Learn Forex Trading: Basic Terms and Definitions
If you have never tried FX trading, or even heard of it, then the first thing to learn is the basic forex trading terms and definitions. Each day, nearly $4 trillion worth of currency (in US dollars) is traded through forex brokers, meaning that Forex trading provides savvy investors with the potential for substantial profits. With these forex basics, you will begin the path toward successful FX trading.
Forex Trading Dictionary
Currency: Any form of money that is endorsed by a government and used for forex trading.
Broker: The intermediary body that handles buyers' and sellers' orders. A forex broker needs to be licensed by the US Commodities Future Trading Commission (CFTC).
Support: The price level below which a currency has difficulty falling.
Support Levels: The specific high and low prices at which an exchange rate will correct itself.
Resistance: The price level at which people are estimated to sell.
Breakout: A price's movement through a selected support or resistance. Breakouts are usually followed by heavy volume and increased volatility.
Volatility: The amount by which an asset price is expected to fluctuate over a period of time. Volatility is normally measured by annual standard deviation of daily historic price changes. Implied volatility can also be estimated from futures/options pricing.
Tick: A minimum up or down change in price.
Down Tick: When a currency is sold at a lower price than the previous sale.
Parity: When two currencies are of equal value in the forex trading market. The exchange rate would be 1:1.
Range: The difference between the highest and lowest prices during a trading period.
Cover: Any action that involves the closing of a position.
Position: A given currency's netted total exposure.
Short Position: A position at which base currency is sold. More currency is sold than bought, and price declines are favorable for FX trading.
Flat/Square Positions: A position at which there is no exposure.
Long Position: A position at which base currency is bought. More currency is bought than sold, and price increases are favorable for FX trading.
Cover on a Bounce: When a trader covers a short position after it has arrived at and "bounced" off a support level.
Risk Capital: The amount of money that a trader is willing to lose. This is important for individuals involved in FX trading to determine so that they can implement stop-loss orders to their forex trading platforms.
Fundamentals: The macroeconomic factors affecting currency markets.
Exotic Currency: A currency that is not popularly traded.
Discretionary Account: A type of account with which the account holder gives a company or trading body power over all buying and selling transactions. The company or trading body is also given power to choose which currencies are to be bought and sold. This type of account is also called a managed or controlled account.
Commission: The transaction fee that brokers charge. Most forex brokers collect a commission.
Limit Order: An order that includes specific boundaries meant to control how much profit and loss that a trader is willing to handle.
Fundamental Analyst: Market analysts who look mainly at the fundamental aspects of an economy when forming their opinions. Fundamental analysts often read and analyze economic data about current market conditions in order to determine what is fundamentally driving the market and where the market is headed.
