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Basic Forex Terminology

Basic Forex Terminology

The realm of Foreign Exchange trading contains a wide range of basic forex terminology that you will need to learn to transact on the markets. While some of these terms are present in other financial trading methods, many terms are only used in foreign exchange trading.
To help you out, below are some descriptions, together with examples, of the most common terms that you will come across.

Bid Price

The Bid is the price that the market is ready to purchase a currency pair for. This is the price at which the trader can ‘sell’ one unit of the base currency.

EXAMPLE – In the quote EUR/USD 1.3110/13 the bid price is 1.3110. Therefore you can sell a single Euro for 1.3110 dollars.

Ask Price

The Ask is the price that the market is ready to sell a currency pair for. This is the price at which the trader can ‘buy’ one unit of the base currency.

EXAMPLE -In the quote of EUR/USD 1.3115/18 the ask price is 1.3118. Therefore you can buy a single Euro for 1.3118
dollars.

Bid/Ask Spread

The bid/ask spread is a term used for the the difference between the bid and ask price. You can calculate it from the following simple formula  – Spread = (Bid price –Ask price)

The spread that you encounter on a currency pair will be dependent upon the pair traded, the market conditions (floating spreads) and also the broker that you use for your trading.

Market Order

A Market Order is probably the simplest of the execution orders to understand. When you execute a market order you are buying or selling at the current market price(spot price)from your broker. Market Orders are executed though the ‘Buy’ and ‘Sell’ buttons on your trading platform.

EXAMPLE – A market order on a EUR/USD spot price of 1.4500/1.4503 will either buy the EUR at 1.4500 or sell it at 1.4503

Limit Order (Entry Order)

A limit order is placed when you want to automatically place a buy or sell order when the market reaches a pre-designated target price. There are two key variables with limit orders; price and time. The price is the level at which you want the order to be executed. The time is the duration over which you want the order to remain active before it is expired.

Limit orders help to get rid of the ‘screen watching’ and manual trade entry that is common among traders waiting for a level to be reached before they enter a trading position.

EXAMPLE – The USD/JPY is currently 90.25 and you want to buy the USD/JPY if the market hits 90.50. So you execute a ‘buy’ limit order for the USD/JPY at 90.50. You are now free to leave the trading screen, knowing that if your predefined level is triggered, then your broker will execute the order. If the order is not ‘filled’ in your allotted time period you can ‘pull’ the order, preventing it from being executed.

Stop-loss Order (Exit Order)

The stop-loss order works in a similar way to the limit order and is used on open orders to prevent losses. It is placed ‘below’ the order entry price and remains in effect until it is either removed or is activated in the market.

EXAMPLE – You go ‘long’ the EUR/USD at 1.4525 expecting it to go up. When placing the trade you also set a stop-loss order at 1.4500. This gives your trade a bit of space to cope with the market fluctuations. It also means that if the trade moves against you and the EUR/USD heads ‘down’ then your trading platform would automatically execute a sell order at  the predefined level.

In the above example your position would be closed if the market touches 1.4500, limiting your loss to 25 pips. If the market continued to fall beyond this level you would  no longer be liable because your Broker would have limited your loss by executing the sell order.

Stop losses are used to protect trading positions and prevent sudden market movements from racking up huge losses. They can also be used for locking in profits. Moving trades to break even and the use of ‘trailing’ stops can help secure profits while letting your trades run.

The bid/ask spread is a term used for the the difference between the bid and ask price. You can calculate it from the following simple formula – Spread = (Bid price –Ask price)The spread that you encounter on a currency pair will be dependent upon the pair traded, the market conditions (floating spreads) and also the broker that you use for your trading.

About Satish Oraon

I'm a good computer programmer & head of forex and crypto analyst, after finishing my programming like to trade & analyze forex, crypto and different trading assets.

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