Before trading currencies, an investor has to understand the basic terminology of the Forex market, including how to interpret Forex quotes and calculations.
ADX (Average Directional Index)
– A technical tool for measuring a trend’s strength. This index works on a 0 to 100 scale. 0 indicates no trend at all. The closer the result is to 100, the stronger and more significant the trend is. ADX doesn’t indicate a trend’s direction, but only its power. Ask Price
– Also known as the Offer Price (appears as the second part of a Forex quote). The price at which the market is ready to sell a particular currency pair. This is the price a trader must pay to buy the base currency.
Bar Chart – A common type of graphic representation of the price actions in Forex. Each bar is built of 4 points: Opening price, closing price, highest and lowest price for the time frame it represents
Base Currency – The left hand currency in a currency quote e.g. EUR/USD.
Bearish Market – A pessimistic market characterized with falling prices. In a bear market there are more sellers than buyers.
Ben Bernanke – The head of the FED (USA central bank) since 2006. Considered as controversial, mainly thanks to the global economic crisis which started in the U.S. but solid.
Bid Price – The price at which the market is ready to buy a particular currency pair. It appears as the first part of a Forex quote and is the price a trader receives when they sell the base currency.
Bid/Ask Spread – The difference between the Bid price and the Ask price.
Bollinger Bands – Technical indicators for measuring market volatility. Built of a band which includes 3 lines: Center, Top and Bottom. The center line connects the average prices over a period of time. The supporting lines define the band between the peaks and lows across the presented period. Bollinger bands are good for identifying upcoming trends.
Breakouts – These happen when the price breaks (Crosses) a support or resistance level. Breakouts lead to serious currency movements and increasing volatility in the markets.
Brokerage – The mediator between the buyers and sellers in the market. The broker executes the trader’s buy and sell orders and charges the spread as a commission fee. Online Forex brokers enable everyone to easily participate in the market without the necessity to act through banks.
Bullish Market – An optimistic market characterized by rising prices. In a bull market there are more buyers than sellers.
Candlestick Chart – The most popular chart used in Forex. It is a nicer, more graphical version of the bar chart. Built of candle shaped sticks. Green (or white) candles indicate uptrends and red (or black) candles represent downtrends. Each candle shows the open, close, high and low prices for the specific time frame.
Carry Trade – A trading strategy that focuses on the interest rates of the currencies traded. The idea is to buy a currency with rising interest rate while selling a currency with falling interest rate. The profits are derived from the growing differential between the two rates. The JPY is relatively very popular for Carry Trade due to its extremely low interest rates across the years (usually interest rates are at or near 0). JPY is efficient against currencies with rising interest rates.
Central Bank – Governmental bank whose job is to manage and run the monetary policy in the country, while at the same time maintaining the currency’s strength and stability.
Channels – An excellent, easy to use tool, mainly for beginners. It defines the price movement inside a channel, helping us to identify trends.
CPI (Consumer Price Index) – A monthly report that measures the average change in the prices paid by urban households for a basic basket of consumer goods and services. CPI is a good indicator of the level of inflation in the market.
Cross Currency Pairs – Currency pairs which do not include the US dollar, e.g. GBP/CHF.
Currency Pair – Two currencies that are simultaneously used in a trade (one is bought and the other is sold).
– A free trading account for practice (with no real money transactions involved). Fantastic for beginners who wish to get familiar with Forex trading. Nowadays most brokers allow their users to open demo accounts in order to try their Forex trading platforms before depositing real money. Doji
– A common type of candlestick. It is characterized by a lack of body and with long shadows. Usually it resembles a cross/inverted cross. In many cases, Dojis alert traders to a change in the balance of power in the market between buyers and sellers. Double Bottom
– A common chart pattern consisting of two lows at relatively equal levels. This identifying technique can help us to predict potential uptrends.
Double Top – A common chart pattern consisting of two peaks of relatively equal height. This identifying technique can help us to predict potential downtrends.
Downtrend – A trend whose general direction is down. Also referred to as a bear trend.
– The European Central Bank Economic Calendar
– An important feature of your trading platform. It presents a roundup of all significant economic announcements and releases, as well as other fundamental events taking place around the world which might impact on the market. Elliot Wave
– A common trading pattern. An identification of Elliot Wave allows the trader to predict trends with high probability. The pattern is built of 8 waves. The first 5 build one trend and the following 3 belong to an opposite trend.
Enter Trade – Starting trading activity by opening a position (buying or selling a currency pair).
Exit Trade – Ending trading activity by closing a position.
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