Entering the trading world for the first time can be a little daunting. Even the language appears foreign. People talk about spreads, pips, bears, bulls, volume and slippage and expect you to understand exactly what they mean. Without the proper preparation and knowledge you're going to be left flailing around trying to come to grips with the trading world and its language The first step to becoming a successful trader is to become familiar with the language. Here are some of the more common terms consistently used in the trading environment.
Bear and bull markets:
The terms are used in all trading scenarios. A bear market is a market that is losing value generally due to a loss of confidence while a bull market is the opposite. If a trader is bearish, they expect the market, commodity or currency to fall. If they are bullish they expect the price to rise.
The terms are closely related to the terms long and short.
Long and short
These terms refer to your trade position and can be correlated to being bearish or bullish. Taking a long position indicates that you are bullish on a commodity or price, to take a short position means that you are bearish.
In practical terms a PIP refers to the smallest price movement in the market. A PIP is measured in terms of the 4th decimal place In most currencies although in the case of the Japanese Yen it refers to the second decimal place.
If the Australian dollar is trading at 0.6915 US cents and moves to 0.6 919. it has moved four pips
Bid and ask
In the Forex market There are always two prices -the bid price and the ask price. The bid price refers to the price you can sell at and the ask price is the price you can buy at.
This is simply the difference between the ask price and the bid price. Spread is usually measured in pips e.g. If the bid price for the US dollar is 1.2341 and the ask price is 1.2344 the spread is 3 pips.
Open and close
The most common definition for opening and closing is the opening first trade price for the day and the last day’s trade is the closing price. You can also open a trading position and close the trading position
Leverage can be a little difficult to understand. It actually defines the amount you can trade relative to your account size. In the case of USGFX you may be able to leverage trades up to 50 to 1 this means that if you had $10,000 in your account you could manage currency trades up to a value of $500,000.
It is important to understand that you are not borrowing the money but you are exposed to the risks and rewards associated with the leveraged trade.
Slippage sometimes occurs between the time you place the order and the trade is done. Usually slippage is marginal.
Volume refers to the amount of contracts exchanged on a given day.
Pullback refers to a situation where a price moves in the opposite direction to its trend. Sometimes pullback is quantified in specific percentage terms. When this occurs it is defined as retracement.
There are many other terms that you will come across as a trader and if you would like to learn more USGFX offer an education program that will help you become fully conversant with how Forex trading works.