Forex Quick Start Guide
What is Forex?
Forex is a portmanteau of ‘foreign currency’ and ‘exchange’. It refers to the foreign currency exchange market, in which currencies are traded with each other. These trades are carried out for a number of reasons, including by retail traders looking to make money.
When you begin Forex trading, you’ll come across plenty of specific terms and expressions that you may never have heard of before.
As a beginner trader, it’s important that you get to grips with this terminology as quickly as possible. This is because having a firm understanding of Forex jargon can actually make a difference between making and losing money.
Not only are there terms related to choosing a broker, and the fees you may incur, but there’s also economic vocabulary to be learned. This vocabulary can help you to make better informed, and therefore more profitable, trades.
10 Forex Terms you must know
Before you dive into selecting a Forex broker and registering for an account, you need to familiarize yourself with several basic trading terms.
- Currency pairs
- A currency pair is, as the name suggests, a pair of currencies that represent the value of one currency against another. In Forex trading, the changing value of a currency pair provides traders with the opportunity to make a profit. Currency pairs are expressed in a XXX/YYY format, such as EUR/USD.
- Majors/minors
- Currency pairs are generally split into two different categories. Major currency pairs all involve the US dollar and are more frequently traded. Minor currency pairs are those which don’t include the dollar.
- Base and quote currencies
- In a currency pair, the first currency is known as the base currency and the second is referred to as the quote currency. So, in the EUR/USD pair, the euro would be the base currency and the US dollar would be the quote currency.
- Bid and ask
- Every currency pair has two price quotes. The bid price represents how much of the quote currency the broker is willing to pay to buy the base currency from you. The ask price represents the amount of quote currency the broker is willing to accept to sell you the base currency.
- Pip
- The change in value between two currencies is expressed through a unit of measurement known as a pip. If the EUR/USD pair was to rise from $1.1001 to $1.1002, that increase of $0.0001 is equal to one pip. In major currency pairs, pips are the fourth decimal place in a quote.
- Spread
- The difference between the bid and ask price is known as the spread. This is expressed in pips.
- Lots
- Lots are the unit of measurement used to express trade size. There are three common lot sizes; a standard lot which is equal to $100,000 of a currency, a mini-lot which is equal to $10,000 of a currency, and a micro-lot which is equal to $1,000 of currency.
- Leverage
- When you make a trade with a Forex broker, the broker offers you credit to hold a much larger trading position than you could afford with your own capital. Leverage rates are usually expressed as ratios, for example, 50:1. This means you can hold a position fifty times larger than your account balance.
- Margin
- This refers to the initial deposit you need to make in a trade, in order to utilize leverage. Margin requirements are expressed as a percentage of the whole trading position.
- Slippage
- Slippage refers to situations in which you receive a different trade execution price than intended. This can happen for a number of reasons, including slow software and large order sizes. Slippage is neither positive or negative, the same term is used whether the execution price has fallen or risen.
Currency Pairs Nicknames
Different currencies and currency pairs have informal names, or nicknames, which are often used by traders and brokers. Below we’ve highlighted some of the most important ones:
- GBP/USD =
- Cable
- USD/CAD =
- Loonie
- NZD/USD =
- Kiwi
- AUD/USD =
- Aussie
- EUR/USD =
- Fiber
Market Movement Expression
The following are special expressions or words use when referring to things that within the foreign exchange market.
Long and Short
When a trader buys a currency pair, it is said that he/she is taking a long position, as the expectations are that the pair will move to the upside. If this does indeed happen, the trader makes a profit.
If a trader sells a currency pair, it is said that he/she is going short, as the expectations are that the pair will move to the downside.
Bullish/Bearish and Hawkish/Dovish
A trader who takes a long position, or is thinking of taking a long position, has a bullish view of that currency pair; or he/she is bullish about that currency. For example, one can be bullish about the Euro and, in particular, bullish on the EUR/USD pair.
The opposite of bullish is bearish, either about a certain currency or on a currency pair.
A central banker can be neither bullish nor bearish, as it is not possible for them to have a position on the market. Therefore, a central banker’s position can be either hawkish or dovish (this being the equivalent of bullish or bearish respectively for the regular trader).
Important Economic Terms
Central bankers are forced to use specific language and expressions due to the fact that the financial market is so globally interconnected and sensitive. One reckless speech in the United States, for example, could actually make the global equity markets tumble. As such, they need to be very careful about the phrases they use.
When trading Forex, it’s equally important to get to grips with economic vocabulary, especially if you want to conduct fundamental analysis.
Inflation
Inflation is mentioned in every central banker’s speech, as controlling inflation is part of the job of all central banks. If you watch the president of the European Central Bank (ECB) or any other central bank head giving a speech, you will notice how often inflation is mentioned.
Inflation refers to the increase in the price of goods and services, over time. You can see inflation happening in real life. For example, the price of your coffee may have increased from $2, last year, to $2.10 this year.
Although inflation a key economic concept, you’ll find that it isn’t listed on your economic calendar. This is because the figure you’re looking for is actually called the Consumer Price Index (CPI). This is the economic indicator that reflects changes in prices at the consumer level.
Employment Terminology
As a Forex trader, you will also come across several terms on your economic calendar which refer to sets of data about employment. The names of these change, depending on which country the data is focused on.