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Forex Tutorial: Basic Forex Concepts

Foreign Exchange (Forex, FX) – Exchange of one currency for another currency.

Exchange Rate - The value of one currency expressed in terms of another currency. It is also called foreign exchange rate.

Spot Market – Spot market in forex trading refers to the market where currency pairs are bought or sold at the current market price.

Contract - A unit of trading for a currency pair. Unlike futures, forward or option contracts which have a standard contract size, forex contract size may vary among different brokers or even between different types of account with the same broker.

Currency - A unit of exchange. As one form of money, a currency is issued by the central bank or the Ministry of Finance of a country in most cases. There are exchange rates between two currencies.

Currency Symbols
AUD, aud - Australian dollar
CAD, cad - Canadian dollar
CHF, chf - Swiss franc
EUR, eur – Euro
GBP, gbp - British pound
JPY, jpy - Japanese yen
NZD, nzd – New Zealand dollar
USD, usd – US dollar

Currency Pair - The two currencies of a quotation in forex trading. For Example, GBP/JPY. See also base currency, counter currency.

Quote - An indicative price for information in forex trading.

Base Currency – In forex trading, base currency refers to the first currency in a currency pair, and quotes are expressed as a unit of the base currency per the other currency quoted in the pair. For example, if the EUR/USD rate is 1.3970, it means one euro (the base currency of the pair) is worth US$1.3970.
See also: counter currency.

Counter Currency – The currency listed after the base currency in a currency pair in forex trading. For example, USD is the counter currency in EUR/USD. It is also called quote currency.

Major Currency Pair - A pair of currencies including the US dollar. For example: EUR/USD or USD/CAD. See cross currency pair.

Cross Currency Pair - A pair of currencies excluding the US dollar. For example: EUR/GBP or AUD/JPY. See major currency pair.

Margin - The amount of money or collateral deposited by a forex trader with his broker. See also initial margin, maintenance margin.

Initial Margin - The initial deposit required from a trader by a broker as a 'good faith' guarantee for trading. See also maintenance margin.

Maintenance Margin - Maintenance margin is an amount of money that must be maintained on deposit at all times by a forex trader with his broker. If a forex trader's account drops to or below the level of maintenance margin because of adverse price movement, the broker will issue a margin call to bring deposits up to the initial level. See also initial margin.

Margin Call - A request from a forex broker to a forex trader to restore the margin deposits to initial levels. If the forex trader fails to do so, account holdings may be liquidated.

Leverage – Leverage in forex trading is the ratio of the amount that a trader can buy or sell to the amount he deposits. For example, with leverage at 100:1 a forex trader can buy $10,000 worth of a currency with $100 in his or her forex account.

Ask Price - The rate a currency pair is offered for sale in a forex market. It is shown on the right side of a forex quote. For example, in the forex Eur/USD 1.3730/33, 1.3733 is the ask price, which means that the 1 Euro is sold at 1.3733 US dollar. Ask price is also known as offer price, asking price, offer, ask.

Bid Price - The price a forex trader can sell a currency. It is shown on the left side of a forex quote. For example, in the quote Eur/USD 1.3730/33, 1.3730 is the bid price, which means that the 1 Euro can be sold by a forex trader for 1.3730 US dollar. Opposite of ask, offer price, asking price, offer, ask price.

Spread - The difference between the bid price and the ask price of a currency pair in forex trading. Forex brokers may differ in their bid/ask spreads, and they may change bid/ask spreads during different time periods of the day. A wider bid/ask spread typically occurs when a currency pair is illiquid. Lower or lowest bid / ask spread is preferable for forex traders, other things being equal.

Pips – Pip is the smallest price unit of a currency in forex (fx) trading, for example, 0.0001 US dollar or 0.01 Japanese Yen. Also called points.

Position - Position in forex trading usually refers to the amount of a currency held by a trader. A trader can have long position, short position, or flat position in a currency.

Open Position – A forex order that has been executed but not been closed.

Long Position - A long position in a currency pair means that the base currency of the pair is bought.

Short Position - A short position in a currency pair means that the base currency of the pair is sold. Opposite of long position.

Square Position - In forex trading square position means a neutral state with all earlier positions are closed out or offset in a currency. It is also called flat position.

Slippage – Slippage in forex trading refers to the situation when an order is filled at a worse rate than what is expected or specified. This often happens when the market becomes volatile. For example, slippage may occur for a sell order of USD at the release of much worse Non-Farm Payroll data than estimated.

Lot - A unit of trading. In forex trading lot sizes may vary between different brokers or different types of accounts. Typically the standard size of a lot is 100 000 units of the base currency.

Order - An instruction by a forex trader to a forex broker to fill a trade at a designated price.

Rollover – A forex trading procedure involving the shift of the settlement of a forex trade to another value date. Normally a forex broker automatically rollovers a forex trader's open positions.

Fundamental Analysis - Fundamental analysis in forex trading is typically performed through evaluating the economic, political, and other related qualitative and quantitative factors that affect foreign exchange rates.

Economic Indicator - A statistic of the economy in a country or a region. In forex trading, economic indicators are often used to predict the future performance of an economy associated with a currency. Key economic indicators analyzed by forex traders include employment rates, Gross Domestic Product (GDP), inflation, unemployment, Consumer Price Index (CPI), retail sales, housing starts, money supply changes and industrial production.

Technical Analysis - An approach to forecast price movements through analyzing historical price patterns, volumes, rates of change, open interest and so on, while ignoring the underlying fundamental factors. See also fundamental analysis.

Trend- The general direction, either upward or downward, of price movement in forex market.

Support – Support is a term in technical analysis referring to a price level where new buying is expected to appear to balk the falling trend. If the support is broken, the price tends to move down at a significant amount. See also Resistance.

Resistance – Resistance is a term in technical analysis referring to a price level where new selling is expected to appear to balk the rising trend; if broken, the price tends to move up at a significant amount. See also support.

Forex Demo – Refer to practice forex trading, usually using the same trading platforms as that for real live trading but virtue money instead of real capital. Some forex brokers provide forex demo accounts to their customers to learn forex trading.

Forex Trading Platforms – Forex trading platforms are software programs provided by forex brokers to forex traders to carry out trading activities. Normally, a forex trading platform include at least functions for presenting live quotes, placing orders, and charting. Some forex brokers have their own proprietary forex trading platforms, while others use some common systems.

Risk/Reward Ratio – Risk/reward Ratio in forex trading refers to the rate between the probability of loss and profit of a trade. It is often used as a criterion for determining whether to initiate a forex position.

Money Management – Money management in forex trading usually refers to following a set of trading rules and guidelines to minimize trading risks.

Risk Management – Identifying exposure to various market or non-market factors that might impose negative impact on forex trading results, and applying trading rules to minimize trading losses.

Chart Types:

Bar Chart - A type of chart that portrays the range between the high and the low of forex prices during a certain trading period with a vertical line. The opening forex price is shown as a short horizontal line to the left of the bar (the vertical line), and the closing forex price is marked by a short horizontal line of the right of the bar.

Candlestick Chart - A charting method first developed by the Japanese that shows price movements with candle-like graphs. On candlestick charts, a rectangle (called the body) represents the difference between the opening and the close prices. A single line, referred as the shadows or wicks, represents the high-low price range. If the open price is lower than the close, the body is white, green or not shaded; if the open price is higher than the close, the body is red, black or shaded.

Point and Figure Chart - A charting method which uses prices to form patterns of movement whie ignoring the time dimension. On the chart a price trend is depicted as a continued movement in one direction until a reversal occurs, with x or o in a box to indicate up or down respectively.

Order Types:

Long - (1) Buying a currency pair in forex trading; (2) when a forex trader's long positions in a currency pair exceeds short positions. See Short.

Short - (1) Selling a currency pair in forex trading; (2) when a forex trader's short positions in a currency pair exceeds long positions. See Long.

Market Order - An instruction given to a forex broker to buy or sell at whatever price that can be obtained at the time the order arrives at the trading facility. Also called at-the-market, at-the-markets, at-the-market order.

Buy Limit Order - An order to buy a currency pair at or below a specific price, which is normally lower than the current market price. For example, a buy limit order at 1.5000 when the current price of GBP/USD is 1.5100/05.

Buy Stop - An order to buy when a currency pair's price rises to the stop price, which is above the current market price. Once the stop price is reached, the order is treated as a market order.

Good 'Til Cancelled Order (GTC) - An order to buy or sell that remains open until filled by the broker or cancelled by the forex trader.

One Cancels the Other Order (OCO) - A pair of orders whereby filling one order will automatically canceling the other order.

Limit Order - An order to buy or sell a currency pair at a specific price, which is normally better than the current market price. The broker can only fill a buy limit order at the limit price or lower, and a sell limit order at the limit price or higher. For example, if the current price of GBP/USD is 1.5100/05, you can place a buy limit order at 1.5000, or a limit sell order at 1.5200.

Limit Buy Order - An order to buy a currency pair at or below a specific price, which is normally lower than the current market price. For example, if the current price of GBP/USD is 1.5100/05, a limit buy order at 1.5000. It is also called buy limit order.

Limit Sell Order - An order to sell a currency pair at a specific price, which is normally above the current market price. For example, if the current price of GBP/USD is 1.5100/05, a limit sell order can be placed at 1.5300. It is also called sell limit order.
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Stop Limit Order - A stop limit order is a type of order that will be filled at the specified price or better.

Stop Loss Order – A stop order in forex trading is an order to buy or sell a currency pair at best available price when the specified price level is reached. For example, suppose GBP/USD is bought at the current price of 1.5105, a sell stop may be placed at 1.5030, which is below the current market price. For example, suppose GBP/USD is sold at the current price of 1.5100, a buy stop may be placed at 1.5130, which is above the current market price.

End of Day Order (EOD) - An order to buy or sell at a specified price that is left open until the end of the trading day. A forex trading day typically begins and ends at 5PM EST (Eastern Time of US & Canada). The order is canceled if the specified price is not met.

Overnight Trade - A forex transaction which is not liquidated during the same trading day on which it was established.

Trading Types:

Automated Forex Trading – Automated Forex Trading refers to program trading of currency pairs. Forex trading strategies are pre-programmed into software code, and forex entry and exit orders are automatically placed by the software program when the preset conditions or criteria are satisfied.

Discretionary Trading – Trading forex on the basis of human judgment rather than mechanically following signals generated by trading systems. This is in contrast to Automated Forex Trading.

Day Trading - Opening and closing forex positions in the same trading day. See also scalping, position trading.

Swing Trading – Swing trading in forex is a trading strategy that focuses on identifying trading opportunities at short-term or medium-term swings of price movement. Normally, the time frame of swing trading is longer than day trading but shorter than position trading, lasting from a few hours to a week.

Position Trading - Opening a forex position and holding it for an extended period of time, as distinguished from day trading and scalping.

Scalping - Buying and selling rapidly, with the goal to gain a small profit at each trade, holding a position for only a short time. See also day trading and position trading.
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Hedging - A trading strategy designed to minimize risk, usually through taking offsetting position(s); for example, taking a position opposite to the current position in the same currency pair, in a correlated currency pair, or in futures or option market.

News Trading – News trading in forex is a strategy to take advantage of the sharp price movement after release of important fundamental news. Certain economic data release or policy announcements, such as the US Non-Farm Payroll (NFP) and interest-rate decisions, tend to move the forex market dramatically within a short period of time. Considerable profits can be generated at such events if appropriate strategy is taken.

Carry Trade – In forex trading, carry trade is a strategy based on buying high-interest-rate currencies and selling currencies with low interest rates to earn the interest differential. For example, buy Australian dollar (AUD) and sell the Japanese Yen (JPY) when their interest rates are 7% and 0.25% respectively.

Trend Trading – Trend trading is a trading strategy that focuses on identifying and following the general direction, either upward or downward, of price movement in forex market.

Breakout Trading – A trading strategy that focuses on identifying trading opportunities when the price movement passes through the upper or lower boundaries of a trading range or chart pattern. There are real breakouts and false breakouts, though.

Range Trading – A trading strategy that sells at the upper boundary or buy at the lower boundary of a trading range or chart pattern. This strategy is usually applied when market prices moves sideways or in a channel.

Technical Analysis Basics:

Technical Indicators
Chart Patterns
Candlestick Patterns