If you’re eager to work your way into the Forex Market trading industry, it’s inevitable that you’re going to be faced with a lot of new terms and jargon specific to that market. Without the right knowledge, you could find yourself drowning in a huge ocean of confusion, making all of the wrong trading decisions and ultimately leading to your Forex downfall.
Plus, with a whole array of new technologies entering the financial industry, such as numerous mobile trading platforms, it can be difficult to know where to begin!It really doesn’t have to be all negative though! With numerous in-depth Forex trading guides available online, you can rest assured knowing that you’ll be up to date with all of the necessary Forex trading tips and tricks in no time. We have you covered, with the 10 most important Forex market trading terms that will build you a foundation to excel in the Forex trading industry!
Without a doubt, margin is a term that you will come in contact with day after day in your Forex market trading career and is something that you will learn very quickly. But what exactly are they? Simply, the margin is the deposit that is required of you if you’re planning on opening or maintaining a current position on the market. These margins can be either free or used.
In terms of a used margin, this means considering the amount which is being used in order to maintain your market position, whereas a free margin is the amount available to you in order to open that all-important new position. So, for you Forex newbies, the free margin is certainly your best bet to get your foot in the door. It’s important to remember that keeping on top of these margins is paramount, as if your account descends below the minimum amount required, you could be at risk of your account being closed.
Once you have your margin established, you can then move onto leverage, which is the ability to gear yourself into a promising position, where your account total is greater than your total account margin. To put this into perspective for you, say you had £1,000 of margin in your account, but you open a £100,000 position, you will have a leverage of 100:1.
By effectively managing your leverages, you can enhance both your gains and losses, so always ensure you’re using them wisely. Of course, to use your leverage you’ll need to calculate it, but this isn’t a difficult task at all – just divide the total value of your open positions by the overall total margin balance that resides within your Forex account.
3. Stop Loss Order
Within the Forex industry, there is a range of different risks associated with the occupation, and one wrong trade could result in huge losses in your account, so it’s paramount that you have effective risk management – introducing the stop loss order!
When you place an order to sell below the current asking price, or you decide to buy above the current asking price, this is a stop loss order. If you set your stop loss orders to compete with open positions, you will limit your possible downside in the unfortunate case that your market moves against you. Having said this, stop loss orders won’t guarantee your execution price, as once the stop level has been reached, the order will be triggered and executed at the next available price.
4. Currency Pair
In order to be successful in the Forex market trading industry, you will have to come to terms with currency pairs, as these can be the be all or end all of your trading career. Simply, currency pairs involve the exchange rate of two currencies, which is usually quoted in a pair, such as EURUSD. This is done as in a foreign exchange transaction, you are essentially purchasing one currency whilst selling another, so you’ll want to ensure that you’re getting the best deal possible to generate yourself bigger profits.
In currency pairs, there is a base currency and a quote currency, and your job is to ensure that you buy a currency pair on the gut feeling that the base currency will appreciate relative the quote currency in the foreseeable future. If you believe that a base currency will depreciate, however, it would be in your best interests to sell it instead.
In order to effectively balance your options within the Forex market trading industry, you’ll want to ensure you’ve got a spread at hand. All a spread is, is the difference between the buy quote or sell quote, otherwise known as a bid and offer price. Throughout your career, you’ll want to ensure that you have your hands on a reliable spread that is always updating the values shown. Of course, a variable spread will transform constantly, condensing and widening as the market conditions and liquidity change, so staying up-to-date with Forex market news is vital to your success.
6. Cross Rate
Exchange rates are constantly changing, especially now that Brexit is in full swing within the UK. Therefore, monitoring cross rates is extremely important to guaranteeing success within your Forex market trading career. A cross rate involves the exchange rate between 2 separate currencies, and both of these are not official currencies of the country in which the exchange rate quote is given. Alternatively, a cross rate can be referred to as currency quote that excludes the US dollar, no matter what country the quote is given in.
7. Safe Haven Currencies
This Forex market trading term sounds heavenly enough, that’s simply because it is! As already discussed, having a place within the Forex industry is high-risk, and you never know the impact that internal and external factors can have on the value of currencies, making your job a lot more challenging than many others in the economy. Because of this, safe haven currencies will be your new best friend, as they represent an alternative currency that is much less volatile as others, making your decision feel more certain and controlled.
For example, there are many factors that contribute to the fluctuations of Bitcoin’s value, including DDoS problems which are devaluing the currency. Safe haven currencies, however, are considered low risk because their issuing governments are stable with stronger economies.
In some cases, you might notice that an open position arises in the opposite direction of another existing one, despite revolving around the same currency or instrument – this is technically known as hedging within the Forex market trading industry. If you’re interested in hedging a position, you’ll be glad to know that no additional margin is required to do so, so that gives you one less thing to worry about. Always bear in mind though that you cannot open a new position if you have an insufficient usable margin.
Whilst experienced Forex traders will expect to generate capital gains throughout their career, they will also have the opportunity to generate interest income too. “How is this possible?” I hear you ask. Well, since trades are always completed in pairs, each trade will involve two individualistic currencies as well as their separate interest rates.
For a positive rollover to occur, the interest rate of the currency that a trade has brought need to be greater than the interest rate of the currency sold, resulting in interest. As you can imagine, a negative rollover involves the opposite procedure, so the trader will thus pay rollover instead.
10. Bid/Ask Price
If you want to secure the best deal on your trade, you’re going to want to haggle harder on your bidding and asking prices. As many of you may understand, a bid is the best price available at which the trader can purchase the instrument on offer, however, it’s a lot more serious than the bidding that you may see on e-Bay. Talented Forex traders will be able to negotiate the bidding price effectively, ensuring that they’re paying as little as possible. In terms of an asking price, this is the best possible price in which a trader can sell an instrument in present time.
With these ten Forex market trading terms under your belt, there’s nothing that you can’t handle out there. The main thing to remember when trying to secure an effective trade is the overall outcome. Will the asset appreciate in time and benefit you in the long run? Is the instrument highly volatile? These are all decisions that you need to make, but we promise that in time, you’ll be the best Forex trader there ever was!
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