Here are 10 essential forex trading terms every trader should know, along with explanations and examples.
1. Pips (Percentage in Point)
A pip is the smallest price movement in a currency pair, usually the fourth decimal place (0.0001). For yen pairs, it’s the second decimal place (0.01).
🔹 Example: If EUR/USD moves from 1.1000 to 1.1005, it has moved 5 pips.
2. Spread
The spread is the difference between the bid (selling) price and ask (buying) price of a currency pair. It represents the broker’s fee.
🔹 Example: If EUR/USD has a bid price of 1.1000 and an ask price of 1.1002, the spread is 2 pips.
3. Leverage
Leverage allows traders to control larger positions with a smaller amount of capital. It amplifies both profits and losses.
🔹 Example: With 100:1 leverage, a $1,000 deposit can control a $100,000 trade.
4. Margin
Margin is the amount of money required to open and maintain a leveraged position.
🔹 Example: If a broker requires 1% margin, you need $1,000 to control a $100,000 trade.
5. Lot Size
A lot represents the volume of a trade.
- Standard lot = 100,000 units
- Mini lot = 10,000 units
- Micro lot = 1,000 units
🔹 Example: Buying 1 standard lot of EUR/USD means trading 100,000 euros.
6. Stop-Loss (SL)
A stop-loss is an order that automatically closes a trade at a predetermined price to limit losses.
🔹 Example: If you buy EUR/USD at 1.1000 and set an SL at 1.0950, your trade closes at a 50-pip loss if the price drops.
7. Take-Profit (TP)
A take-profit order automatically closes a trade when a specified profit target is reached.
🔹 Example: If you buy GBP/USD at 1.2500 with a TP at 1.2550, the trade closes with a 50-pip gain when the price hits 1.2550.
8. Slippage
Slippage occurs when a trade is executed at a different price than expected, usually due to fast-moving markets.
🔹 Example: You place a buy order for EUR/USD at 1.1000, but due to volatility, it gets filled at 1.1003, causing 3 pips of slippage.
9. Drawdown
A drawdown refers to the percentage decrease from a trading account’s peak balance before recovering.
🔹 Example: If your account balance drops from $10,000 to $8,000, you have a 20% drawdown.
10. Currency Pair
A currency pair consists of a base currency (first) and a quote currency (second), showing how much of the quote currency is needed to buy one unit of the base currency.
🔹 Example: In EUR/USD = 1.1000, 1 euro is worth 1.10 USD.
Mastering these terms helps traders navigate the forex market with confidence.
Other useful resources:
https://www.finextra.com/blogposting/27422/10-essential-trading-terms-every-beginner-should-know
https://www.fortrade.com/a/blog/basic-forex-terms-you-should-know-before-trading
https://thefundedtraderprogram.com/25-forex-terms-to-understand
