The Forex market comes with a set of terms and jargon that every trader must know in order to follow market commentary and trade currencies. Some are completely related to the forex markets and some are more trading related. Nonetheless, it is essential that you understand the terminology of forex trading and the ins and outs of trading the foreign currency market before you start FX trading. So, let’s get started.
Key Points to Take Away
- The foreign exchange market is the largest and most liquid market in the world with an annual trading volume of approximately $6 trillion.
- There are many technical terms and forex terminology that you need to know before you start forex trading.
- What’s more – Currencies and currency pairs have nicknames, the FX market has 4 trading sessions, and it has an extremely unique market structure.
The Forex Jargon – Terms That Every Forex Trader Should Know
Like any other field or industry, the foreign exchange market has its own terms, words, and slang – or in other words, jargon. Below you will find some of the most common terms you need to know to make the first step to get into the Forex and financial markets and trade FX currency pairs.
Pip – A pip stands for ‘percentage in point’ and represents the smallest market price movement of a forex pair. For example, when the US Dollar versus the Japanese Yen (USD/JPY) moved from 114.00 to 114.01 then the currency pair rose by 1 pip. If the USD/JPY jumped from 114.00 to 115.00 then the pair price changed by 100 pips.
Lot Size – In forex, a lot size is the size of position measured in the number of currency units. The standard lot size is equivalent to 100,000 units of currency and the pip value is calculated according to the size of the position. Today, most forex brokers offer Standard lot size in addition to min (10,000), micro (1000) and nano (1000). To calculate the right trade size for your forex trade, it is advisable to use a lot size calculator.
The Bid and Ask Spread – A spread in forex is the difference between the currency price at which investors are willing to buy or sell that one currency pair. Whenever you see a quote of a currency pair, you’ll notice a bid and ask price, or buy and sell. For instance, the bid quote for the EUR/USD currently stands at 1.16061and the ask at 1.16065 – a spread of 0.4.
Leverage/Margin – In essence, leverage in the forex markets is the ability to trade currency pairs by using only a fraction of the total funds you have in your account. For example, using a leverage ratio of 100:1, a trader can control a position size of $100,000 by using a margin of just 1%, or $100. However, while leveraged trading enables investors to control larger sizes of positions, it also significantly increases the risks involved in losing money.
Bullish and Bearish Market – Simply put, the terms bullish and bearish describe the market condition or sentiment of a certain asset/market. A bullish market refers to a situation where the market is rising while a bearish market refers to a situation where the market is falling. The terms come from the way in which a bull and a bear attack their opponent – bull attacks in an upward direction while a bear attacks in a downward direction.
Long and Short – In currency trading, long and short are definitely terms you’ll hear frequently. In simple terms, going long means to buy an asset, while going short means short selling an asset. For example, taking a long position in the EUR/USD essentially means you are buying the Euro and selling the US dollar. Short selling the EUR/USD means you are doing the opposite, selling the Euro and buying the US dollar.
Used/Free Margin – On the vast majority of online forex trading platforms, you’ll see tabs of free and used margin. A free margin shows an investor’s money available to open new positions while a used margin shows the money used for open positions.
Stop Loss and Take Profit – Two of the most important and widely used market orders in trading. A stop loss is an order to close the position at a certain price in order to limit the potential loss. A take-profit order allows you to set a price at which you wish to close the position at profit.
Currencies and Currency Pairs Nicknames
If you want to learn how to trade the foreign exchange markets, it also might be helpful to know the nicknames of the most popular individual currencies and FX currency pairs. This way, you can easily read and understand market news and forecasts related to currencies.
Nicknames for Currencies
- US Dollar – Greenback
- British Pound – Sterling, Quid
- Euro – Fiber or Single
- Canadian Dollar – Loonie
- Australian Dollar – Aussie
- New Zealand Dollar – Kiwi
- Swiss Franc – Swissy
- Norwegian Krone – Noki
Nicknames for Currency Pairs
- EUR/USD – Fiber
- GBP/USD – Cable
- USD/JPY – Ninja
- EUR/GBP – Chunnel
- USD/CAD – Loonie
- USD/RUB – Barnie
- GBP/JPY – Gopher or Guppy
- EUR/JPY – Yuppy
- EUR/RUB – Betty
The USD/RUB and EUR/RUB are named after Barnie and Betty Rubble, the neighbors of the Flinstones family from the iconic Flintstones movie and TV series.
Forex Market Structure
The forex market is different from any other market in the sense that it is decentralized and has no major exchange. Ironically, it works the same as the cryptocurrency market. The only difference is that FX currencies are not decentralized (as they are controlled by central banks and governments) while digital assets like Bitcoin, Ethereum, and other altcoin are, in fact, decentralized.
Regardless, the way the forex market structure works are quite impressive. There’s huge competition in this giant global marketplace and quotes essentially vary from one dealer to another. At its most basic, this global decentralized over-the-counter (OTC) market enables any person on the planet to buy and sell currencies at any given moment.
In terms of market structure – Major banks are at the top of the forex market hierarchy. They are responsible for creating the interbank market, which is basically a huge global network where banks trade currencies and provide exchange rates. Next, the exchange rates are being transferred to electronic brokering services such as EBS or Reuters dealing 3000 spot-matching and from there to medium and small size commercial banks. At last, retail market makers, ECN brokers, hedge funds, investment banks, and information data websites extract the quotes and allow retail traders to view and trade currencies.
Trading Sessions in the Forex Market
Unlike the stock market, the forex market is decentralized and runs 24 hours a day, five days a week from Monday to Friday. This essentially means that currencies are traded worldwide in four major forex decentralized exchanges across the globe that include Sydney, Tokyo, London, and New York. Getting to know the exact times of trading sessions is crucial as many traders are looking for certain hours with high liquidity, tighter spreads, etc. On the other hand, some traders prefer to trade at times when the markets are slow and less liquid and avoid times at which economic data is released.
With that in mind, here are the four trading sessions each trading day:
- Sydney session: 21:00 GMT (5 pm EST) to 06:00 GMT (2 am EST)
- Tokyo Session: 23:00 GMT (7 pm EST) to 08:00 GMT (4 am EST)
- London Session: 07:00 GMT (3 am EST) to 16:00 GMT (12 pm EST)
- New York Session: 12:00 GMT (8 am EST) to 21:00 GMT (5 pm EST)
Taking the above into account, the forex market opens at 5 pm EST (21:00 GMT) on Sunday and closes at 4 pm EST on Friday (20:00 GMT).
According to analysts and traders, the best time to trade the forex market is during the overlap of the New York and London exchanges. It is estimated that 50% of all forex trades are executed during these hours..
Forex Trading Basics – The Bottom Line
In a nutshell, understanding the technical terms and jargon used in the forex market can help you in your progress as a trader. Occasionally, you’ll contact your brokerage firm or read an article with some of the terms above – so getting familiar with these terms will make the process of learning and your forex trading journey more effective and exciting.
If you have no previous knowledge in trading, it is advisable to take an online forex trading course to achieve confidence and develop your own trading strategies before you start trading. We also suggest you visit our guide on what is forex and how does it work. As they say, knowledge is power and power is knowledge.
How’s the forex market regulated?
Generally, there’s no one regulatory body that is responsible for the regulation of the forex market. However, the primary market participants in the forex market are banks and retail forex brokers, which are regulated by various regulatory agencies. Therefore, even though the forex market is not directly regulated by one regulator, all transactions and dealers must be approved and licensed by a regulatory authority in the area they provide services.
How to trade news in forex?
The forex market is highly influenced by market news and economic data. As such, many traders monitor news and important information released on the market to assess currency pairs and based on that, take trading decisions. For that purpose, it’s important for a forex news trader to find a news source provider and understand the key factors that impact a certain currency pair’s price movements.
Can you make a living from trading forex?
Well, in essence, yes you can. But that is very difficult and only a few reach the point in which they have the skills to generate consistent profits over the long term.
What is the minimum capital required to start trading forex?
If you want to trade forex, you can basically with just $100. However, it is recommended that you make an initial investment of at least $500-$1000 to get the most out of your trading forex account.
What’s the best way to trade FX currencies?
The key to successful trading in the forex market is to develop a trading strategy or trading style that works for the long term. There are lots of ways to do that and each successful trader has different strategies. To start, you need to know how to read candlestick charts, use technical analysis indicators, and effectively interpret fundamental factors and central bank announcements that influence currency prices.