glossary of terms
Here is a list of basic terms you will often hear within the FX trading industry:
- Pip – Generally the lowest and smaller increment in which a currency pair is priced. Pips are used to measure movement in a forex pair. Pips prices are subject to change and can be moved due to the timing of the trade and the amount that is being traded.
- Bid – The price at which the market maker/broker is willing to buy the currency pair. The value of the underlying currency pair affects the Bid price.
- Ask – The price at which the market maker/broker is willing to sell the currency pair. It is also based on the value of the underlying currency pair.
- Spread – The difference between the Buy/Sell (Bid/Ask) prices, offered to traders on the trading platform. When a CFD provider offers lower spreads than its competitors, this means traders can enjoy a smaller difference between the Buy and Sell price of the underlying FX trading pair. Spread can be used to measure market liquidity.
- Base – The first currency in a currency pair, also referred to as the nominator (or top number). For example, when trading the USD/CAD pair, the USD is the Base.
- Quote – The second currency in a currency pair, also referred to as the denominator (or bottom number), therefore, when trading USD/CAD the CAD is considered the Quote.
- Leverage – The means of gaining exposure to larger amounts of currency without having to pay the full value of your trade upfront. It effectively allows you to trade larger amounts with less capital. For example, a leverage of 1:50 means you could use the initial margin of $200 to open a trade valued at $10,000. Using leverage can largely amplify your profits but it can also amplify your losses.
Beyond Forex, the market is a multifaceted sphere full of endless terms that traders must be aware of in order to make the best trading moves possible. This is why, to help you get a better understanding of the many concepts and technical terms, we’ve compiled a summary of the main market terms to keep in mind below:
- Bear Market – A market on the decline, where traders expect prices to fall, which indicates there is going to be more short selling (or traders ‘going short’).
- Bull Market – A market that is appreciating, where traders are eager to increase their long trading activity (also known as ‘going long’). For example, in 2022, NVIDIA entered a bullish market and its value went up, which urged many traders to invest in its shares.
- Broker – An intermediary for traders and financial institutions to go through for executing transactions.
- Federal Reserve – The official centralised bank for the regulation of economic activity in the USA. Often abbreviated as the ‘Fed’. The Federal Reserve aims to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.
- GDP (Gross Domestic Product) – The total sum of the economic activity of a country and is reflective of the overall health of its economy.
- Inflation – The rate of increase in the price of goods and services in a national/state economy. Inflation rates can affect Forex pairs and other traded assets by either lowering or heightening their value.
- Foreign Exchange Volatility – Refers to the price fluctuations of a market. The bigger the price movements the more volatile a market is considered. In other words, it is a measure of how dramatic/unpredictable its price movement can be. This is generally an indicator of how risky a currency pair can be to trade.
- Interest Rates – The rates of interest charged for lending money from a bank or credit provider. Generally, central banks control the levels of interest rates, which is critical to the strength or weakness of a currency. Interest rates can affect currencies’ value in that, for instance, the US dollar tends to appreciate due to increased interest rates, and a supply reduction by the Fed. Thus, Forex traders should be aware of how each country sets its interest rates when trading a certain currency pair as each currency has different interest rates set by different central banks.
This is who sets the interest rates for the most traded currencies:
- The US dollar’s interest rate is determined by the Federal Funds rate.
- The Euro is set by Euro Interbank Offered Rate (EURIBOR).
- The GBP follows the Sterling Overnight Index Average (SONIA).
- The CHF follows the Swiss Reference Rates (SARON).
- The JPY follows the Tokyo Interbank Offered Rate (TIBOR).
In order to make the most of market movements and try to anticipate your next trading move, it is prudent to refer to chart indicators and economic reports. Chart indicators and economic reports can have an impact on various assets, like currencies and commodities. You can find all of the key data releases on the economic calendar and many different charting tools available on the Plus500 platform. Here are the main ones you should be familiar with:
- RSI (Relative Strength Index) – typically used over a two-week span, RSI is an technical indicator of whether an asset is overbought or oversold. It ranges from 1 – 100. RSI marks the strength or weakness of an underlying asset in the past and in the present.
- CCI (Commodity Channel Index) – a measure of the statistical variation from a defined average, from -100 to +100. CCI is used to track extreme market conditions and trends.
- MACD (Moving Average Convergence/Divergence) – a technical trading indicator that identifies moving averages and helps to represent potential new upward/downward trends in the market. MACD is used to signal potential overbought or oversold market trends.
- Correlation – the mutual relationship between two assets, indicating how similar (or dissimilar) they are to each other. Correlations range between +1 and -1.
- CPI (Consumer Price Index) – a common inflation measurement that helps to track the price of goods and services. It can also be used to track monetary changes, inflation, and wages and salaries, and is usually gauged on a monthly basis.
- PMI (Purchasing Managers Index) – an indicator of the relative strength of the manufacturing and services industry. PMI is used to segment market conditions into categories of rising, lowering, or stable, hence reflecting present and future fluctuations.
- QE (Quantitative easing) – the process of injecting money into the market to help the wider economy avoid recession. Central banks like the Federal Reserve use QE in order to reduce interest rates and provide customers with easier access to loans.
In addition to the Forex terms discussed above, the list below includes the main terms you may find on trading platforms. Knowing these terms can be helpful to your trading, especially if you wish to build a trading strategy.
- Stop Loss Order – a market order used to close a losing position once it has reached a certain level.
- Close at Profit Order – a market order used to close a profitable position once it reaches a certain level.
- Fundamental Analysis – relies on wider economic and political data to predict which way a currency pair will move. Traders who use this type of analysis usually weigh the effects of larger economic changes on currency pairs’ value.
- Technical Analysis – relies on chart patterns (of past performance) to predict which way a currency pair will move next.
- Major Pairs (or Majors) – A list of the most traded pairs of currencies in the world. They constitute the largest share of the foreign exchange market and all are priced and traded against the USD, such as the EUR/USD, GBP/USD, USD/CHF, and USD/JPY.
- Minor Pairs (or Minors) – Currency pairs that are neither as heavily-traded nor as liquid as the Majors. Sometimes also referred to as Exotics, like the AUD/JPY.
- Cross Currency Pairs (or Crosses) – Currency pairs that do not involve the USD. Popular crosses include Euro to Pound (EUR/GBP), Euro to Swiss Franc (EUR/CHF) and Australian Dollar to Japanese Yen (AUD/JPY).
In conclusion, these are just some of the basic terms that you need to understand before trading Forex currency pairs. There are thousands more, and some will be more relevant to you than others; this all depends on what currencies you want to deal with and what types of trade you are executing. If you wish to stay updated on Forex, Forex pairs’ movement and market news regarding Forex and other instruments go to Plus500.com to read more.
If you wish to trade Forex CFDs, Plus500 offers a sophisticated, yet user-friendly platform where you can trade on Forex and thousands of other instruments using CFDs.