To continue learning and developing as a trader, you will need to study the basic terminology of online trading and trader’s jargon.
If you can’t learn all the terms right away, don’t be upset, as it’s impossible to do it all at once. You can return to this part of the course at any time when you come across an unfamiliar term.
Currency Pairs
Currency pairs will be the first thing you pay attention to when getting acquainted with the Forex market.
The concept of the value of a commodity is not difficult to understand, because there is only one. For example, the cost of oil is the price of one barrel. For gold, it’s the price of one ounce.
When it comes to Forex trading, 2 currencies are involved in forming the price. This is called a currency pair. The pairing confuses beginners, so we’ll figure out the term “currency pair” first.
During Forex trading, we acquire one currency by exchanging it for another. For example, you don’t just buy the British pound, but exchange it for a certain amount of another currency.
If you have US dollars, you will be buying euros for the amount in US dollars. This currency pair is called GBP/USD.
For example, the cost of the currency pair GBP/USD is 1.6. This means that one pound is worth 1.6 dollars. That is, to buy 1 euro you will pay 1.6 dollars.
Another way of expressing the price:
The cost of the GBP/USD pair is the exchange rate, which means how much of the second currency in the pair you need to pay to buy a unit of the first currency in the pair. For example, the exchange rate of 1.6 for GBP/USD means that to acquire one euro, you will have to pay 1.6 dollars.
The phrase “strengthening of the dollar” means that you need fewer dollars to acquire more pounds.
In the GBP/USD pair, the dollar is the second currency. This means that the rise of the dollar will lead to a decrease in GBP/USD.
For example, if the GBP/USD rate has dropped to 1.4, then the price of the dollar has risen relative to the pound. In this case, the dollar is strengthening, and the euro is weakening.
Therefore, if the cost of GBP/USD falls to 1.4, then you will need to pay 1.4 dollars for 1 pound.
To trade a currency pair, it is not necessary to have one of these currencies on deposit.
To purchase the GBP/USD pair, it is not necessary to have specifically dollars on the trading account. The account can be in euros, and you will be buying GBP/USD. Euros on the account will be converted into dollars, for which you will be buying the pound.
Base and Quote Currency
The first currency of the pair is the base. Its value always equals 1. The second currency of the pair is called the quote. Its price is expressed in the amount of the second currency needed to exchange for one unit of the base.
Points (Pips)
In future lessons, we will often use a concept known as a point (or pip). A point is a measure of price movement.
The exchange rate between the euro and the dollar (EUR/USD) can be represented as the number 1.27. Here, only 2 digits are shown after the decimal point.
But on the Forex market, the rate is presented more precisely, and in this case, the cost will be displayed as 1.2700. The last digit (0) is the point (pip). If the price of the pair changes from 1.2700 to 1.2701, it means that the price has changed by 1 point (pip).
Traders often measure profit in points. For example, a trader buys the EUR/USD pair at a price of 1.2700 and the price rises to 1.2730. This means that the price has increased by 30 points, or the trade has made a profit of 30 points (if closed at this price).
Most brokers measure the price even more precisely and add a fifth digit, which is called a fractional point or pipette. Here the cost looks like 1.27000. Therefore, in the trading platform, you can see 5 digits after the decimal point in the price of many currency pairs.
Japanese Yen – An Exception
Currency pairs with the Japanese yen differ from other pairs. Here, the yen has a low value relative to the other major pairs. Therefore, in such pairs, the point is the second digit after the decimal point. If the exchange rate of the USD/JPY pair equals 81.035, then here the point will be the number 3, and the pipette is the number 5.
A Note on Spreads
To better understand the term “spread,” it should be perceived as a commission fee that you must pay to the broker for conducting trading operations.
If a pair has a certain price, for example, the price of AUD/USD is 0.8000, you will not buy the currency pair from the broker at this price. The broker will set a higher price (for example, 0.8002). If you plan to open a sell trade, the broker will not buy the AUD/USD pair from you at a price of 0.8000, but at 0.7998.
Between the price of 0.8003 and 0.7998, there is a difference of 4 points. This difference is called a spread. Therefore, a spread is the difference between the price at which a broker acquires an asset and the price at which he sells that asset. The broker makes money by buying assets at a lower cost and selling at a higher one.
Bid and Ask Prices
The bid price is the most favorable price at which a trader can buy a financial instrument at a particular time. In the Forex market, the bid price is the highest price the broker pays during the purchase of the instrument.
The ask price is the most favorable price at which a trader can sell a financial instrument at a particular time. In trading, the ask price is the lowest price at which the broker will sell you the instrument.
Charts Display Price Change Over Time
A chart is a visual representation of price movements. It is used in technical analysis. With the help of charts, traders study changes in the foreign exchange rate over a certain period of time.
On price charts, the cost of a currency pair is displayed on the right side of the vertical axis (the exchange rate, which shows how much of the second currency in the pair is needed to acquire one unit of the first currency). Time is displayed at the bottom on the horizontal axis.
Japanese Candlestick Charts
An overwhelming majority of traders conduct analysis on Japanese candlestick charts.
A Japanese candlestick is a way to display price movements. Candles contain a lot of information. To start, if you look at the color of the candle, you can find out whether the price has risen or fallen, as they are colored in different colors depending on whether the price has risen or fallen.
Japanese candles can be displayed on various time intervals (from 1 minute to 1 year). On a minute chart, each candle is formed over a separate minute. The formation of a candle ends when the minute ends. After this, a new candle is formed. On an hourly chart, a candle is formed over 1 hour, and so on.
Candles also have opening and closing prices. That is, you immediately see what the cost of the asset was at the beginning and at the end of each time interval. For example, if you look at a 4-hour candle, you can determine the cost of the instrument, which was at the beginning of the 4-hour segment and the cost after the completion of these 4 hours.
The candle also helps to know about the minimum and maximum price, which was recorded during the formation of the candle. On a 4-hour candle, you can determine the minimum and maximum price for an interval of 4 hours.
Trades are Opened on the Trading Platform
A trading platform is a software program that helps a trader place orders to sell or buy assets. The trading platform can also be seen as your control center, where you position trades, analyze charts, and review your trading history. Through the platform, you communicate the following information to your broker:
- What you wish to sell or buy;
- The quantity you wish to sell or buy the chosen instrument;
- When you plan to take profit, if the price moves in your favor;
- When you plan to close the deal at a loss, if it turns out to be unprofitable.
Brokers can use various software as platforms. In the screenshot above, the MetaTrader 4 program is depicted, which, despite being somewhat outdated, still remains popular. In the picture, you see the order window. In this window, the trader enters all the information described above.
Many trading platforms offer roughly the same features, and price charts are presented in the same way as in the screenshot above.
Trading Instrument (Financial Instrument, Asset)
The trading instrument is the subject of the deal. For example, when buying or selling oil, it is the instrument. In the case of selling or buying the GBP/USD pair, this pair acts as the instrument. Instruments are also often referred to as assets.
Opening and Closing Positions
When you make a deal to sell or buy an instrument, you open a position. Therefore, buying or selling is sometimes referred to as opening a position. In addition, this process is called entering the market. When a trader leaves the market, they are said to close a position.
Stop-Loss Protects the Account
When a trader sets a stop-loss, they protect their account in case the price moves against them. For example, you purchased an asset, but its cost did not move in your favor, and the position began to generate a loss. Due to the price moving in the opposite direction, you can lose all funds in your trading account.
A stop-loss is an order that automatically closes a deal at the moment the price reaches a certain level of loss. This level is the maximum loss that was anticipated for this deal.
Target Level of the Deal
The target level of the deal is the cost at which you decided to exit the market, having fixed a certain profit. Usually, a trader determines the target level of the deal before they open a position. This means that the trader determines the amount of profit (if the price moves in their favor) before opening the deal.
Bears and Bulls
“Bulls” refer to traders who believe that the market will rise. People often say these traders act “bullishly” or in a “bullish” manner. This term originated from the real behavior of bulls in life. During an attack, they strike upward with their horns. This analogy helps to remember the term.
“Bears” refer to those traders who believe the market will drop. People often say traders behave “bearishly” or in a “bearish” manner. In life, during an attack, a bear pounces on its opponent from above and tries to crush them with its claws. This will help you remember the term.
Long Position
We expect growth when we talk about a long position. A “long position” refers to opening a buying deal. Traders often say: “I am in a long position” or “I am opening a long position”. This means that the trader has opened or plans to open a buying position. For example, in Forex market trading, it is said that the trader opens a long position (when buying an asset) if they believe the EUR/USD pair will rise.
Short Position
It’s easy to understand why users open long positions in trading. To open such positions, you need to click the “buy” button. The price will go down or up. If the price goes up, you will be able to make money. If it goes down – you will lose money.
If you plan to enter the market and think the price will drop, you can click the “sell” button and open a “short” position. This means you are selling something you don’t own for its redemption during a price change. If you open a short position on an asset and the price goes down, you make money. If the price goes up when opening a short position, you will lose money.
The broker will lend you the asset you want to sell. Then you sell the selected asset, the price changes, and you can buy it back.
If the price has fallen, you will make a profit, as you immediately sold the asset at a higher price, and then bought it at a lower one.
If the price has risen, you have lost money, as you immediately sold the asset at a lower price, and then bought it at a higher one.
After the deal is closed, the borrowed asset returns to the broker.
So, on the trading platform, you click the “buy” button if you think the price will rise. And if you think the price will drop, you click the “sell” button.
Short Currency Sale
Short currency sale is different from short selling on the stock market. Currencies are always traded in pairs. One currency is bought for another.
For example, if you open a long position on the EUR/USD pair, you sell dollars and buy euros. When opening a short position, you sell euros and buy dollars. This is the sale of the EUR/USD financial instrument.
This can be explained in other words. When opening a short position on the EUR/USD asset, you acquire the USD/EUR instrument.
Risk / Reward Ratio
This ratio equals the ratio of the amount of money you risk in a certain deal to the amount of potential profit you will get if you correctly determine the currency rate change.
For example, if you risk $10, this amount will be the loss you are willing to bear. You will know how much you risk if the price does not go your way. Therefore, you will not lose more than $10. If, according to the forecast, the deal can bring $30, then $30 will be your potential profit.
In this case, the risk-to-profit ratio will be 1:3, as you risk $10 and hope to get $30.