There is a lot to learn with Forex trading. The best place for newcomers is to first understand common Forex jargon. However, for newbies, understanding the basics of forex is the key to beginning your journey as a successful trader. In this guide, I will explain the most common terms that every UK trader should know.
Lets develop your knowledge in forex so you can make much more confident and informed trading decisions.
1. Pip (Percentage in Point)
A pip is the smallest price movement in the forex market. It is typically equivalent to 0.0001 for most currency pairs (or to four decimal places from the period).
- Pips in forex trading represent a one-digit movement that’s seen in the fourth decimal place of a FX pair’s price. Pip is short for ‘point in percentage’.
- Why pips matters: Pips help traders measure the profit or loss of a trading pair. For instance, if GBP/USD moves from 1.2500 to 1.2505, that’s a 5-pip increase (since we measure pip movements based on the 4th decimal.)
2. Spread
The spread is the difference between the bid price (what buyers are willing to pay for the pair) and the ask price (what sellers are asking for the pair).
- Why it matters: A smaller spread means lower trading costs, which is especially important for high-frequency traders.
3. Leverage
Leverage allows traders to control a large position with a small initial investment. For example, a 30:1 leverage means you can trade £30,000 with just £1,000 of your capital (but this also means a higher movement and possible losses if they can’t be covered)
- Risk warning: While leverage amplifies potential profits, it also magnifies losses. In the UK, leverage is capped at 30:1 for major currency pairs by FCA regulations.
4. Lot Size
A lot refers to the quantity of currency units traded.
- Standard lot: 100,000 units of the base currency.
- Mini lot: 10,000 units.
- Micro lot: 1,000 units.
Understanding lot sizes helps traders manage their position sizes and risk exposure.
5. Margin
Margin is the amount of money a trader must deposit to open a position for a new trade. No money, no margin.
- Example: If you use 30:1 leverage and want to trade £30,000, your margin requirement would be £1,000.
Failing to maintain sufficient margin can lead to a margin call, where your broker may close your positions to cover losses and also avoid costing you to go into debt.
6. Currency Pair
There are many options for trading and “pairs”. Currencies are traded in pairs, such as GBP/USD. The first currency, in this example “GBP” is the base currency, and the second “USD” is the quote currency.
You would be trading based on the price movements of the currency pair whether an ask or a bid price.
- Example: If GBP/USD is 1.2500, it means 1 GBP equals 1.25 USD.
7. Bid and Ask Prices
- Bid price: The price at which you can sell a currency pair.
- Ask price: The price at which you can buy a currency pair.
The difference between these two is the spread.
8. Bull Market vs Bear Market
- Bull market: A market where exchange prices are rising.
- Bear market: A market where exchange prices are falling.
Understanding these trends can help traders make better decisions about entering or exiting trades and avoiding losses.
9. Slippage
Slippage is a term to refer to when a trade is executed at a different price than expected(usually due to market volatility). Take the correct precautions to de-risk your trades.
- How to manage Slippage: Use limit orders to control the price at which your trades are executed.
10. Stop Loss and Take Profit
- Stop loss: Automatically closes a trade to limit losses.
- Take profit: Automatically closes a trade to secure profits.
These tools are crucial for effective risk management.
Why Understanding Forex Jargon Matters for UK Traders
Forex jargon is more than just terminology, it’s the language of the market. By understanding these terms, UK traders can:
- Interpret market conditions more effectively.
- Communicate with brokers and fellow traders.
- Make informed trading decisions that align with their goals.
Tips for Learning Forex Jargon
- Use Demo Accounts: Practise trading in a risk-free environment to familiarize yourself with terms.
- Stay Updated: Follow forex news to see these terms in action.
- Join Communities: Participate in UK-based forex forums for peer support and learning. We have a new forum too.
Disclaimer
I am not a professional advisor and the content on this blog is just designed for education and entertainment. Remember that trading forex involves significant risk and is not suitable for all investors. Leverage is a highly risky but rewarding method of amplifying gains but also amplifying losses. You should always take the correct precautions to ensure you understand the risks and seek a financial advisor where necessary.
Past market performance is also not an indicator of future results and UK traders should also ensure they follow FCA regulatory rules.
My preferred trading platform is VT Markets. If you’d like to get started with a bonus 50% on your deposit. Use my link.
