LESSON 2: KEY FOREX TERMINOLOGIES
Objectives:
If you take this lesson to the end, you will:
1. Understand all the Basic Forex Terminologies.
2. Be able to utilize them.
Exchange Rate/Price
This is the amount of the quote currency needed for you to get one unit of the base currency.
Pip
A pip is the smallest unit of price for any currency pair. It is the 4th digit after the decimal in a price. A "pip" stands for "percentage in point" or "price interest point." It is a standardized unit of measurement that represents the smallest price movement in the exchange rate of a currency pair. Most currency pairs are quoted to four or five decimal places, and the pip is typically the last decimal place in the quote. For example, if the EUR/USD currency pair moves from 1.1200 to 1.1201, it has moved one pip.
Pipette
The pipette is one-tenth of a pip. It is the 5th digit after the decimal points.
Lot Size
Forex is traded in specific amounts called lots, which is the number of currency units you will buy or sell.
When you place orders on a trading platform, orders are placed in sizes quoted in lots.
Standard lot (1 lot) = $10 per pip
Mini lot (0.1 lot) = $1 per pip
Micro lot (0.01 lot) = $0.10 per pip
Nano lot (0.001 lot) = $0.01 per pip
Bid Price
The bid is the price at which the broker is willing to buy the base currency in exchange for the quote currency. This means that, the bid is the best available price at which you can sell to the market.
Ask Price
The ask Price is the price at which the broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you can buy from the market.
Bid-Ask Spread
The spread is the difference between the Bid price and the Ask Price.
Quote Convention
The exchange rates in forex are expressed using:
Base-Currency/Quote-Currency
That is – Bid/Ask
Transaction Cost
This is the Bid/Ask Spread for a round-turn Trade.
For instance:
EUR/USD at 1.2812/15, the Transaction cost is 3pips.
Transaction Cost = Ask-Price – Bid-Price
= Spread
Margin
The margin is the percentage of your Trading Account required to service a trade. Which depend on the currency pair, current price, and the Lot size traded.
Leverage
Leverage is the Ratio of the amount of capital used in a transaction to the required security deposit (Margin).
It is the ability to control a large dollar amount of security with a small amount of capital.
Order Types
Instant/Market Execution
Pending Orders
Limit Order
Stop Order
Instant Execution
It is an order type in which you Buy or Sell at the current Market Price. The order is executed instantly.
Limit Orders
A limit entry is an order placed to either buy below the market or sell above the market at a certain price.
Buy Limit – Order is placed below price, in anticipation that price will come down to the entry point, before it will rise.
That is, price will at least fall to this point before it will rise again.
Sell Limit – Order is placed above price, in anticipation that price will go up to the entry point, before it will fall.
That is, price will at least rise to this point before it will fall again.
Stop Order
A stop entry is an order placed to buy above the market or sell below the market at a certain price.
Buy Stop – Order is placed above price with the anticipation that price will continue upwards.
That is, price will rise to the entry point and continue upwards.
Sell Stop – Order placed below price with the anticipation that price will continue downwards.
That is, price will fall to the entry point and continue downwards.
Stop Loss
A Stop Loss order is a type of order linked to a trade to prevent additional losses if the price goes the other way. A Stop Loss order automatically closes the trade to prevent further losses if the Price is going against the position.
Trailing Stop
A stop loss order which is always attached to an open position and which automatically moves once profit becomes equal to or higher than a specified level.
A trailing stop is a type of stop loss order attached to a trade that moves as the price fluctuates. And allows you to lock in profits as the market moves in your favor while still providing protection if the market reverses.
Take Profit
The take profit (TP) is the point (price) at which a winning trade closes on its own to save the stipulated profit.
Trading Sessions
These are the Resumption and Closure times of the various forex markets Centers.
1. Sydney Session (Asia-Pacific)
Open: 10:00 PM GMT (5:00 PM EST, 11:00 PM WAT)
Close: 7:00 AM GMT (2:00 AM EST, 8: OO AM WAT)
2. Tokyo Session (Asian Session)
Open: 12:00 AM GMT (7:00 PM EST, 1:00 AM WAT)
Close: 9:00 AM GMT (4:00 AM EST, 10:00 AM WAT)
3. London Session (European Session)
Open: 8:00 AM GMT (3:00 AM EST, 9:00 AM WAT)
Close: 5:00 PM GMT (12:00 PM EST, 6:00 PM WAT)
4. New York Session (North American Session)
Open: 1:00 PM GMT (8:00 AM EST, 2:00 PM WAT)
Close: 10:00 PM GMT (5:00 PM EST, 11:00 PM WAT)
Key Session Overlaps
London + New York Overlap (1:00 PM - 4:00 PM GMT) (2:00 PM– 6:00 PM WAT)
This is the busiest trading period in the forex market. It accounts for a significant portion of global trading volume. The overlap between London and New York creates the highest liquidity and volatility, providing traders with the best opportunities for short-term trading.
Sydney + Tokyo Overlap (12:00 AM - 7:00 AM GMT) (1:00 AM– 6:00 AM WAT)
The Sydney and Tokyo sessions overlap for a few hours, but this period is usually quieter and less liquid than the London-New York overlap.
NOTE: There are so many Forex Terminologies and Processes left out here. This is because we believe, many of those processes only help to complicate things and does not add to our trading success. Or in simple terms, we can succeed without them.
Feel free to ask questions in the comment, or send us a mail at morepipz@gmail.com
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