Forex Glossary to Help with Your Trading

Jan.10/21

2nd blog post, Forex glossary

This is my second blog post. I signed up for a forex trading course. This particular one has dozens of little videos about forex. They were so overwhelming that I decided to make a forex glossary about what I was learning.

I made an index to give links to all of those forex glossary blurbs in alphabetical order.

Forex market trades

forexIn the forex market it is possible to trade:

  • Currencies
  • Commodities (such as oil, corn, gold, silver, etc.)
  • Cryptocurrencies.

However, in this forex blog, we will stick to currency pairs. An example of a currency pair is USDJPY. If you were to trade in this pair, you would simultaneously be buying US dollars and selling Japanese yen.

Disclaimer

Note that the forex market is a high risk market. If you make your trades based on the information below and you lose more than you gain, that is your responsibility. I will in no way share any of the blame. You are assuming 100% of the risk.

index

Index of Forex Trading Terms

Bid vs. ask price
Binary options
Bollinger bands
Breakout vs. fakeout
Candlesticks
Cashtrap
Compound interest
Forex brokers
Forex reversal points
Fundamental analysis
Leverage
Live trader user interface
Lot size
Margin
Order types
Pip
Pullbacks
Scalp vs. swing trading
Sentimental analysis
Spread
Stochastic RSI
Stop loss
Support & resistance
Technical analysis
Trading session times
Vdub binary indicators

 

 

Trading session times       Go to index

Trading session times?

There are four main forex trading markets in the world. They are listed below along with the times in Pacific time that they are open 5 days a week.

  • Sydney, Australia — 2 pm – 11 am the next day.
  • Tokyo — 4 pm – 1 am the next day.
  • London — Midnight – 9 am.
  • New York — 5 am – 2 pm.

If you decide to trade forex, you will trade with a broker anytime between 2 pm Sunday and 2 pm Friday (Pacific time). However, when the New York market is open, you would likely focus mainly on USD. When Tokyo is open, you would likely focus mainly on JPY, and so on.

Forex brokers                                   Go to index

Your forex broker

When you place an order, the broker enters the trade. Each time you order, you pay your broker a commission (called “the spread“). Once you are about to trade forex, I recommend joining a Facebook forex trading group. Join a group in which the members help each other. If you do, you will likely find someone who can recommend a good broker. Whether or not a broker is considered good is based on things such as having a small spread and whether or not they will be trading the currency pairs in which you are interested.
Leverage       Go to index

Leverage

After you get a broker, you may hear the term leverage. A broker may offer you a leverage of 2:1. Then each $1000 you invest will have a purchasing power of $2000. So, a 1% profit would be $20 which represents a 2% ROI. If the broker offers you a leverage of 50:1, each $1000 you invest will have a purchasing power of $50,000. So, a 1% profit would be $5000 which represents a 50% ROI. A broker offering you a high leverage can make you more money per trade. However, not all trades make you money. So, you may very well lose more money per trade.

Pip       Go to index

What is a pip?

Pip stands for percentage in point. It represents the smallest unit of change in the value of a currency pair. For most currencies a pip represents the fourth decimal place in the exchange rate for the two currencies. However, this decimal place can vary for some currency pairs.

Lot size

Lot size

Lot Type Order Size Value/pip
Micro Lot 0.01 $0.10
Mini Log 0.1 $1
Standard Lot 1.00 $10
10 Standard Lots 10.00 $100

Look at the table above. If your order size is worth one cent, the value of the trade per pip is 10 cents. And so on.

Spread

Spread

The spread is your broker’s commission. They are charged in pips. The size of the spread depends upon the volatility of the currency pair. All trades start negative. Suppose you won 30 pips on the trade that started at 5 pips. You would have earned 25 pips and your broker would have earned 5 pips.

This image is from my broker’s webpage. These are 4 different currency pairs. To the right is a percentage which represents the percentage of the trading amount I would get if I won the trade.

Suppose I won a $10 trade with GBPJPY. I would get $7.20 and $2.80 would be my broker’s spread.

Some traders never bother with a currency pair unless their profit would be at least 70%.

Bid vs ask       Go to index

Bid vs. ask price

forex The bid price is the price at which you entered the trade. The ask price is what your broker looks as your entry into the market. The difference between the bid & ask price is the spread. It is your broker’s commission.

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Margin

The margin is a portion of your funds that your forex broker sets aside from your account balance to keep your trade open and to ensure that you can cover the potential loss of the trade. A margin can be expressed as a percentage to express the leverage ratio. A 1:1 ratio would be a 100% margin requirement. A 2:1 ratio would be 50% and so on. There are 4 types of margins:

  1. Account margin — The amount of money in your trading account.
  2. Used margin — The amount of money held by your broker to keep your current positions open. Suppose you are in a live trade. The broker will hold a little over the amount needed to cover the trade to cover any extra loss you may have if the trade goes in the wrong direction. This is returned to your account when you close your position or receive a margin call.
  3. Usable margin — The money in your account that is available with which you can open a new position.
  4. Margin call — This happens when the amount of money in your account cannot cover your potential loss. If that happens, your broker will close all of your positions at market price.

Order types

Order types

There are 2 order types:

  • Market execution.
  • Pending order execution.

In a market execution trade you will execute a trade at market price for instant activation. In pending order execution, your order will activate when the currency pair hits a SPECIFIC entry price. There are 4 pending order types:

  • Buy stop — Order placed above price & price keeps going up.
  • Sell stop — Order placed below price and price keeps going down.
  • Buy limit — Order placed below price and price then goes up.
  • Sell limit — Order placed above price and price then goes down.

Stop loss       Go to index

Stop loss & take profit prices

We refer to prices for currency pairs 3 different ways:

  • Entry prices — the amount of money you actually pay for a currency pair.
  • Stop loss prices — It prevents you from losing more money than you were willing to risk.
  • Take profit price — After you have entered a trade, a take profit price will pull you out of a trade if you have chosen this option.

Candlesticks       Go to index

Candlesticks

forexA candlestick chart is a type of chart that graphs the movement of a currency pair over a predetermined time frame. Each chart is for a specific currency pair and is for a specific time frame. It could be a minute, a day or a week or a number of other time frames. Candlesticks are one of the best ways for a trader to identify trends. This GBPJPY chart in the animated gif seems to be showing an upward trend. When the prices are going down (the red candle), that is called a bear market. When the prices are going up (the candles are green or blue depending upon settings), that is a bull market.

  • forexOpen price: The first traded price during the formation of a new candle is the open price.
  • High priceThe top of the upper wick. If there is no upper wick, then the high price is the open price of a bearish candle or the closing price of a bullish candle.
  • Low price: The bottom of the lower wick. If the low price is the open price of a bullish candle or the closing price of a bearish candle, there is no lower wick.
  • Close price: The close price is the last price traded during the formation of the candle.

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Forex technical analysis

forexTechnical analysis is the framework in which forex traders study price movement. Traders look at historical price movements and determine the current trading conditions and potential price movement. Technical analysis helps you identify trends & ranges; technical analysis makes your charts easier to interpret. For more information, go to the Babypips website.

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Fundamental analysis

In fundamental analysis you listen to news stories, etc. and assess the overall state of the economy, etc. You look at trends such as interest rates, employment rate, GDP, international trade and manufacturing.

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Sentimental analysis

In sentimental analysis, you go by your gut feel of what is going to happen. I do not recommend it.

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Compound interest

Compound interest is interest calculated on the initial principal plus all of the accumulated interest from previous periods on a deposit or loan.

When you trade forex, you should have paper, pen & calculator in front of you. Then jot down the amount of money in your brokerage account and then 1%, 2% and 3% of that amount. Choose one of those product amounts to trade.

(Personally, I always choose exactly 1% every time. If I make 9 trades a day and win 7 of them, I will have reached my goal of increasing my account by 3%. )

In the spreadsheet here, someone has invested 3% of their  $1000 account. The currency pair presently has a payout of 75%. By investing 1% of their account, they have made $7.50 from their first trade. Now they have $1007.50 in their account. By investing  exactly 1% of that, they now make $7.56 from their second trade and so on.

Notice that they lost their last two trades. They still increased their brokerage account by over 3% that day by making 9 trades and winning 7 of them.

The YouTube video below explains it beautifully.

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Forex support & resistance

As you’re looking at a candle chart, you may see high & low trends. If you are looking at a bull market, you will notice that the candles will not seem to be going above a certain point. This is called resistance. So, you can draw a transparent rectangle in this area. When you are in the resistance area, you are looking for a put.

At the bottom there is an area in which the candles do not get any lower. This is called support. You draw a transparent rectangle in that area. When you are in the support area, you are looking for a call.

If you want to buy in this bull market, ideally you would buy in the support area and sell in the resistance area.

The above chart represents a couple hours worth of 5-minute candles.

See the corresponding blog post.

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Pullbacks

forexNotice the trend line in this image of NZDJPY candles. The trend is obviously going up. However, it does not go up constantly. It keeps having temporary movements that are opposite to the trend line. These are called pullbacks. At the end of one of its pullbacks forexwould be an ideal place in which to make a buy trade. The image on the left is a down trend. Note that trend lines for a down trend connect the tops of the candles & the trend lines for an up trend connect the bottom of the candles.

Breakout vs. fakeout

forex Notice the trend line below these bullish 5-minute candles. The trend went up for 3 candles and then went bearish. Suppose historical data had made us believe that the green candles would continue rising much higher than they did.

Pretend it stayed bearish until the far right of this image and then continued going down for much longer than expected.

Then, at the point where the green candle became a red candle and continued as such would be called the breakout point.

Sometimes an event such as world bankers buying a huge amount of a currency pair will cause a temporary change of direction. Then, after the market has reacted to this news, it will revert back to the same old trend. That would be called a fakeout.

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Scalp vs Swing Trading

Scalp & swing trading can both be very profitable. Scalp trading is when you make trades in a short period of time. Swing trading is when your trades last hours or days or possibly even months.

The people who got me involved with studying forex are scalp traders. So, that is what I am planning to do. I want to almost exclusively use 3 minute trades.

As a little aside here, it is best practice to develop a strategy that works and stick to it.

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Binary options

A binary option is an exotic financial instrument based on a simple yes or no question. The payoff is a fixed amount or nothing at all. E.g., at the end of this trade, do you think the price of the currency pair will be above or below the market price. You buy USDCAD for 1.26420. At the end of the trade, the price of USDCAD was 1.26451. You had bet that the pair would go up and they did. Therefore you earn a fixed amount of money. It the trade had ended at 1.26466, you would still have earned the same amount of money.

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Live trader user interface

There are thousands of different forex brokers out there and different brokers will have different user interfaces. (BTW, my strategy for finding the ideal broker will to simply ask some successful traders from a Facebook page forex group which brokers they like.) For option type I I will choose Turbo because it matches my personality. If you look at the time choices, you will see that they are between one and thirty minutes. (I like my trades to last 3 minutes.) For Intraday you can choose trades that last between two and seven hours. For Long Term you can chose between 5 and 12 days. Amount is the amount of money you are willing to trade in this particular trade. As a general rule, I will choose between 1 and 3% of the amount of money in my account. There are two important factors to look at in the Currencies column above. They are the currency pair that you wish to trade and the payout you will get for that particular pair. In the sample interface above, USDJPY has a payout of 64%. That means that when you win a trade, your payment is based upon 64% of the amount of money you traded. The more volatility a currency pair has, the higher the percent payout will be. If you click the Currency tab, you will see that this broker will also allow you to trade commodities, crypto currencies and stocks. You must also consider the Call or the Put. In a call, you want to buy the currency pair. In a put, you want to sell the currency pair.

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Bollinger bands

Bollinger Bands are a form of analysis that you use to plot trend lines.  These trend lines are two standard deviations away from the simple moving average price of a currency pair. As you study this blog and the related course, you will learn more about Bollinger bands than you will learn here. As the candles are being added to your chart, 90% of all price movements will be occurring within the band. So, if you see the market close to or touching the band, you know that the price movements will most likely be reversing. Look at any green candle near or at the top band. Logic demands that at that point, you will create a sell position.  When a red candle shows up near the bottom band, logic demands that you create a buy position. It will likely be wise to sell after the price meets the simple moving average. Here is another strategy some traders use. Notice in the Bollinger band on the right there is a line of green candles along the top band. That’s called surfing the band. After it finishes surfing, that would be a good time to sell. Then you could get out of your trade after you reach the simple moving average. As it says above, 90% of the time your prices will be within the Bollinger bands. If a red candle is through the lower band, that is an indication that it has been oversold. There is a very good chance that it will retrace shortly. So, now most likely is the time to buy. Conversely, if a green candle breaks through  the upper Bollinger band, it has been overbought. Now would most likely be an excellent time to sell.

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Stochastic RSI

  From your list of indicators, click on Stochastic RSI. Above the top of the rectangle you see above, Stochastic are showing areas in which currency pairs are overbought. Below the rectangle, they are showing areas that are oversold. When pairs are oversold, there is a high probability that they will reverse. It would be a good time to buy. When pairs are overbought, there also is a high chance that they will reverse. It would be a good time to sell.

Important note: Stochastics show momentum. You should buy or sell when the momentum is slowing down. To help you do that, hover over the icons to make them white. Then click on the gear icon to the left of the “X”. Change the settings to make it easier to read the details in the line. Look at the white letter A on the image to the right. Notice that it is the beginning of a downward trend. Now notice the white line connecting the first green candle to the point where the Stochastic line begins to leave the oversold area. When it leaves that oversold area, you know that the downward momentum has slowed and reversed. It is a wise idea to start buying.

When investors are talking about the Stoch/RSI, they often refer to the 40, 50 and 60% lines. The two dashed lines are the 40 & 60%. The 50% line is half way in between.

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Identifying forex reversal points

Let’s look at a strong indication that currency pairs have been overbought or oversold and the prices are reversing. In this image from Cash Trap, the top indicator is Stochastic and the bottom is RSI (Relative Strength Index). The red enclosures I made indicate where the market has overbought. The green enclosures indicate where the market has oversold. The Stochastic lines cross the horizontal lines more often that the RSI lines. When the red or green enclosures in both of the 2 indicators cross their respective horizontal lines, that is a very good indication that you should be making a trade. With the red enclosures, you enter a put order after one of the lines crosses back down over the horizontal line indicating the end of the overbought situation. With the green enclosures, you make a call order after one of the indicators passes back over the horizontal line.

(I recommend that you do not buy any forex until you have a thorough understanding of CashTrap. And then, you should start your trading with a dummy account.)

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Vdub binary indicators

As you learned earlier, a binary indicator is one with a fixed payout based on a yes or no bet. Your broker may not offer Vdub binary indicators. If they do, it will display something like what you see to the right.

That is rather complex. So, you should go into the settings, remove lots of features and make it look something like the chart to the left.

That it can become very useful for your 15 minute binary trades. You are looking for reversal points where things are overbought or oversold.

If you are interested, you should play around with this system in a dummy account using 15 minute intervals.

You will likely have a higher success to failure ratio if you combine this chart with a Stochastic RSI chart.

If you look for an area that both suggest positive trades, you will not get as many chances to trade. However, you will have a greater success rate.

Wherever possible it’s a good idea to have at least 2 indicators that confirm each other. In the example in this image, I would buy where you see the right-hand arrow in the Stochastic RSI chart.

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CashTrap

CashTrap is a strategy built into an application. It is unique to one of the Forex schools. In it, 6 different indicators are watched at the same time. You get different numbers of points for different indicators.

If they add up to 3 points, you invest 1% of your account.

If they add up to 4 points, you invest 2% of your account.

If they add up to 5 or more points, you invest 3% of your account.

In this example you will be trading the EURUSD. In the chart, the first graph is the USD. The second one is the EUR.

If the first currency is stronger than the second, there should be an up arrow telling you to call (buy). If the second is stronger, you should put (sell).

The second currency is stronger. So, you should sell. The red arrow in the image to the left is telling you to sell. That indicator is worth 3 points. The two graphs near the bottom of the image show an area that is two standard deviations above the simple moving average.

The graphs indicate that the USDEUR has been overbought & it most likely is time to sell. Each of those are worth 0.5 points because they correctly are telling you to sell.

Those numbers add up to 4 points. So, even without the other two indicators, I would invest at least 2% of the amount of money in money account.

Important Cash Trap changes: (Apr. 5) Since I wrote this little article about Cash Trap, the program has been updated. It is no longer necessary to use those bars for the Currency Strength Meter. That metric has now been built into Cash Trap. For more information, go here.

Points to remember

  • NEVER invest more than 3% of the amount of money in your account.
  • Get into your trades just seconds after a new candle has formed.
  • STOP trading your currency pair for the day if you have two losses in a row.
  • If the Live Currency Strength chart indicates that the first currency is stronger than the second, you should buy. If the second is stronger, you should sell.
  • You can do very well if you stick to these 5 currency pairs: USDCAD, EURUSD, EURJPY, EURCAD & USDJPY.
  • Refresh the Live Currency Strength chart before starting a trade.

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