The following are the basic words and ideas behind forex trading that will help you decode the lingo of the industry.

There are two types of currencies involved in forex trading. The major currencies are the eight major currencies that are the most frequently traded. These include:

USD – The United States Dollar
EUR – The Euro
JPY – The Japanese Yen
GBP – The Pound
CHF – The Swiss Franc
CAD – The Canadian Dollar
NZD – The New Zealand Dollar
AUD – The Australian Dollar

All other traded currencies are referred to as minor currencies. Minor currencies are generally the territory of experienced traders. The most commonly talked about currencies are the five most liquid – USD, EUR, JPY, GBP, and CHF.

In the world of forex, currencies are generally listed as pairs. In any pair, the currency listed first is called the base currency. It shows how much the base currency is worth when measured against the second currency listed, or just second currency. In most forex markets, the USD is considered the base currency for quotes, with quotes expressed as a unit of one USD per the second currency.

The quote currency is the second currency in any currency pair. The quote currency is also known as the pip currency. Any unrealized loss or profit is expressed by this currency.

A pip is the smallest unit of price for any given currency. Currency pairs generally include five significant digits (for example, X.XXXX).

The bid is the price at which the market is prepared to buy a specific currency pair. At the bid price, a trader can sell the base currency. Conversely, the ask price is the price at which the market is prepared to sell a specific currency pair in the market. The ask price is also known as the offer price. If the quote for a pair of currencies is 1.2812/15, the ask price is 1.2812.

The critical characteristic of the bid/ask spread also represents the transaction cost of a round-turn trade. A round turn means both a buy or sell and an offsetting sell or buy trade of the same size in a currency pair. To calculate the transaction cost, simply subtract the bid price from the ask price.

Transaction cost = Ask price – Bid price

Any pair in which neither currency is the US dollar is a cross currency.

A margin account opened with your forex broker is any account in which you must deposit a minimum amount with that broker. Minimums range from $100 to $100,000. Leverage is the ratio of the amount of capital used in a transaction to the required margin. Leveraging varies between different brokers, but it is the ability to control a large dollar amount of a security with a relatively small amount of capital.

By trading currencies on margin, you are able to increase your buying power. With more buying power, you can potentially increase your total return on investment with less cash outlay. However, trading on margin also has the potential to magnify your losses as well as your profits.

The margin call is completely undesirable and a dreaded turn of events for an trader. The margin call is the call you receive from your broker notifying you that your margin deposits have fallen below the required minimum level because an open position has moved against you. You can help avoid receiving the margin call by taking time to fully understand the risks associated with trading on margin.

The standard unit size of a transaction is known as a lot. One standard lot is typically equal to 100,000 units of the base currency.

The units of the base currency in play also determine the type of account that you are trading with. A standard account is an account where the trader is trading with a standard lot size of 100,000 units of the base currency. A demo account is a practice account that allows for trading with fictitious money.  A mini account trades with mini lot sizes, generally 10,000 units of the base currency. A micro account trades with micro lot sizes, or 1,000 units of the base currency.

Order Types

These are the order types that you will typically encounter in trading on the forex market.

A market order is an order to buy or sell at the current market price. A limit order is an order to buy or sell at a pre-specified price level. A stop-loss order is an order to restrict losses at a pre-specified price level.

A limit entry order is an order to buy below the market or sell above the market at a pre-specified level with the hope that the price will reverse direction from that point. Conversely, a stop-entry order is an order to buy above the market or sell below the market at a pre-specified level, believing that the price will continue in the same direction.

An OCO order, or one cancels other, is an order whereby if one is executed, the other is canceled. A GTG order, or good ‘til canceled, is an order that stays in the market until it is either filled or canceled.

Trade types

There are two types of common trade that you will likely encounter. The long position is the position in which a trader attempts to profit from an increase in price – buy low, sell high. The short position is a position in which the trader attempts to profit from a decrease in price – sell high, buy low.

Trading styles

Trading styles are widely variable based on strategy and planning. The following are the common trading styles that you will encounter in the market.

Technical analysis involves the analysis of price charts for technical patterns of behavior. Fundamental analysis is a trading style in which the trader analyzes the macroeconomic factors at play in an economy, underpinning the value of a currency and placing trades that support the trader’s long or short-term outlook.

Trend trading attempts to profit from riding short, medium, or long-term pricing trends.

Range trading attempts to profit from buying and selling currencies between a lower level of support and an upper level of resistance, which define the range. The range forms a price channel where the price can be seen to oscillate between the to levels of support and resistance.

News trading attempts to profit from fundamental news announcements regarding a given country’s economy that may affect the value of a currency, usually seeking short term profit in the period of time following the announcement.

Scalping is frequent trading over a short period of time in search of short-term gains.

Day trading involves multiple trades on a daily basis, spanning minutes to hours.

Swing trading seeks to profit from short to medium term swings in trend, lasting hours to days.

Carry trading is when the trader attempts to profit from holding a currency with a higher rate of interest and selling a currency with a lower interest rate, thereby profiting from the daily interest rate differential.

Position trading involves assuming a long-term position that reflects a longer term outlook.

Discretionary trading uses human judgment or intuition in every trade.

Automated trading involves neither human decision making or human involvement. Instead, automated trading uses a preprogrammed strategy based on technical or fundamental analysis in order to automatically execute trades through an automated software program.