Like many trading and investment markets, forex has a specific language, including jargon and terminology that all brokers, traders and liquidity providers use in their day-to-day transactions.
It is essential to understand these terms to open a forex account, pick the correct currency pairs, and interpret charts and analysis tools that help traders make informed decisions.
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Forex Account Types
When you first open an FX account, you will see a range of options, depending on whether you are a retail investor, an institutional trader, or a professional forex trader.
Accounts typically work based on lot sizes in fixed increments of currency units:
- Standard forex accounts allow traders to place orders in 100,000 unit lots.
- Mini forex accounts permit trades from 10,000 units.
- A micro forex account will accept trades up to 1,000 currency units.
Trading limits include leverage, which is any money borrowed from the broker to take a position and is usually limited to a maximum ratio.
You might be able to borrow 100 currency units for every unit you pay as a deposit, so you could stake £10 on a £1,000 trade. It is essential to remember that if you make a loss, you will still need to repay the broker; leverage can maximise both gains and losses.
FX Markets
Bear markets mean that currency values are falling and indicate downtrends across the market, usually due to financial pressures or other events.
Bull markets are the opposite and signify an upward movement where prices are rising in all currencies – this usually happens when economic news is upbeat, and investors are introducing higher demand.
Forex Pricing
Beware of several different types of pricing when trading forex. The pricing determines how much a trade costs and the returns you might expect.
- Ask or offer prices are the lowest price you are prepared to pay for a specific currency. For example, you might place an ask price for US dollars in GBP, which will be the lowest you will pay for each unit of USD.
- Bid prices indicate the value at which you are prepared to sell and are generally lower than the ask price, although the opposite can occur if demand is high.
- The spread is the variance between the ask and bid prices. Forex brokers make their money through spreads, which can change depending on the value of the trade, the currency pairs in question, and market volatility.
- A margin is the cash you leave in your forex account for the trade. You often need a minimum margin balance to proceed with a transaction. This assures the broker you can repay the leverage if a trade does not pan out.
Brokerage platforms may charge higher spreads and lower commissions, or vice versa, and set limits and thresholds for margins depending on your account type and trading experience.
Leverage In FX
Leverage is the funds you borrow from your broker to make a trade, normally with a maximum leverage ratio applied.
The Financial Conduct Authority (FCA) sets these limits on all UK-regulated brokers, with an upper cap of between 30:1 and 2:1 for forex products, including spread bets, spot forex trades and CFDs for retail investors.
For example, a trader might wish to bet £10,000 against EUR, putting up £1,000 of capital for the transaction and borrowing £9,000 from their broker.
If the trade moves in a favourable direction, the trader makes a far larger profit than they would have with their £1,000 stake – but likewise will suffer a bigger loss if their bet turns out to be wrong.
Currency Market Pips
Most currency pairs are quoted in prices to four decimal points. The pip is the price interest point and the fourth digit in the currency price after the decimal place.
One pip is equivalent to 0.0001 units of the currency in question.
Forex markets use pips because even minimal price movements can significantly impact the outcomes of large-volume trades.
Contract For Difference
A contract for difference (CFD) is a derivative product subject to regulatory restrictions in the UK.
Brokers must abide by several FCA guidelines to offer CFDs, which traders use to speculate on currency price movements.
Traders might bet that a currency pair price will increase and purchase CFDs with the potential profit of the difference between the currency value when they enter and exit the transaction. If they suspect that a currency pair will drop, the trader will sell the CFD.
Forex Lot Sizes
Lot sizes are standardised trade sizes split into four categories:
- Standard lots = 100,000 units
- Mini lots = 10,000 units
- Micro lots = 1,000 units
- Nano lots = 100 units
Not all forex brokers accept nano lot trades.
Forex traders with larger lots stand to make higher profits or losses and vice versa, so experienced investors may trade multiple standard lots worth hundreds of thousands of currency units. In contrast, a novice trader might begin with micro lots to mitigate their potential losses.
Forex Trading Strategy Terminology
The basic forex trading options are to take a long or short trade. Long trades involve a bet that currency prices will rise, producing a future profit, and short trades mean that the investor believes prices will fall.
FX traders and professional investors use multiple trading strategies and methodologies, often relying on technical analysis charts to determine when they move, buy or sell.
There are four primary types of forex trade, whether long or short.
Scalp trading
Scalp traders retain a position for a very short period – usually a few seconds or possibly minutes. Profits are small and limited to the number of pips the currency moves by in that time.
The idea is to accumulate multiple small daily profits using predicted price patterns without significant risk exposure. This FX trading style works best with liquid currency pairs and during busy trading periods.
FX day trading
Forex day trades are opened and closed within one trading day and work similarly to scalp trades, although with a longer time between holding and liquidating a position.
Day traders need strong technical analysis skills to produce maximum profits and aim to make marginal gains throughout each day.
Swing trading
Swing trading means that a forex trader holds a position for longer – possibly days or several weeks.
This type of forex trade is beneficial during periods of significant change or when currency pairs are expected to move sharply following economic or political announcements.
Because the time period is longer, swing traders do not need to monitor movements minute by minute and use technical analysis to anticipate how currencies will adapt to wider market conditions.
Position trades
Investors hold position trades longer than any other forex position, for months or possibly years. A trader might use fundamental analysis to gauge long-term market movements to select their chosen position trades.
Sniping and hunting are also practises that forex traders should know of – although they relate to brokers rather than investors. Brokers may buy or sell currencies when they approach a pre-set pricing point to make as much profit as possible.
Seasoned traders monitor activity to identify and report sniping or hunting, although regulated and trusted forex brokers are unlikely to try and deliberately manipulate prices.
Unethical offshore or unregulated FOREX brokers may attempt to cause stop losses to be triggered or influence market activity to adjust spreads or prices – a regulated brokerage platform will not engage in these activities.
Secret Language Of FX Revealed FAQ
What is forex?
Forex, or FX, are short for the foreign exchange market, where traders, investors and institutions trade different global currencies.
The currency market is global and decentralised, with thousands of online brokers and exchange platforms with varying price structures and trading types available.
What is the best way to start in forex?
Forex is highly volatile, so educating yourself about the terminology, trading styles and market movements is the best place to start.
Many novice forex traders begin by setting up a demo account, available through most brokers, allowing them to test theories or trade currencies and see real-world outcomes without risk.
What are pips in forex?
A pip is the fourth digit following the decimal place in a quoted price for a forex pair. It refers to the slightest movement a currency price can make – one pip is 0.0001 units in the relevant currency.
What is a contract for differences in FX trading?
CFDs are trading agreements where the profit or loss is the difference between the opening and closing trade prices, settled in cash.
What does leverage mean in forex?
Leverage means a trader borrows money from their broker to make a trade. The higher the leverage, the greater the potential profits and the higher the possible losses.
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