Definition terms in forex

forex(foreign exchange market)

The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies.  It includes the  buying, selling and exchanging currencies at current market or determined limit prices .Trading takes place online on  the chosen Forex platform like mt4 or ctrader being linked by brokers. Because of this,we can say that forex market is an interbank market, that is, it is connected together by different banks as well as institutions. When a certain currency like EUR is being exchanged in terms of USD, a certain portion of funds will be used for this trannsaction in the traders account. Let say that the traders account has $1000, and he/she wants to buy 100 EUR at a price of 1.17200 at 1:1 leverage, then the total amount to be used will be $117.200. If the price goes up to 1.18200 and the trader happens to want to exchange the funds again back, then he/she will receive 118.200. This will be an equivalent profit of $1. That sounds great.


BULL
-in forex trading, a bull is a market in which the price of a currency in terms of another currency is rising encouraging one to enter a buy position .For example, the price of EUR in terms of USD. This can be shown in the figure below



BEAR

In forex trading ,a bear is a market in which the price of a currency in terms of another currency is falling encouraging one to enter a sell position. For example, the price of EUR in terms of USD. This can be shown in the figure below;


BUY and SELL

In forex, when you are buying a currency, you are hoping that its value will strengthen comparing to the currency that you are selling while when you are selling a currency, you are hoping that its value will weaken comparing to the currency that you are buying. Here is how a buy and a sell button looks like in a trading platform;

PIPS

A pip(short for point in percentage), is a very small measure of change in a currency pair in the forex market. It is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly referred to as 1/100th of 1%, or one basis point. This standardized size helps to protect investors from huge losses. It can also be considered as a transaction cost whenever a person enters a buy or a sell position in the market. For example, a eurusd pair is selling at 1.14118 and buying at 1.14129. The difference between the two pairs will give a pip for entering the market thus being considered as a transaction cost. This is calculated as follows;1.14129-1.14118=0.00011.This is considered as 1.1pip.This is indicated in the figure below;

LOT

-In forex trading, a forex lot is a trading term used to describe the size of a trading position in forex with reference to a standard of 100,000 units of the base currency. In most trading platform 100,000 unit is equivalent to 1lot size. This is indicated in the figure below;

TRADING PLATFORM

-In forex trading,a currency trading platform is a type of trading platform used to help currency traders with forex trading analysis and trade execution. There are many trading platforms but most currency traders prefer to use meta trader 4 since it is easy to use .Here is how the meta trader 4 trading platform looks like

FOREX CHART

-In forex trading,a forex chart is a chart that allows a trader to view historical currency exchange rates.Most forex brokers provide forex chart for free of charge to their client.Forex charts also present useful information for the technical analysis of the currency pairs.The three commonly used forex charts by currency traders are;candlesticks,line chart and bar chart.Here is how each of the forex chart looks like
candlesticks
line chart
bar chart

Fundamental analysis and technical analysis

-Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock or a currency in terms of another currency using the released news events. Technical analysts do not attempt to measure a security's intrinsic value, but instead use stock or currency charts to identify patterns and trends. The most commonly used technical analysis tools are trend and oscillator indicators.

Scalping and hedging

Forex scalping is a trading strategy used by forex traders to buy or sell a currency pair and then hold it for a short period of time in an attempt to make a profit. A forex scalper looks to make a large number of trades and earn a small profit each time while forex hedging is a strategy used by traders in which they place a buy and a sell order of the same pair currency at the same time resulting to a zero profit or a transaction cost profit.Here is the figure of a scalper 


FOREX RISK MANAGEMENT

Foreign exchange risk describes the risk that an investment's value may change due to changes in the value of two different currencies. It is also known as currency risk, FX risk and exchange-rate risk. Traders are advised to apply risk management to avoid loosing their margin or liquidating their account since market punishes greedy traders.

FOREX BROKER

Forex brokers are firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies .In return,they earn commissions they charge when traders open positions .The commission may be in form of pips or in terms of per lot size. Some brokers may charge between 1 to 5 pips while others may charge $1 per lot size.

SWAP

-A forex swap rate is defined as an overnight or rollover interest (that is earned or paid) for holding positions overnight in foreign exchange trading . In most cases ,a sleep over sell positions will have a positive value while a sleep over buy position will have a negative value

TAKE PROFIT(TP)

TP is a limit order that you send to your broker notifying them to close your position or trade when a certain price reaches a specified price level in profit.The price must be higher than the limit price.For example,you may open a buy position  of currency pair eurusd at 1.1410 and notifies the broker to close it when it reaches 1.1430 thus will enable you to make a profit of 20pips.

STOP LOSS(SL)

-SL is A trade order to sell a currency when the price reaches or falls below the specified price. This is used to limit loss, usually when the price can not be actively monitored by the trader.For example,if the trader had made a buy position of eurusd at 1.1410,then he or she should set an SL of 1.1390 if he or she wants the position to close when it triggers at 1.1390 when the price falls below 1.1410

TIMEFRAME

-This is the period in which a forex trader chooses to operate in.In most trading platform,the timeframe may encompass second,minute,hour,day,week,month and even year.Here is a an image of a timeframe of a metatrader platform;

timeframe

MARKET WATCH

-This is a tab in a trading platform showing several trading pairs thus enabling a trader to choose the trading pair that they want to trade.The trading pairs that appear on market watch may include,EURUSD,USDJPY,GBPUSD,AUDUSD,NZDUSD amongst others.Here is a photo of market watch;

market watch

Bid and Ask

-Bid is the selling price while ask is the buying price of a given pair of currency.Here is a photo of a bid and ask price on a metatrader platform;

bid and ask price

DEMO ACCOUNT

A demo account is a type of account offered by trading platforms, which is funded with fake money that enables a prospective customer to experiment with the trading platform and its various features, before deciding to set up a real account funded with the customers actual money.In a demo account,a trader can not withdraw the profit made over there since that profit was made with a fake money.

REAL ACCOUNT

-This is a type of account offered by brokers under certain conditions and which is linked to a certain trading platform and it enables traders to deposit their own real money via the broker after which they can trade with their deposit amount using the platform provided by the broker and the profit can be withdrawn from the brokers portal account.

LEVERAGE

-This is the ratio of the value of transaction versus the fund on margin.This ratio enables traders to be able to control large amount in the market with the small fund in their account.Leverage can be expresses as; 1:10,1:100,1:200,1:400,1:1000 or even 1:2000.

MARGIN ACCOUNT

-This is an individual account in which they will be able to open a position after depositing a certain amount of money in their account and selecting a certain leverage to use.

USED MARGIN

-This is the amount of deposited money in the margin account used to open a trading position 

MARGIN LEVEL

-The Forex margin level is the percentage value based on the amount of accessible usable margin versus used margin. It is calculated as;margin level=equity/used margin

DIVERGENCE

This is a movement in the market in which the price is moving in opposite direction for a short time against an oscillator indicator after which a reversal of the price will take place and start moving in the same direction as the oscillator indicator.For example,when a certain oscillator indicator is moving downwards while the price is moving upwards,the price will reverse and start moving in the same direction downwards as the oscillator indicator

OVERBOUGHT

This is a condition in the market in which many traders are buying a certain currency at high price thus making its price not to be able to continue to rise. This will cause its price to start declining thus signaling many traders to start closing their buying positions and open a sell position.

OVERSOLD

This is a condition in the market in which many traders are selling a certain currency at very low price thus making its price not to be able to continue to fall.This will cause its price to start inclining thus signaling many traders to start closing their selling positions and open a buy position

Market price and limit price   

Market price is the current price whereby the buy or sell order position placed by the trader is being executed instantly while limit price is the pending price whereby the buy or sell order position placed by the trader is being executed when their order reaches that price.


INTRODUCING BROKER

These are third party individual or institutions who happen to have their own Forex consulting firms whereby they will bring in new clients to the brokers where they normally trade at . In return,they will be paid commissions for every lot being traded by the clients they will have brought to those brokers.The more the clients the more the commission to be paid.



Market makers and market takers

Market makers are those traders who are considered as liquidity providers whose work is to create the market for buy or sell orders . Their created price will get into the market as limit price waiting for other traders to come and trade with those prices. On the other hand, market takers are those traders who just place their orders using the current market price or the limit price created by the market makers. Market makers profit when other traders use their created price to place a buy or sell orders. Their profit is the different between the selling and buying price. For example,if their limit buy price for a given currency like EURUSD is 1.18200 while the sell limit price is 1.18100,then their profit will be 0.001 when those orders is being initiated. If a certain trader place around 100,000 unit order for EUR,then their profit will be around $100. That sounds good for market makers



Trend and oscillator indicator


Trend is a technical analysis indicator that enables a forex trader to identify support and resistance point. For support point, a forex trader will be signaled to close any short running position and opens a long position since the market will start moving upwards while for resistance point, a forex trader will be signaled to close any long position and opens a short position since the market will start moving downwards. On the other hand, an oscillator indicator is a technical analysis indicator that enables a forex trader to know whether the forex  market is in an overbought or oversold condition. For oversold condition,it will signal the forex trader to close any short running position and opens a long position since the market will start moving upwards . For overbought condition,it will signal the forex trader to close any long running position and opens a short position since the market will start moving downwards.












 







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