*OspreyFX would like to state that traders should research extensively before following any information given hereby. Please read our Risk Disclosure for more information.
ABCs of Trading: 12 Must-Know Forex Terms
Beginner or an experienced trader? When it comes to trading, continuous learning is essential for all traders. When it comes to Forex terminology, many traders have their preferred technical terminology. However, there are key terms that every trader should be familiar with in order to operate effectively in the market. That’s why we’ve put together a glossary with all the important ones that you need to know.
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Let’s start with one of the most important, Forex. The Foreign Exchange is a marketplace for the simultaneous buying and selling of national currencies. It is currently the largest and most liquid global market with 6.6 trillion dollars traded on a daily basis. In other words, 53 times larger than the New York Stock Exchange and 4 times the collective GDP of the world.
You may have heard the term “buy a bounce”. Traders that buy bounces focus on buying securities after the price has fallen and reached a support level. When conducting bounce trading, traders aim to profit from a short-term correction (“bounce” off) of the identified support.
Bear Market / Bearish
This term is used to describe a market scenario where prices are in decline, they are fuelled by pessimism and selling is encouraged. Traders are referred to as “Bears” if they expect prices to fall. For instance, the term “Bearish EUR/GBP” means that traders believe that the Euro will weaken against the Sterling.
Bull Market / Bullish
The Bull is the direct opposite of a Bear. A Bull market is a market that is experiencing an upward trend and traders might be classified as bulls when they are optimistic that market prices will rise. As a result, the term “Bullish GBP/USD” means that traders believe that the Sterling will rally against the Dollar.
Gap / Gapping
Gaps are sharp moves in the market during which no trading activity takes place. It is common for these gaps to occur after specific events or during weekends, when the Forex market is closed. Gaps give a clear indication of market sentiment and monitoring them is important. For instance, an upward market gap means that traders are not willing to sell at that level.
Leverage (or a margin) is used by traders to increase their potential return on investment. Within the Forex market this typically takes the form of loans and allows traders to trade at notional values that are far higher than the capital they are actually investing. This expands exposure and increases a trader’s buying power. That’s why here at OspreyFX, we offer a leverage of 1:500, so that traders can trade 500 times the value that is available in their trading account.
Market Capitalization (Cap)
Market Cap is a term used to describe the aggregate market value of a company’s outstanding market shares. Capitalization is a method investors use to indicate the relative size of a company. Market Cap is computed by multiplying the current stock price by the total number of outstanding shares. For example, if a company has $10 million worth of shares and the selling price is $40 per share then the Market Cap is $400m.
This type of market refers to the limited movement of prices in either direction. We witness a bull market if prices rise above the previous highest price. Conversely, it’s a bearish market if the prices decline by 25%. A sideways market means that prices are continuing forward in the same direction that they had been heading towards previously. Although this concept is more common in stock markets, it is important to keep in mind that sideways markets can occur in any investment sector.
Reversal / Trend Reversal
This term is used to describe an upward or downward trend that is opposed to the current price of a currency. The influential element that creates this reversal is supply and demand.
Stop Loss Order
Stop loss is an important risk management tool since it allows traders to exit a trade automatically when it reaches a specific price point. This concept is applied to limit a potential downside risk and can be used for short or long positions.
The “bid” is the price at which we sell and the “ask” is the price at which we buy a base currency when trading. A spread is the difference between the bid and the ask price and is used to measure the liquidity of the market. The smaller the spread, the more liquid the market is.
A trading plan is an essential framework that guides you through the trading process. A trading plan sets the conditions with which a trader enters a trade, identifies markets, exits trades, and most importantly, manages risks along the way. We’ve put together a great Trading Plan Guide to help you during the preparation stage of your plan.
We have been hearing this term a lot lately in view of recent market events. Volatility refers to the level of fluctuation in trading prices over a specific time frame. Low volatility indicates lower risk while traders are more likely to see price spike in highly volatile markets.