Now let’s get started on the main business.
Currencies are traded in pairs. The major pairs are USD/CHF, GBP/USD, USD/JPY and EUR/USD. Other pairs are USD/CAD, GBP/JPY, AUD/JPY, CAD/JPY and NZD/USD
Types of Order
Market Order: This is an order to sell or buy a particular currency at the prevailing market price.
Stop loss order: This is an order you give the trade station to exit the trade if the trend is against you by a certain number of pips.
Take profit: This is the price at which you want to exit if the trend is in your favour by a certain number of pips.
Buy stop order: This is an order to buy a particular currency pair if it rises to a certain level. For instance, if the current price of USD/JPY is 101.99, an order to buy this pair at 102.22 is a buy stop order. A trader will only place this kind of order if he believes the currency will rise further.
Sell stop order: This is an order to sell a currency pair if the price drops to a certain price believing it will drop further. For instance, if the current price of USD/JPY is 101.99, an order to sell the pair at 101.05 is a sell stop order.
Buy limit order: This is an order to buy a currency pair if it falls to a certain level. For instance if the current price of USD/JPY is 101.99, an order to buy the pair at 101.05 is a buy limit order.
Sell limit order: This is an order to sell a currency pair if the price rises to a certain level. For instance, if the current price of USD/JPY is 101.99, an order to sell the pair at 102.22 is a sell limit order.
(I have decided to use the same currency pair in the example so that you can have a better understanding.)
Other terms used in Forex Trading:
Leverage
This is a worked out ratio which a trader receives to increase his purchasing power. For example 400:1, 200:1, and 100:1 etc. A leverage of 100:1 means for every $1 you have, you are allowed to trade as if you have $100.
Position
This refers to the action you are taking in the market either buying or selling. A LONG position is a buying position while a SHORT position is a selling position.
Lot Size
This is otherwise called volume. It is the unit of trading currency. For instance a Standard account is worth $100,000 while a mini account is worth $10,000.
Margin
This is the amount of money a trader needs to hold a position in the market.
Pip
This is the acronym of price index point. It is the last decimal number in a currency quote. For instance in 124.58, 8 is the pip. Some currency quotes are to 4 decimal places like 1.5529, here 9 is the pip.
Trend
Trend refers to the direction of the market. An uptrend means the market is shooting up while a downtrend means the market is going southwards, while consolidation means the market is indecisive.
Bulls and Bears
The bulls are the buyers while the bears are the sellers. Therefore when the market is said to be bullish, it means there are more buyers than sellers or that buyers are forcing the price upwards and when the market is bearish, it means there are more sellers than buyers or sellers are forcing the price downwards.
In subsequent write ups, we shall be looking at how money is made in Forex trading as well as Technical and Fundamental analysis.
Have a swell time!
