7 Basic Forex Terms Every Trader Needs To Know
As online Forex brokers continue to gain popularity, more and more people are looking into trading and setting up their own investment portfolios. While trading has certainly become more easily accessible, the Forex market still contains many esoteric terms, which can be confusing to beginners. It is essential for traders to get to grips with the basics before they can start placing trades on currency pairs, stocks, cryptos, indices, commodities, and more.
Here we look into seven basic FX terms that will introduce new traders to the world of Forex.
CFDs or Contracts for Difference
If you’ve glanced at a Forex broker website, then you’ve probably come across the term CFDs, or Contracts for Difference. That’s because CFDs have become one of the most popular ways to trade on all manner of assets, from currency pairs and cryptos to indices and stocks.
In essence, a CFD is a contract between a trader and a broker. Rather than pay a hefty price to own your own stocks or cryptocurrency, CFDs allow traders to trade on the price movements of these assets at a fraction of the cost. Traders analyse the market and place a trade with the broker on whether the underlying financial market is about to rise or fall. Profits or losses are made depending on whether a trader’s prediction was correct. This is called trading with leverage and gives traders more value for each investment. CFDs make trading more cost-efficient and give traders more flexibility on how they choose to invest their money.
A bullish market is a financial market where prices are rising and are expected to continue surging. The name is inspired by how bulls attack. When a bull is facing an aggressor, it runs and thrusts its horns up into the air. Therefore, when a financial market is on the way up, it’s said to be “bullish”. There are many reasons why a market is deemed bullish. These can range from sudden interest in a market from traders, optimistic forecasts from economists, political events that leave a positive outcome on an economy, and many other global events. When a market experiences an uptrend, it typically attracts even more interest from investors who pour more money into the market, which in turn results in an even bigger rally for the market. Bullish trends can last anywhere from a few weeks to months or even years.
A bearish market is the opposite of a bullish market and is when a financial market experiences a severe decline. Like the term “bullish”, “bearish” also derives from the animal. When bears attack their opponents, they swipe their claws downwards. Within financial circles, that downward swipe of the bear has come to represent a market fall. Again, many small- and large-scale events can affect a market becoming bearish. Global crises, negative economic outlooks, and even blunders from high-profile CEOs and politicians can cause markets to go on the downturn. When a market is deemed bearish, traders will try to protect their investments by selling their CFD trades, in order to minimise their losses. This forces the market into further decline.
Liquidity is a term that refers to how much money is flowing through a financial market. This is determined by how many traders are trading at any given time and the total volume of their investments. It is commonly agreed that the Forex market is the most liquid financial market in the world with an average daily turnover of $5.3tn across all the currency pairs being traded. Liquidity in currency pairs fluctuates throughout the day as markets across the globe open and close. Forex is tradable 24hrs a day, all week long, and is the most active trading market in the world, meaning that prices can change quickly and drastically compared to other markets.
Volatility refers to the up and down shifts within financial markets. Some markets, like the crypto market, are known to rise and fall drastically. This is called a highly volatile market. High volatility markets bring a certain amount of uncertainty with them because prices can shift in any direction at a moment’s notice. However, they also offer traders greater potential to generate bigger profits in a shorter amount of time. Other markets, like gold, are low in volatility. This means that their value tends to remain stable and does not fluctuate as dramatically. These offer more secure investment opportunities, although profit margins will be considerably less, especially in the short term.
Forex is a portmanteau of foreign exchange. This market is all about trading on currency pairs. There are many currency pairs to trade on from all across the world, and it is generally advised for newer traders to begin with the Majors. Major currency pairs are typically those that trade the most volume against the US dollar. The big four are EUR/USD, GBP/USD, USD/CHF, and USD/JPY. The most traded currency pair out of all of them is the EUR/USD, commonly referred to as Fiber. This is perhaps not much of a surprise since the European Union and the United States enjoy two of the strongest economies in the world. To simplify discussing FX pairs, traders have given certain currency pairs easy-to-remember nicknames.
FX Crosses refer to currency pairs that do not include the US dollar. They are also referred to as Minors. As these markets are trading outside of the US dollar, they are commonly not as liquid as the major currency pairs. However, a few remain considerably large markets with a significant volume of trades occurring on a daily basis. The most popular FX Crosses are those that still feature another currency from a Major pair. These include EUR/GBP, EUR/CHG, and GBP/JPY. Furthermore, Crosses can enjoy stable markets due to strong political ties between their respective countries.
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