Getting into Forex trading can feel very exciting, but it can seem complex or even confusing to new traders. This market has a language of its own, and the learning curve can feel steep.
Don’t worry, our guide to Forex trading is here to help! In our last chapter, we looked at key asset classes in trading. Today, our focus is on Forex terminology and common questions about trading currency pairs.
If you’re feeling confused about basic Forex terms, this guide can make things a little simpler. Here, we define many common Forex trading terms to help you better navigate the market.
You’ll find answers to a few very frequently asked questions about Forex. Here’s our suggestion: Bookmark this page and use it as a reference while you build your knowledge and skills as a Forex trader.
Forex Trading Glossary: Basic Terms in Forex Trading
Here is a list of common Forex trading terms along with their definitions so that you have a clear understanding of their meanings:
Pip
A pip represents the smallest possible standard price change for a Forex pair. They represent the difference between the bid price and ask price. For most pairs, that’s a change at the fourth digit past the decimal point. It represents one ten-thousandth of a whole unit of currency.
Keep in mind that certain pairs, like pairs including the Japanese Yen, only have two decimal places, as Babypips explains.
Spread
The spread is the difference between the bid price (the maximum a buyer is willing to pay) and the ask price (the minimum a seller is willing to take) of a currency pair. Spreads represent the cost of making a Forex trade. Lower spreads mean lower costs and benefit traders, while higher spreads mean higher costs.
Leverage
In general, leverage is the use of borrowed funds to trade at a larger scale. Leverage boosts the profits of a winning trade, but also amplifies the losses of a losing trade.
Lot
A lot refers to 100,000 units of currency. This is the standard size used in trading, but your personal Forex glossary of terms should also include the mini (10,000 units), micro (1,000), and nano (100) lot sizes. The large size of standard lots is part of the reason why leverage is so important in Forex trading.
Currency Pair
All Forex trading is done with currency pairs, such as the US Dollar and Euro (USD/EUR). The first currency is the base currency, while the second currency is the quote currency. The exchange rate that follows the currency pair tells you how many units of the second currency is needed to purchase one unit of the first currency.
Bid Price & Ask Price
The bid price is the maximum a buyer is willing to pay for a Forex pair. The ask price is the minimum a seller is willing to take for a Forex pair. The difference between the two is the spread.
Long Position & Short Position
A long position is the purchase of a Forex pair with the belief that the pair will rise in value and can be sold later for a profit. A short position involves selling a borrowed Forex pair with the goal of buying it back after the price drops, earning a profit before returning it to the lender.
Stop Loss & Take Profit
A stop-loss order is an automatic signal set up by traders to close a position if it drops in value to a certain point. Stop-loss orders help to limit financial losses and keep traders active by retaining some of their funds.
Take-profit orders are the opposite of a stop-loss order in the big picture. They are automatic signals set up by traders to close a trade once it gains a certain amount of value, securing a profit.
Broker
A broker provides traditional traders with the services needed to trade Forex pairs.
Bear Market & Bull Market
A bear market indicates an overall drop in the value of most currency pairs. A bull market is the opposite — showing a general increase in the value of most currency pairs.
FAQs: Common Forex Trading Questions
Now that we’ve covered basic Forex terms, here are answers to a few common questions about Forex trading.
What is Prop Trading?
Prop trading is an alternative to traditional forex trading where traders buy a simulated account from a prop firm and trade based on the firm’s rules.
This approach limits the direct financial risk to traders, as the most they can lose is the cost of the account. At the same time, reputable prop firms offer generous profit sharing to traders who are consistently successful. For instance, FundedNext offers profit shares of up to 95% in the trader’s favor.
Learn more about prop trading and how it compares to traditional trading.
How Much Money Do I Need to Start Prop Trading?
In traditional trading, the exact amount of money needed to open an account depends on the broker and the leverage offered. Some brokers have minimums as low as $100, although this can severely limit the scale of trading and traders are still financially responsible for the leverage on losing trades.
In prop trading, traders can purchase simulated accounts that range in value from under $100 to a few thousand dollars. Traders also gain access to leverage but are not responsible for personally paying it back on losing trades.
Is Forex Trading Risky?
Yes, all forms of asset trading involve the risk of losing money as well as the opportunity to earn it. Prop trading helps to manage this risk by limiting the possible financial losses of traders to only the value of the account they purchase.
Start Trading Forex with FundedNext!
Now that we’ve covered common Forex terms and answered a few key questions about trading Forex, our guide is almost complete. Read our last chapter to learn what makes FundedNext the best prop trading firm for you!
Kick-start your Forex trading success today. Compare FundedNext challenges to find the right fit for your trading style.
