Starting Forex: Trading Terms

How do I start trading?

It’s simple. Register on a legit broker’s website and deposit the amount you wish to invest into your account. Most brokers accept many different payment types which vary according to the region you live in. Generally, they accept deposits via most major credit or debit cards, bank wire transfers and e-wallets. Contact your account service manager through their Live Chat or email to find out which payment solutions are available to you. Once your deposit has been received, you are ready to start trading.
If you are new to forex or not ready to start trading yet, you can open a free demo account to try trading and experience trading under real market conditions without risking any real money. However, the best way to really understand the psychology of trading is to trade in a live account with real funds. You can get started by opening a mini account with a low first deposit and making small trades.

Trading Terms:

What a Trader must know getting started. To start trading, here are some of the terms you will come across as you plan your first trade.

Pip
Spread
Long and Short  
Margin and leverage 
Stop loss and take profit 
Orders 
Hold position  

What is a pip?

One pip is the smallest unit of change in price. It stands for ‘percentage in point’. Because most currency pairs are quoted with four decimal points, one pip usually equals 0.0001 but there are some currency pairs such as the USD/JPY where 1 pip equals 0.01.

What is a spread?

When looking to trade a currency there are always two prices. The price you can buy for is on the right side and is called the ask or the buy price. The price you can sell at is on the left side and is called the bid or the sell price. Remember when you buy a pair you are buying the base currency and selling the counter and when you sell a pair you are selling the base and buying the counter. The difference between these two prices is called the spread, which is the difference between what you pay to buy a currency to what you get when you sell it.
The spread is essentially the cost of your trading. You may come across brokers advertising low spreads but be sure to check what other commissions and costs they may be charging you.

What do ‘long’ and ‘short’ mean?

The forex market is bi-directional, meaning that you can trade both ways. You can buy or sell depending on your strategy. ‘Long’ means to buy, and you will go long when you are looking for prices to rise. If you are going ‘short’ you are selling because you are looking for prices to fall. Going short is just as common in currency trading as going long. If you are ‘square’ or ‘flat’, it means that your buy positions exactly offset your sell positions, or that you have no positions in the market at all.

Margin and leverage:

Through the use of leverage, traders are able to invest a small amount of money and trade much larger deal sizes. This is useful because the movement in currency rates can be very small, and larger trades represent larger profits/losses for every pip change in the rate.
Leverage allows you to trade with more money than you have in your account, because you effectively “leverage” your free balance to open a larger trade.
Leverage is shown as a ratio, for example 1:100. Note that leverage amplifies both potential profits and losses alike.

Stop loss and take profit:

Setting a stop loss is a way to limit your risk. You decide upfront what your maximum loss could be by choosing the stop loss rate. If the market reaches that rate, your deal will be automatically closed. Since you are the person setting the rate, you are in control of your investment.
Setting a take profit rate works in the same way. You decide on a desirable profit amount and your deal is automatically closed when the profit rate you have chosen is reached. Using a take profit rate helps you to control your trading without having to continuously monitor your position.

Types of orders:

You can decide to open a day trade, limit order or forward order.

A day trade, also known as a market order, is an order to buy or sell at the best available price. This type of order is typically executed immediately.

A limit order is an order to open a day trade deal at a rate that you have pre-defined when and if the market reaches that rate. The limit order will remain pending (i.e. waiting to be turned into a day trade) until the market reaches that rate, or the time expires. It has the usual features of a day trade, including a margin requirement.

A forward order is an open trade with a value date greater than the spot value date. It has the usual features of a day trade, including a margin requirement. All three types of orders can have tailored stop loss and take profit rates set by you, in order to help you manage your risk.

How long should I hold my position open?

If you are day trading, you usually hold your position open anywhere from a few minutes to a few hours and generally not longer than a day – hence the name, “day trading”.
A medium-term trader will look to get the general market direction right and profit from more significant currency rate moves. This kind of trading requires many of the same skills that a day trader would use, especially when it comes to entering and exiting positions. However it also demands a broader view on the markets, additional analytical work as well as much more patience.