Forex Online Trading
Definition of Common Terms
By starting to trade (even on an online demo account), a newbie will gradually learn almost all of these terms, but a brief overview of the terms is useful for future careers in online trading. These are just basic terms involved in online trading, not a full list of essential terms for a forex trader.
Trading-Related Terms
Pip: The smallest price increment in a currency. For example, the difference of 1.3015 and 1.3016 in EURUSD is one pip.
Position: A view expressed by a trader through the buying or selling of currencies, and can also refer to the amount of currency either owned or owed by an investor.
Long: Buying the first (base) currency by paying (or selling) the second (counter) currency.
Short: Buying the second currency by paying (or selling the first currency, which is simply identical to buying the second currency.
Ask: The price at which broker is willing to sell the base currency.
Bid: The price at which broker is willing to buy the base currency, and the trader has offered to purchase.
Spread: The difference between the Bid and Ask price.
Limit Order: A request to open a position (long or short) at a specified better price, if achieved.
Stop Order: Order to buy or sell at the best available price when a given price threshold has been reached.
Lot: The unit of trade size, equal to 100,000 unit of the base currency.
Swap: The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.
Rollover: An overnight swap, which is debited or credited to the trader's account, according to the current swap rate of the currency pair of any open position. Rollover is calculated daily at 23:59 of the broker's time zone.
Broker-Related Terms
Platform: The software for trading and chart analysis. There are some popular platforms like MT4, and some brokers have their own licensed platforms.
Leverage: The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For instance, with a leverage of 1:100, a trader can buy 100 times of his available fund.
Margin: The amount of funds required in a trader's account in order to open a position or to maintain an open position. For example, 1% margin means that $1,000 is required for a $100,000 position.
Margin Call: A requirement by the broker to deposit more funds in order to maintain an open position. When a margin call is reached, the broker closes the open position (or open new hedged position) to avoid negative balance.
Some More Terms
Bull market: Indicative of rising prices.
Bear Market: Indicative of falling prices.
Fundamental Analysis: Analyzing the market based on economic factors. The macro economic factors that are accepted as forming the foundation for the relative value of a currency such as inflation, growth, trade balance, government deficit, and interest rates.
Technical Analysis: Analysis applied to the price action of the market to develop trading decisions, merely based on mathematical indicators and regardless of fundamental factors.
Liquidity: A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.
Volatility: A measure of price fluctuations.
Day Trading: Opening and closing the same position or positions before the close of the same trading day.
Hedge: The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.
Hedged Position: One open buy position and one open sell position in the same currency.
A preliminary introduction to the forex market can be found at What Is Forex?
References and Further Readings
Toni Turner, A Beginner's Guide to Day Trading Online, 2nd Ed, Adams Media, 2007.
James Chen, Essentials of Foreign Exchange Trading, Wiley, 2009.
Mark Galant, Brian Dolan, Currency Trading For Dummies, For Dummies, 2007.
Forex Online Trading
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