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The industry’s most important terms

The financial markets are made up of so many definitions that are easy to forget a few along the way. They all refer to a form of investment that is undertaken by banks, business, governments, individuals and traders who exchange and speculate on various currencies.

Take the time to get to grips with forex jargon because understanding forex vocabulary is an important step in a trader’s journey.

Since no forex education can be complete without a glossary of basic terms, we’ve compiled one which explains key words and phrases in the simplest possible way.

The amount of money in the account, excluding credit and the floating profit of currently open orders.

A natural resource or agricultural product. There are two broad types – hard commodities and soft commodities. Hard commodities include for example crude oil, gold, silver and iron ore. Soft commodities include for example wheat, rice, soybean and corn.

It is a financial derivative where traders have the opportunity to trade assets without owning them. The buyer and the seller enter into a contact where the seller agrees to pay the buyer the difference between the entry and the exit price provided the difference is positive. If the difference is negative, then the buyer pays the seller.

Digital currency in which encryption is used to regulate the generation of units of currency. It operates independently of the traditional banking system. Bitcoin, Ethereum and Litecoin are the most popular cryptocurrencies.

Commission is often calculated as a percentage of the value of a sale.

An order to execute a trade at a specific price or a better one.

The specific price referred to in limit order.

A position taken on a financial instrument that is subject to profits or losses.

A financial derivative where the buyer has the right to buy/sell an asset by the expiration date. More specifically, Call Options are contracts that give the owner the right (not the obligation) to buy an asset in the future (before or at the expiration date) at an agreed price. Investors buy Call Options when they believe that the value of the underlying asset will increase above the strike price. Similarly, Put Options are contracts that give the owner the right (not the obligation) to sell an asset in the future (before or at the expiration date) at an agreed price. Investors buy Put Options when they believe that the value of the underlying asset will decrease below the strike price.

Here are some examples of different types of Options:

  • Call
  • Put
  • American Style
  • European Style
  • Exchange Treaded Options
  • Over the Counter Options
  • Option Type by Expiration
  • Option Type by Underlying Security
  • Employee Stock Option
  • Cash Settled Options
  • Exotic Options

The lowest price that a financial instrument is traded during a specific timeframe.

The ratio of gained profit to maximum drawdown.

A trader in financial markets who aims to gain from anticipated future market moves.

An order placed to close a position so as to lock profits once it hits a specific price.

The amount of a specific financial instrument which has exchanged hands during a trading day.

An intermediary between the traders and the liquidity providers. It facilitates in the execution of clients’ orders.

A means of exchange in the form of paper, metal or digital money.

A stock market index composed of 30 stocks of large American companies. It’s based on Charles Dow’s 1884 stock market average composed of nine railroad and two manufacturing companies. The index grew to include 30 stocks by the year 1928. It is used to gauge stock market activity and the country’s economic health.

Funds in an account that are available for withdrawal or investment.

Foreign exchange, or Forex for short, is the “place” where currencies are traded. In the forex market, currencies are traded in pairs. When a trader buys a currency, he or she is selling another currency at the same time. Currency trading is the exchange of one type of currency for another. The forex market has no physical location or central exchange as it is a global, decentralized market and trades 24 hours a day, 5 days a week.

An agreement between two parties – a buyer and a seller- where the seller agrees to sell an asset to the buyer at a predetermined price, date, quantity and quality.

Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.

The volume available in the market for a specific currency pair.

This refers to the amount of money needed in your account to maintain an open position

It is the ratio of Equity to Margin used for your open positions and indicated as a percentage.  It indicates the “health” of your account.

The order will be filled at the next available price.

A broker who is willing to buy and sell financial instruments in order to facilitate trading and liquidity.

It’s the price that a financial instrument may be bought (Ask price) or sold (Bid price).

The rate at which one currency can be exchanged for another.

A server that runs 24/7 without any downtime due to internet connectivity, electricity cutoffs or hardware faults.  Ideal for automated trading (expert advisors).

An item/resource of value.

The rate at which a country’s central bank lends money to its domestic banks.

Failure to fulfil debt obligations.

The potential of a negative outcome such as underperforming, failing to achieve investment/trading goals or losing money.

It refers to the controls applied to mitigate trading risk, for example:

  • Stop Loss
  • Position Size
  • Reward-to-Risk Ratio

A detailed plan on how to trade the financial markets. It is a step-by-step set of instructions on when to enter the market, when to exit with minimal loss once the market goes against you and when to book profits.

The price at which a trader is prepared to sell a financial instrument.

This is a notification which alerts you that you need to deposit more money in your trading account, to ensure that there is sufficient margin to keep existing positions open.

The second currency of a currency pair is called the Quote currency. In EUR/USD for example, USD is the quote currency.

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