Trading forex can be the most financially rewarding experience in the world. However, when new traders first dip their toes into the seemingly murky waters of the forex markets, they can often be put off by scary sounding terminology.
Let’s face it, who wouldn’t feel intimidated by phrases like “the average directional index” or “relative strength index” – but, the more you immerse yourself within the throbbing excitement that is forex trading, the more you appreciate that these scary sounding terms are actually there to help you. And to nick bigger profits from the markets.
While we cannot cover nearly everything within this article, here are some of the terms you’ll hear as you begin your exciting career as a forex trader – and what they mean:
Bid/Ask Price – The prices of currency pairs can be bought by you (ask price) or sold by you (bid price). You will always pay slightly more if you’re buying, and receive a little less when you’re selling. The difference is known as the bid ask spread, and it is how brokers make their commission.
Hedging – This has nothing to do with the terribly overgrown bush in the garden that your wife’s been nagging at you to trim. Hedging is a technique that means that traders take opposite positions within the same trade. It’s normally used as a risk management tool, and tends to be used only by advanced traders.
Technical Analysis & Indicators – At the start we mentioned “the average directional index” and “relative strength index”. These are two examples of technical indicators which exist to aid your trading. There are literally hundreds of indicators, but as a home based forex trader you’ll only need to learn about a few. And they aren’t nearly as frightening as you might think. If you can read a basic bar chart like you did during your school days, you can understand technical indicators – and more importantly use them to make money. Technical analysis relates to the use of any charts in the process of getting in or out of a trade.
Fundamental Analysis – This relates to numbers and news based analysis. While 99% of your trading will be based on charts, fundamental analysis is the use of news releases and certain events (such as unemployment figures, GDP figures etc) which will move markets. While you really do not need to know about the nitty gritty of these, you do need to know when the numbers are released as it will affect your trades. There are many free sites where you can get this information.
Pip – This is the smallest point of movement in a currency pair. When a currency pair moves in any direction by one unit, this unit is known as a pip.
Stop Loss – A stop loss cuts you out of a trade once it incurs a specific loss. It is a key tool for capital preservation. Different traders will apply different stop losses according to their trading styles. For example, a bold trader may set the stop loss a long distance from the current price, while a more conservative trader will set the stop loss rather more tightly. Any home based forex trader worth his salt will want to set a stop loss on every single trade.
There are of course many more terms that you’ll want to learn about. If you’re a new forex trader, then enjoy this learning experience – because every new bit of information you tap up, will help you to become that little bit more profitable.