When I started trading forex years ago, the jargon left my head spinning. Everyone seemed to speak a language I couldn’t understand. After talking to dozens of new traders, I’ve seen the same confusion time and again.
This article cuts through the complexity. Below are the actual terms you need to know before putting money on the line.
Currency Pairs
Forex isn’t like buying stocks – you’re always trading one currency against another.
EUR/USD means euros versus US dollars. The first currency (EUR) is what traders call the “base currency.” The second (USD) is the “quote currency.”
Most trading happens in a handful of pairs:
● EUR/USD: The euro versus the dollar
● GBP/USD: British pound versus dollar
● USD/JPY: Dollar versus Japanese yen
● USD/CHF: Dollar versus Swiss franc
Each behaves differently. EUR/USD might crawl along steadily while GBP/USD jumps all over the place.
Pips
Ever hear someone say, “I made 50 pips today”? That means they’re talking about price movements.
A pip equals 0.0001 for most pairs (0.01 for yen pairs). Tiny movements, yet they can mean big money depending on trade size.
Different traders track different things. Day traders obsess over pips. Swing traders care more about percentage gains. Both work.
Lot Size
Lot size determines how much currency you control. The standard sizes:
● Standard lot: 100,000 units
● Mini lot: 10,000 units
● Micro lot: 1,000 units
● Nano lot: 100 units
Newer traders should stick with micro lots. A single pip in a standard lot can mean $10 at stake – too much for most beginners.
Spread
Spread is like a hidden fee on every trade.
Look at any currency pair and you’ll see two prices – the buy price and sell price. The difference between them is the spread. Wider spreads mean higher costs.
Major pairs like EUR/USD typically have tighter spreads. Exotic pairs like USD/ZAR (South African Rand) cost more to trade.
Leverage
Leverage lets traders control big positions with small accounts. It’s powerful but dangerous.
With 1:100 leverage, $1,000 controls $100,000 in the market. Sounds great until prices move against you.
Some traders swear by high leverage. Many went broke using it wrong. Tread carefully here.
Margin
Your broker wants insurance when giving you leverage. That insurance is called margin.
For 1:100 leverage, you typically need 1% margin. So controlling $10,000 requires $100 in your account as margin.
If losses eat into your margin, expect a dreaded margin call. The broker wants more money, fast. Most traders fear these calls for good reason.
Stop-Loss Order
Never trade without stop-losses. Full stop.
These orders automatically close losing positions at prices you set. They protect you from catastrophe when markets go haywire.
Placing effective stops takes practice. Too close, and normal market noise triggers them. Too far, and they don’t protect enough.
Take-Profit Order
While stop-losses limit pain, take-profits lock in gains.
These orders close winning trades when prices hit your targets. They remove emotion from the equation – crucial when greed takes over.
Some traders prefer manual exits. Most do better with pre-set take-profits.
Fundamental Analysis
The news matters in forex. Interest rates, employment numbers, political chaos – all move currencies.
Fundamental analysts study economic reports and central bank announcements. They trade based on how these events should affect currency values.
During major announcements, markets often go wild with huge rapid moves. Beginners should probably sit these times out.
Technical Analysis
Charts tell stories. Technical analysts read them like books.
They examine patterns, trends, support and resistance levels – looking for clues about where prices head next. Their tools range from simple trend lines to complex indicators.
Most traders use at least some technical analysis, even if they focus elsewhere.
Ready for Real Trading? After mastering these terms, consider a trading challenge. These programs let skilled traders access serious capital without personal risk. Pass their tests, and you could trade their money while keeping most profits.
Ready for Real Trading?
After mastering these terms, consider a trading challenge. These programs let skilled traders access serious capital without personal risk. Pass their tests, and you could trade their money while keeping most profits.*
Final Thoughts
These terms form the backbone of forex knowledge. Learn them cold before risking money.
The forex market has chewed up countless unprepared traders. Don’t become another statistic. Take time learning, practice with small amounts, and keep emotions in check.
Once these terms become second nature, you’ll find yourself speaking the language of forex, and hopefully profiting from that knowledge.
*Disclaimer: FTMO provides clients with demo accounts that use simulated funds. All trading activity takes place in a simulated environment and does not involve real capital.
