Common Forex Terms and Definitions
Essential Glossary for the Novice Forex Investors
New forex investors can be overwhelmed by the number of technical terms used by professionals. The following is a quick go-to reference to solve all your doubts.
When first approaching the world of currency trading, novice investors tend to be overwhelmed by the rich and varied terminology used by professionals. This guide is a good place where to start learning forex terminology.
General Forex Trading
- Leverage: indicates the amount you are borrowing from the broker to place the order. For instance, with a 200:1 leverage you are paying 0.5% and borrowing the remaining 99.5% of the amount to trade from your broker.
- Oscillator: a tool — such as RSI or MACD — that helps predicting a trend change in the market before it happens; usually prone to error
- Momentum Indicator: a tool — such as EMA or SMA — that helps assessing whether a recent change trend will continue or revert to its initial state; usually less prone to errors than oscillators
- Long/Short position: a position that earns from the raise (long) or fall (short) in value of a given currency pair
- Support/Resistance: levels at which the trend reverts either from bearish to bullish (support) or vice versa (resistance)
- Spread: the difference between the bid and the ask price
- Hedging: the act of minimizing exposure in a certain trade by entering in it both with a long and a short position
- Scalping: the technique that consists in trading currency pair with low spreads on trades lasting a few seconds to a few minutes, to grab 3 to 5 pips per trade
Forex Balance and Margin Definitions
- Equity: the difference between the current assets and the current liabilities
- Used Margin: the fraction of the trade amount that is put by the investor himself when opening a trade; multiplied by the leverage, it yields the total size of the trade
- Usable Margin: the amount that is currently available to open new positions; if you are gaining or losing on an open position, the amount of the usable margin will vary accordingly
- Margin Call: order executed by the forex broker as a safety measure when the equity of your account drops below your usable margin; all your open positions will be closed at the current market price to avoid further losses
Forex Chart Patterns
- Head and Shoulders: pattern in which the value of the pair has a top, followed by a higher top, followed by a lower top at about the same level of the first top; the 'reverse head and shoulders' is analogous but works with bottoms instead of tops
- Double top/bottom: two consecutive tops/bottoms at about the same resistance/support levels
- 5-3: in the Elliot Wave theory, a pattern consisting of three strong bullish waves, alternated with two weaker bearish waves
- ABC Correction: in the Elliot wave theory, a pattern that usually manifests itself immediately after the 5-3 pattern and consisting of a strong bearish wave, a weaker bullish wave, and finally a strong bearish one
- Ascending/Descending/Symmetrical Triangles: a long series of alternating support and resistance levels that forms the shape of an ascending, descending, or symmetrical triangle converging to a specific level.
The copyright of the article Common Forex Terms and Definitions in Investment is owned by Dario Borghino. Permission to republish Common Forex Terms and Definitions in print or online must be granted by the author in writing.
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