The forex market can be an attractive spot for many of us as we get a lot of opportunities to make money from currency trading. But being a beginner in the forex space is not that easy as you will have to indulge in systematic learning before engaging in trading.
There are a lot of things that you will have to learn but the first lessons are about the technical terms that are used in the forex market as you need to know the meaning of these forex jargon for exploring a trading platform.
The MT4 and MT5 platforms are most popular among beginners, with the former being widely used because of their easy UI and inclusion of all basic tools. Here is the link to learn more about the MT4 trading platform.
But in order to kickstart your trading journey with the right set of tools, you will have to start by understanding the basic forex terms and this blog can be an insightful read to expand your knowledge.
Decoding the Currency Trading Terms- Pips and Spreads
The global currency market is quite different from other financial markets as the trading instruments are currencies which are bought and sold on the basis of their value against another currency. Thus two currencies form a currency pair and the exchange rate fluctuations become the basis for all trading decisions.
However, since different currencies have different values, measuring the price movement is a complicated task for traders. Hence, a standard forex unit is used for expressing and stating the price movements in currency pairs and this unit is known as pips which is the abbreviation for price interest point or percentage in point.
With pips, you can keep track of the smallest price changes that happen in forex as pip is stated in decimals and 1 pip is 0.01 for Japanese Yen pairs and 0.0001 for all other currency pairs. Traders decide the entry and exit prices by counting the number of pips that they want to earn from a trade.
They also depend on pip calculations for setting a stop loss and the spreads that are charged by brokers on currency pairs are also calculated in pips. Spreads are actually a part of the trading cost as the buying and selling prices of currencies are different from the actual market price.
Another forex term that you need to learn about before trading is swap. The forex market gets impacted by the interest rate differential of currencies as the trades that are kept open for an extended duration are subject to swap charges.
Swap is charged on the basis of the difference in the interest rates of two currencies in a pair. When you open overnight trades, the swap will be either deducted from your account balance or added to your account depending on whether it is a positive or negative swap.
But if you are a Muslim, then any interest-based transaction is forbidden as per Sharia law and thus you may not be able to open overnight trade positions unless you trade on a swap-free account. The swap-free account is popularly known as Islamic accounts and the brokers who offer these accounts, provide halal trading conditions, helping you to trade freely without breaking any religious rules.
Forex terms to learn before navigating the currency Market
- Trading account – A trading account is made for carrying out trading activities on a trading platform like MT4 or MT5. But to access the forex market, you will have to sign up with a forex broker and provide the required details for account opening. There are different types of trading accounts that you can use based on your requirements. There is a demo account for practice without risking real money and a regular account where you have to deposit money for trading. There are also micro accounts to trade with a smaller capital and like I mentioned earlier, swap-free accounts are used by Muslim traders.
- Base currency – Base currency in a pair is the first currency that is stated. For example, the base currency of the GBP/USD pair is the British Pound and its value is stated against USD, which is the quoted currency. The currency that is bought or sold in trading is the base currency and the currency with which you have funded your account is the base currency of your trading account. Basically, the base currency will be the basis for your trades, profits and losses.
- Leverage and Margin – Leverage is like a loan from your broker and the purpose of leverage is to increase the trade size with a smaller amount of capital. Margin is the minimum amount that should be there in your account for placing a trade. The margin requirement for a trade depends on two things. The trade size and leverage. The currency pairs that you are trading with and the base currency of the trading account are also relevant for calculating the margin requirement for a trade. Tools like trading calculators can be used for estimating the margin and managing risk while trading with leverage.
Bulls, Bears, and Beyond: Mastering Market Sentiment
Market sentiment can be defined as the psychology of the market and it often decides the direction in which the market is moving. The term bulls or bullish stands for buyers and buying behaviour in the world of trading.
Thus, when you see a surge in the number of buyers, the market sentiment is said to be bullish. On the other hand, bears are sellers and bearish market sentiment refers to the dominance of sellers. To identify the market sentiment from a price chart, you need to look at the price pattern and market trend that is being formed.
Some chart patterns indicate a bullish trend and the other patterns suggest a bearish trend. If you see that the price movements are happening with higher swing highs and higher swing lows, that is an uptrend and market sentiment is bullish due to the rising prices.
If you see the price chart displaying low swing highs and low swing lows, the sentiment is bearish and the prices are falling. This is what we refer to as a downtrend. Identifying the type of trend that is happening is crucial for finding trade setups based on your strategy.
There is also a sideway trend where the prices only move horizontally and this happens during periods of consolidation. Two things can happen after a consolidation. The trend can continue in the same direction or the trend may reverse and the prices start moving in the opposite direction.
When you learn chart reading, you will get to see reversal patterns and continuation patterns that can be used to predict the potential price movement. Thus, learning about technical analysis and chart reading is essential to make sound trading decisions.
Final Words
So, these are some basic yet very important forex terms that you should know before becoming a forex trader. This blog is only a starting point as there are a lot more terms that you need to learn about for devising a solid strategy and executing it with perfection. When you understand the basics, your trading journey becomes easier.
