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Essential Terms for Forex Traders

Essential Terms for Forex Traders


Essential Terms for Forex Traders

Basic Forex Glossary:

  • 1. Bears – Bears are the opposite of bulls, and they bet on a falling market. Hence, they are by virtue of their expectations, short traders.

  • 2. Bid / Ask Price – Bid price is the price quoted by the bidder to purchase a currency. The ask price is the price which is offered by the trader on the other side of the trade.

  • 3. Bid / Ask Spread – The difference between the bid and ask price is called the spread. This is also the main indicator which helps in predicting the volatility in the market. If the spread is more, it indicates high volatility and if it less it shows low volatility.

  • 4. Bulls – Bulls refer to traders who trade in an uptrend. In other words, bulls are essentially long traders and expect the price to go up.

  • 5. Cross rates – Cross rate is also an exchange rate between two currencies, ut traded in another market. For instance, GBP/CHF is a primary currency pair in the UK and Switzerland, but a cross rate in the US and Japan.

  • 6. Good till Day – this is an order that’s placed with a broker to be valid for only that day. If the specified limits are not reached, the order gets automatically cancelled at the end of the trading day.

  • 7. Good till cancelled – A good till day order, except that it remains valid until the limit is met. It is mostly not favored by brokers or traders as it exposes them to long term market risks.

  • 8. Initial Margin – Initial margin is the money deposited by investors before entering into a contract. This is sort of a down payment on a loan- it needs to be furnished with the broker in order to participate in a forex trade.

  • 9. Long / Short Entry – Long means buying a currency or pair. This is a position to buy (plus) assets or instruments when an investor believes that the market will go up. On the other hand, when investors want to take advantage of downward moves, they take short positions.

  • 10. OTC – Over the Counter (OTC) market is where transactions take place over the phone between banks and dealers. No interaction takes place between the parties.

  • 11. Stop loss – Stop loss is the amount of loss which traders or investors are ready to bear in an unexpected turn of events. In a trading system, stop loss play a key role for traders by limiting their downside by automatically completing a round-trade. For instance, if someone bought

EUR/USD at 1.3575 on a bullish expectation, and the pair starts falling, the stop loss can automatically be triggered, at say, 1.3400, to limit losses due to a crash.

  • 12. Transaction Cost – Transaction cost is the cost of buying and selling a financial instrument. The Bid/Ask spread is also the transaction cost and is the income earned by the bank in a forex trade. For example, in the USD/JPY bid/ask is 96.60/96.62, and the transaction cost is 2 pips.

  • 13. Volume – Volume is the quantity of trade. It indicates the total quantity and amount of trading that took place in a financial market.

  • 14. Volatility – Volatility is the measure of movement in prices over a period of time. Beta and standard deviation are the two statistical measures through which one can estimate volatility.

  • 15. Limit order – Limit order is an order placed by traders to buy or sell a currency pair automatically at a specified price. This is also the way stop losses are executed by forex traders.

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