Forex terminology

Have you started your free Metatrader demo account yet? If not, then go and do it quickly!

You will see different windows of currency pairs. Those are called your charts. It's inside your charts where all the magic happens. You base your technical analysis and trading actions from the charts.

Price quotes, spread and pips?

There is a lot of "special" words used among currency traders that you have to know. Have a look at the picture below to see the price quotes:

You see that the Bid price for EUR/USD is 1.3981 and the Ask price is 1.3983. This basicly means that:

When you sell: 1 Euro it cost 1.3981 US dollar

When you buy: 1 Euro it cost 1.3983 US dollar

Then, why isn't the Ask and Bid price the same? That's because the Broker needs to make money on every transaction they complete. That's called the spread.

Spread: 1.3983-1.3981 = 0.0002

An other VERY importand word you should know is PIP. Pip is the smallest amount in the price quote.

Traders often talk about price movements in PIPS. For example: Let say that EUR/USD goes from 1.3983 to 1.3987, 1.3987-1.3983=0.0002 which is a movement of 4 pips. I will use the word PIP very often from now on, so it's very important you understand what pips are.

Most of the currency pair have four decimal places, but there are pairs that only have two. USD/JPY for example, if it moves from 96.02 to 96.05 it's a movement of 3 pips.

Candlestick, open, close, high and low

There are several different ways to represent the price. One of the most common ways is called candlestick which I strongly recommend. With candlesticks you get a very clear visual representation on how the price behaves. If you look at the picture on top of this page, you see almost 200 candlesticks. Look at the two zoomed in candlesticks below to get a explaination how they work...

	Have a look at this green candlestick. From this we can read what has happend to the price this day. We see that the open price (1.3200) is lower than the close price (1.3350) which mean that the price has gone up. When the price goes up it's usually reffered to as a "Bullish move" among traders. We can also see that the price has been down at 1.3150 (Low) and the price has been up at 1.3400 (High) but decided to close at 1.3350. Price movement of today is 1.3350-1.3200=0.0150 (150 pips) The price range today is 1.3400-1.3150=0.0250 (250 pips)
	Have a look at this red candlestick. From this we can read what has happend to the price this day. We see that the open price (1.3350) is higher than the close price (1.3200) which mean that the price has gone down. When the price goes down it's usually reffered to as a "Bearish move" among traders. We can also see that the price has been down at 1.3150 (Low) and the price has been up at 1.3400 (High) but decided to close at 1.3200. Whats the movement? Price movement of today is 1.3350-1.3200=0.0150 (150 pips) Whats the price range? Price range today is 1.3400-1.3150=0.0250 (250 pips)

Lot

The currency market is traded in lots. Standard lot size is $100 000, mini lot size is $10 000 and there is micro lot size of $1000.

Lets's for an example say we are trading a standard lot, and wan't to buy EUR/USD. It's quoted at 1.3900. One pip is as you now should know 0.0001. To calcutate how much every pip is worth we do like this: 100000*(0.0001/1.3900) = 7.19 (Euro) which you can easily recalculate to dollars => 7.19*1.3900= $10 . This is usually calculated by your broker, but it's always good to know the simple math behind it.

Long, short, stop loss and take profit

Let's take this quick, I know you wan't to learn more interesting stuff like technical analysis.

If you are interested in buying EUR/USD it's called going LONG, and if you are interested in selling EUR/USD it's called going SHORT.

Yes, you can make money in either way the EUR/USD is going! If you go Long, you actually is buying EUR and selling USD hoping that the EUR will be worth more when you decide to close your position. If you go Short, you buy USD and sell EUR and hoping that the USD will be worth more when you close it.

One golden rule, as you should ALWAYS follow is: use stoploss.

Stop loss is the maximum range you allow the pair to go in the wrong direction before it automaticly closes your position.

Take profit is the opposit of stop loss. If you did go long EUR/USD and believe it could go to 1.3350 then the broker automaticly closes your position at that price with a nice profit in your account.

Final example:

Look at the picture with the green candle above, and pretend that day has not ended yet. You believe EUR/USD is going to be "Bullish" today. The price quote is: Bid: 1.3200 and Ask:1.3202. You are interested in going Long so your price is 1.3202.

You think EUR/USD maybe could go up to 1.3380. You have a $100 000 account (standard) and are not willing to risk more than $1000 (1%) on this trade. Therefore you enter a new order to the broker with a take profit at 1.3375 (always have your take profit target a bit lower than expected). Your pip value in this case is 100000*(0.0001/1.3202)=7.57 EUR = $10. Your stoploss should be $1000/$10 =100 pips when trading with one lot.

After the day has gone and the price goes up to 1.3375 the broker sells your EUR automaticly to an other trading, and you have a nice 173 pip profit (1.3375-1.3202=0.0173) which is $1730.

That wasn't so hard, was it? Go and take a cup of coffe and see if you can remember what you learned.

Go back to Learn forex for beginner