Essential trading terms and definitions every forex trader should know. From basic concepts to advanced terminology.
The price at which you can buy a currency pair. Also known as the "offer price." The ask is always higher than the bid price, and the difference between them is the spread.
ExampleIf EUR/USD shows 1.1050/1.1052, the ask price is 1.1052. You would buy at this price.
Using computer programs (trading bots or Expert Advisors) to execute trades automatically based on predefined rules and algorithms, without manual intervention.
The first currency in a currency pair. When you buy a pair, you're buying the base currency and selling the quote currency.
ExampleIn EUR/USD, EUR is the base currency. If you buy this pair, you're buying euros.
The price at which you can sell a currency pair. The bid is always lower than the ask price.
ExampleIf EUR/USD shows 1.1050/1.1052, the bid price is 1.1050. You would sell at this price.
A financial intermediary that provides traders with access to the forex market through a trading platform. Brokers make money through spreads and/or commissions.
Two currencies quoted together, showing the exchange rate between them. The first is the base currency, the second is the quote currency.
ExampleEUR/USD = 1.1050 means 1 Euro equals 1.1050 US Dollars.
A type of price chart that shows the open, high, low, and close for a specific time period. Green/white candles indicate price rose; red/black indicate price fell.
Learn more in Book 2: StrategiesThe decline from a peak in your account equity to a trough, before a new peak is achieved. A key risk management metric that measures losses from highest point.
ExampleIf your account grew to $10,000 then dropped to $8,000, your drawdown is $2,000 or 20%.
A trading style where all positions are opened and closed within the same trading day. Day traders don't hold positions overnight to avoid overnight risk.
The specific price level at which a trader opens a position (enters a trade). Good entry points are typically identified using technical or fundamental analysis.
The price at which a trader closes their position, either to take profit or cut losses. Should be planned before entering the trade.
Foreign Exchange - the global decentralized market for trading currencies. It's the largest financial market in the world with over $6 trillion traded daily.
Learn more in Book 1: FoundationsAnalyzing economic data, central bank policies, and political events to predict currency movements. Focuses on what "should" happen based on economic conditions.
A break in price where no trading occurred. Often happens when markets open after weekends or during major news events. The price "jumps" from one level to another.
Opening positions to offset potential losses in other positions. Used to protect against adverse price movements or to lock in profits.
Borrowed capital that allows you to control larger positions with less money. While it amplifies profits, it also amplifies losses. Retail leverage is capped by regulators (1:30 on major pairs in the UK, EU, Australia and under the DFSA); offshore brokers offer far more, with far less protection.
ExampleWith 1:100 leverage, $1,000 can control $100,000 worth of currency.
The standardized unit for measuring trade size. Standard lot = 100,000 units, Mini lot = 10,000 units, Micro lot = 1,000 units.
Use our Position Size CalculatorBuying a currency pair with the expectation that its value will increase. If price rises, you profit; if it falls, you lose.
The amount of money required to open and maintain a leveraged position. It's essentially a security deposit held by your broker.
A warning from your broker that your account equity has fallen below the required margin level. You must deposit more funds or close positions to avoid liquidation.
Different ways to execute trades: Market Order (immediate execution), Limit Order (specific price), Stop Order (triggered at price level), and Stop-Limit Order (combination).
Percentage in Point - the smallest price movement in a currency pair. For most pairs, 1 pip = 0.0001 (fourth decimal place). For JPY pairs, 1 pip = 0.01 (second decimal place).
ExampleIf EUR/USD moves from 1.1050 to 1.1055, it moved 5 pips.
Use our Pip Value CalculatorDetermining how large your trade should be based on your account size and risk tolerance. Critical for proper risk management.
Learn more in Book 3: MasteryThe relationship between potential loss (risk) and potential profit (reward) on a trade. A 1:2 ratio means risking $100 to potentially make $200.
Use our Risk/Reward CalculatorA price level where selling pressure is expected to prevent further upward movement. Price often reverses or consolidates at resistance levels.
The difference between the bid and ask price. This is the cost of trading and represents the broker's profit on the transaction.
ExampleIf bid is 1.1050 and ask is 1.1052, the spread is 2 pips.
An order to automatically close a losing position at a predetermined price to limit losses. Essential for risk management.
A price level where buying pressure is expected to prevent further downward movement. Price often bounces or consolidates at support levels.
Selling a currency pair with the expectation that its value will decrease. If price falls, you profit; if it rises, you lose.
An order to automatically close a profitable position when it reaches a predetermined price target. Locks in profits without manual monitoring.
Analyzing price charts, patterns, and indicators to predict future price movements. Based on the idea that historical price action tends to repeat.
Learn more in Book 2: StrategiesThe general direction of price movement. Uptrend = higher highs and higher lows. Downtrend = lower highs and lower lows. Sideways = no clear direction.
The degree of price variation over time. High volatility means prices are changing rapidly and significantly. Low volatility means more stable, slower price movements.
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The three books cover these terms in depth with worked examples, and each book has a video course that teaches them in the order you meet them.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for everyone. You can lose more than you deposit. The glossary is education, not financial advice. See the risk disclaimer.