Getting started in Forex trading and understanding the terminology can be difficult. As one of the world’s largest markets, it is essential to understand how it works. Whether you’re an experienced trader or just starting, here are some terms you need to know:
The spot price of a currency pair refers to the current market price quoted by brokers for the immediate delivery of two currencies against each other. The spot forex rates can be used to benchmark all other trades involving the same currencies. Some of these include futures contracts and options which involve different types of risk and reward profiles.
A pip is the smallest amount that a financial instrument (e.g., stock) can move up or down on any trade; it is also widely known as a “point.” The value of one pip can vary. For example, the value of USD/JPY currency pair one pip = 100ths of a yen or 0.01 yen, while EUR/USD 1 pip = 100 cents.
A good-till-cancelled order or open order is an order that remains valid until you cancel it yourself or the market price fills it. An example of this would be if you want to buy EUR/USD at 1.1500 and set your stop loss (SL) to 1.1050; this will remain in place until either your SL is hit, you cancel the order yourself, or the pair hits your target (in this case buying price of EUR/USD at 1.1500).
A limit order is to buy/sell at a specified price or better once the price reaches the level you specify. It will only ever be executed when the market reaches that price. An example would be if you wanted to buy ten lots of USD/JPY at 102.50 with your SL set to 100 & TP set to 107; this will only execute once USD/JPY hits 102.50 and will remain in place until either SL is hit, TPs are reached, or you cancel it yourself.
A stop-loss order or a “stop-market” order is an instruction to sell a currency pair should its value decrease below a specific price or sell a stock should it decrease below its market value. A stop-loss order guarantees that your loss will be minimized when the asset price reaches the stop level.
An example would be if you wanted to buy ten lots of USD/JPY at 102.50 and set your SL to 100; this will only execute once USD/JPY hits 102.50 and will remain in place until either your SL is hit or TPs is reached (in this case selling price of EUR/USD at 1.1500).
A take-profit order is an instruction given by a trader to sell a financial instrument when it has traded above a specific price, for instance, to increase their profit margin on the trade. The take-profit target acts as a point of control for the trade.
An example would be if you bought ten lots of EUR/USD at 1.1500 with your TP set to 1.1550; this will only execute once EUR/USD hits 1.1500 and will remain in place until either TPs are reached or SL is hit (in this case selling price of USD/JPY at 102.50).
Understanding the different components of forex trading is very important for beginners, as it helps to have a general knowledge of what is being bought or sold. Learning how to read charts can also be helpful to see these moves occurring within the market.
Overall, forex trading is an ever-changing sector that requires all participants to keep abreast of new developments. By becoming acquainted with terms used by brokers and traders, you will have greater confidence when executing trades or deciding on your strategy.