Forex terms, in plain English.
38 essential terms, each explained in a sentence or two.
A
- Ask
- The price at which you can buy a currency pair from your broker. Always slightly higher than the bid. See also
B
- Base currency
- The first currency in a pair (EUR in EUR/USD). The quote shows how much of the second currency one unit of the base costs.
- Bid
- The price at which you can sell a currency pair to your broker. See also
C
- Carry trade
- Borrowing in a low-interest-rate currency to hold a higher-yielding one, aiming to earn the interest difference.
- Central bank
- The institution that sets a country's interest rates and monetary policy, such as the Federal Reserve or the European Central Bank.
- CFD (contract for difference)
- A leveraged contract that pays the difference in an asset's price between opening and closing, without owning the asset itself.
- CPI (consumer price index)
- A measure of inflation based on the price of a basket of consumer goods. One of the most market-moving economic releases.
- Cross pair
- A currency pair that does not include the US dollar, such as EUR/GBP or AUD/JPY.
D
- Drawdown
- The fall in account value from a peak to a subsequent low, usually expressed as a percentage.
E
- Economic calendar
- A schedule of upcoming data releases and central bank events that can move currency prices.
- Equity
- Your account balance plus or minus the profit or loss on open positions.
F
- Fundamental analysis
- Analysing currencies through economic data, interest rates, policy and politics rather than price charts.
H
- Hedging
- Opening a position to offset the risk of another position or exposure.
L
- Leverage
- Using borrowed funds to control a position larger than your deposit. Expressed as a ratio, such as 30:1. Magnifies both gains and losses. See also
- Liquidity
- How easily a currency can be bought or sold without moving its price. Major pairs are the most liquid.
- Long
- A buy position that profits if the price rises. See also
- Lot
- A standard unit of position size. A standard lot is 100,000 units of the base currency, a mini lot 10,000 and a micro lot 1,000. For metals a lot is usually measured in troy ounces: 100 oz of gold or 5,000 oz of silver.
M
- Major pair
- One of the most traded pairs, each including the US dollar: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD and NZD/USD.
- Margin
- The deposit a broker sets aside from your account to keep a leveraged position open. See also
- Margin call
- A warning that your equity has fallen close to the minimum needed to keep your positions open.
- Margin level
- Equity divided by used margin, as a percentage. Brokers use it to trigger margin calls and stop-outs.
N
- Non-farm payrolls (NFP)
- A monthly US jobs report that often causes large moves in the US dollar.
O
- Over-the-counter (OTC)
- Trading directly between parties rather than on a central exchange. The forex market is OTC.
P
- Pip
- The standard unit of price movement: 0.0001 for most pairs and 0.01 for pairs quoted in Japanese yen.
- Pipette
- One tenth of a pip — the extra decimal place many brokers display.
- Position size
- How large a trade is, in lots or units. Should be set from the amount you are willing to risk and your stop-loss distance.
Q
- Quote currency
- The second currency in a pair (USD in EUR/USD). Prices and pip values are first expressed in it.
R
- Risk–reward ratio
- The potential loss of a trade compared with its potential profit, for example 1:2.
S
- Short
- A sell position that profits if the price falls. See also
- Slippage
- The difference between the price you expected and the price your order was actually filled at, common during fast markets.
- Spread
- The difference between the bid and ask price — one of the main costs of trading.
- Stop loss
- An order that closes a position automatically at a set price to limit the loss.
- Stop-out
- The margin level at which a broker starts closing your positions automatically.
- Support and resistance
- Price levels where buying (support) or selling (resistance) has repeatedly appeared in the past.
- Swap (rollover)
- Interest paid or earned for holding a position overnight, based on the interest rate difference between the two currencies.
T
- Take profit
- An order that closes a position automatically once it reaches a set profit level.
- Technical analysis
- Analysing price charts, patterns and indicators to judge likely future price behaviour.
V
- Volatility
- How much and how quickly a price moves. High volatility means larger swings in both directions.