If you are new to online trading and you are looking at the Forex market with a view to learning the ropes, you have come to the right place. In this short article, we offer some of the trading terminology to get you up to speed, while also looking at top Forex trading strategies that you might wish to engage.
Like most sectors, traders have their own buzzwords and understanding these is paramount. The latest trading platform is Metatrader 5 which has more features than its predecessor.
Here are some commonly used trading terms and their meanings.
- Long position – If you hold a long position, you have acquired an asset with the intent of selling when the value goes up.
- Short position – The term for selling an asset, the opposite of a long position.
- Currency pairs – When you trade currencies, you work in pairs; it might be buying US Dollars and paying with Euro. The buy and sell involve two currencies.
- Bid price – The market price for the sale of an asset.
- Ask price – The market price for the buying of an asset.
- Spread – The spread is the difference between the bid and ask price.
- Appreciation – The added value of a currency at exchange.
- Depreciation – A decrease in value of a currency at exchange.
- Lot – Currencies are traded in lots, a maximum would be 100,000 units, say, U$, GPB, Euro or whatever. A minimum lot would be 10,000 units.
- Leverage – This is when a broker offers a trader additional capital to increase the position. Most big traders use leverage, as it strengthens your position. It can be as much as 30 times the original investment.
- Margin – The margin is the minimum deposit to maintain a position; leverage can strengthen your position (up to 30 times).
- Stop loss order – A stop loss order is a tool for risk management that automatically closes a position when the price falls to a specific point. Smart traders use stop loss orders for obvious reasons.
- Risk management – This is an essential tool for every trader, Forex or otherwise; the stop loss order is one example of risk management.
- Base currency – When trading with a currency pair, the first one is the base currency. (USDTHB, USD is the base currency).
- Quote currency – The second currency of the pair. (GPBUSD, USD is the quote currency).
Forex Trading Strategies
This is the meat and potatoes and will determine your success or failure, as the case may be. Here are a few of the common trading strategies used.
- Price momentum – Simply put, buying top performing stock and selling the worst performers. This is a long strategy when you open positions with the top performers, while selling short the worst performers.
- Earnings momentum – Similar to price momentum, with the exception of different performance criteria. The emphasis is placed on earnings, rather than value.
- Pairs trading – Predicting how one currency will fare against another is called pairs trading; you choose both base and quote currencies – the trader watches the rates and when they see a mispricing, they sell short the overpriced currency and buy long on the underpriced.
There are many strategies and we recommend you register with a leading global Forex platform where you have access to a huge library of resources and state of the art analysis software.