Pound or EUR/JPY is the Euro paired with the Japanese Yen. The currency pair will serve as the foundation for your trading. This means when you trade within the forex market you will choose one of the currency pairs to initiade your trade. The first currency is your base and always set to 1 and the second is your quote. So USD/GDP would mean 1 USD will equal to an X amount of GDP.
Leverage - Many of the forex brokers provide an opportunity for users to access extra money for their trading. This is not a loan but a way for you to make trades with money not currently inside your account.
Pips - Aka "percentage in point" refers to the fourth number after the decimal point for the trading price except for the Japanese Yen which is the second number after the decimal point. For example if the price for the EUR/USD is 1.876534 and rises to 1.877727 your trade gained 12 pips. The same trade for example goes down 20 pips than the price would be 1.874534. You will see your gains and loses for every trade calculated in pips which serves as your basis for the amount won or loss. Most brokers will have a software program designed to show you how much money you will earn for each pip gained which will vary for each currency pair.
Trading Strategy - Even though it is possible to make money just by trading without a plan it is not recommended when trading forex. All of the successful forex traders have a strategy in place for their trades. Many types of strategies exist which depends on how often you trade, how much time you have alloted for your trading, the amount of money you have, and many more.
Indicators - If your familiar with stock trading you may be familiar with some of the indicators that point out trends and opportunities within the market inside the varios forex charts. Forex works with many of the same indicators including countless others however they are more heavily involved when compared to stock indicators. Stocks sometimes have a more fundamental aspect to them where forex has more of a technical aspect which involves indicators. One of the main key terms in forex trading.
Margin - Many brokers have an account minimum which has to be met or your account will be closed. This amount is the margin.
Back Testing - Refers to testing your strategy or strategies with the past history of the charts. Before a trade is entered for a particular trade many traders will look at the pairs chart history to see how that particular strategy performed in the past.
Line Chart - Many experienced traders will draw lines on the various forex charts to point out the support and resistance zones.
Support Zones - Points on the chart that show bullish movements. Each time frame will have many points on their respective charts that show trades trending downwards and then rising upwards at the same or very similar price points. These price points where the market trends back upwards are called support zones.
Resistance Zones - These are the points on the chart that show bearish movements. Opposite of support zones, the price points on the various charts that show the market trending downward on similar price points as the market is trending upward.
Bid/Ask - In Forex when you are asked to bid on a currency pair you are placing an order to buy it. On the contrary when you ask you are placing the order to sell. The bid ask price will always show on the same order screen with the bid price always lower than the ask price.
Spread - Brokers receive a commision on every trade which will be the difference between the bid ask price. So if the bid price is 1.7400 and ask price is 1.7600 than the spread is 2 pips.
Stop Loss - At the same time you enter a trade with your broker for a currency pair you can place a stop loss which will stop a losing trade once it reaches a certain price point you specify when you entered the trade. Most experienced forex traders place stop losses with their trades. Great for budgeting your trading and not allowing the trades to get out of hand to the point of bankrupting your trading account.
Candlestick - The bars on a forex chart that are fat and skinny. Sometimes they look mostly fat, sometimes they look skinny, or look exactly like how a candle would look with a fat bottom and small skinny top.
You will encounter many more key terms in forex trading as you continue on with your forex trading career. All of the terms you encounter will be important and should not be ignored. You definitely want to take the time to learn these key terms in forex trading as they will serve as a strong foundation for your trading. Many beginners ignore many of these important terms and just trade in the market hoping to achieve success. They then wonder why they do not win. Just by taking the time to learn the terms and developing a forex mindset will increase your winning percentage with your trades.