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Popular Forex Trading Terms

In order to be a successful Forex trader, you need to be aware of both the market’s current trends and common terminology.

Unfortunately, it’s not always so simple and may get very complicated at times. Before you begin trading currency pairings, you should familiarize yourself with some of the most commonly used words in the foreign exchange market.

The first step in designing your own trading strategy is to understand this terminology, which has been outlined in this useful guide.

 

1.     Spread

On a trading platform, the spread is the difference between the Buy and Sell (Bid and Ask) prices that are given to traders.

In the event that a CFD provider offers lower spreads than its competitors, this indicates that traders will be able to benefit from a smaller difference between the Buy and Sell prices of the underlying foreign exchange trading pair.

Spreads can be used to gauge the liquidity of the market, and it is also useful to check for low spread Forex brokers like Khwezi Trade in order to take greater advantage of this liquidity.

 

2.     Leverage

Using leverage, you can obtain exposure to higher quantities of currency without having to pay the entire value of the trade upfront. It effectively enables you to trade larger quantities of money with less initial investment.

For example, if you have a leverage of 1:50, you might use the initial margin of R2000 to open a trade with a value of R100,000. Leverage can significantly increase your profits, but it can also significantly increase your losses.

 

3.     Pip

The smallest increment in which a currency pair is valued. Forex pair movement is measured in pips, which are one-point increments of one cent. It is possible for pip prices to fluctuate and shift as a result of the time of day a deal is executed and the amount of money that is traded.

 

4.     Base

This describes the currency that is used as the starting point in a currency pair (or top number). When trading the USD/CAD pair, for example, the USD is referred to as the Base.

 

5.     Quote

This is the second currency in a currency pair, so that using our example above, the CAD will be referred to as the quote.

 

6.     Bear market

A market in decline suggests that traders expect prices to fall, which means that there will be more short selling (also known as traders ‘going short’) in the future.

 

7.     Bull market

A rising market in which traders are keen to enhance their long trading activity (also known as ‘going long’) and indicates that the market is appreciating.

 

8.     Foreign Exchange Volatility

This term refers to the price fluctuations in a market. A market is considered more volatile when price changes are particularly large. For want of a better term, it is a measure of how sudden and unpredictable the market’s price movement can be.

This is typically considered to be an indicator of how hazardous it is to trade a certain currency pair.

 

Related News: Forex Trading: What You Need To Know

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Written by How South Africa

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