April 2, 2022
Learn The Terminologies in The Forex Market
When you enter the forex market, you will come across a lot of jargon that might catch you off guard, including bulls and bears, hawks and doves, pips and ticks, and more. To understand the market, you must have a solid knowledge of regularly used market jargon.
Here are several terms you will encounter when foraying into the world of trading.
Forex Long/Short Trade
- Going long means you are “buying” when you expect a price to increase.
- Going short implies you are “selling” when you expect a price to decline.
Price Bid/Ask
- The Bid price is the price taken when placing a Sell position.
- The Ask price is the price taken when placing a Buy position.
Spread
The spread is the difference between the Bid and the Ask Prices. In forex, a lower spread is considered preferable. Generally, when a market is “liquid” (there are a large number of traders), spreads are lower.
Usually, Major currencies have a lower spread because it’s more popular. On the other hand, exotic currency pairs have a wider spread because there are fewer traders.
Bullish/Bearish
Market sentiment provides insight into the performance of an individual asset or the broader market. When the market sentiment is bullish, the price is increasing. When the market sentiment is bearish, the price is declining.
Hawkish/Dovish
Unlike Bullish and Bearish, Hawkish and Dovish refer to the central bank’s attitude toward the country’s monetary policy. When the central bank takes a Hawkish stance, such as allowing higher interest rates to achieve the central bank’s inflation target, the market sees this as something positive and generally causes prices to rise.
On the other hand, when the central bank takes a Dovish stance, such as keeping interest rates low to stimulate the economy, the market sees this as something negative and generally causes prices to fall.
Safe-Haven
As the name implies, a safe-haven means “safe assets”. Traders and investors seek them out to limit their exposure to or losses during a market slump. The US Dollar and the Japanese Yen are examples of safe-haven currencies. An instrument that is most often considered a safe-haven is Gold.
Hedging
Hedging is when you start a new trading position on the same currency pair in the opposite direction of an existing position. Traders frequently do this to hedge against or limit prospective losses.
Rollovers
This is the procedure by which an open position’s settlement date is extended. If you want to hold a position overnight, rollover fees are determined at the end of each trading day.
Leverage
Leverage enables you to take on larger positions than would be achievable with your limited capital. For instance, if you wish to start a position on AUD/USD with $100 of your capital, 100:1 leverage allows you to open a position worth $10,000 ($100*100).
Naturally, traders must utilize this with caution. While leverage can dramatically boost earnings, it can also magnify losses.
Commissions
Commissions are the payments to a forex broker when you trade. Varying accounts frequently charge different commissions, so be sure to select the one that is most advantageous to you.
Now that you’ve deciphered the perplexing world of forex jargon, it’s time to learn more about the fundamentals of forex trading: when to buy and when to sell.
Summary
Mastering these key forex terms will enhance your trading skills and help you navigate the forex market with confidence.
FAQ For Forex Terminologies
Q: What is the bid price in forex trading?
A: The bid price is the highest price a buyer is willing to pay for a currency pair. It represents the demand side of the market.
Q: What is the ask price in forex trading?
A: The ask price is the lowest price a seller is willing to accept for a currency pair. It represents the supply side of the market.
Q: How is the spread calculated?
A: The spread is the difference between the bid and ask prices. It’s essentially the cost of trading and the broker’s profit margin.
Q: Why is the spread important in forex trading?
A: The spread affects your overall trading cost. A smaller spread means lower trading costs and is more advantageous for traders.
Q: How do brokers earn from the spread?
A: Brokers earn through the spread by buying at the bid price and selling at the ask price. This difference constitutes their profit.
Q: Can the spread change during the trading day?
A: Yes, spreads can vary based on market conditions, liquidity, and volatility. High volatility can lead to wider spreads.
Q: What factors can influence the bid and ask prices?
A: Economic news, geopolitical events, market sentiment, and liquidity can influence bid and ask prices.
Q: How can I minimize the impact of spreads on my trades?
A: Trade during high liquidity times, use limit orders, and choose brokers with competitive spreads to minimize costs.
Q: What are the typical spread ranges for major currency pairs?
A: Major currency pairs usually have tighter spreads, often between 1-3 pips, due to higher liquidity and trading volume.
Q: How does VT Markets ensure competitive spreads for traders?
A: VT Markets offers tight spreads, advanced trading platforms, and real-time market data to help traders execute cost-effective trades.
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