There are hundreds of terms in the forex terminology, but it is hard to understand most of them if you are a novice forex trader. For now, only learn the following terms:
Ask Rate - The rate at which a financial instrument if offered for sale (as in bid/ask spread).
Bear Market - A market distinguished by declining prices.
Bid Rate - The rate at which a trader is willing to buy a currency.
Bid/Ask Spread - The difference between the bid and offer price, and the most widely used measure of market liquidity.
Bull Market - A market distinguished by rising prices.
Contract (Unit or Lot) - The standard unit of trading on certain exchanges.
Fundamental Analysis - focuses on the economic forces of supply and demand that causes price movement. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.
Limit order - An order with restrictions on the maximum price to be paid or the minimum price to be received.
Long position - A position that appreciates in value if market prices increase. When one buys a currency, their position is long.
Offer - The rate at which a dealer is willing to sell a currency.
Pips - Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points.
Rate - The price of one currency in terms of another, typically used for dealing purposes.
Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.
Short Position - An investment position that benefits from a decline in market price. When one sells a currency their position is short.
Spread - The difference between the bid (buy) and offer (ask, sell) prices; in other words the spread is the commission that the brokerage house makes on each trade. This can vary widely between currencies and between brokerage firms.
Stop Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor’s position.
Support Levels - A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross below.
Technical Analysis - An effort to forecast prices by analyzing market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators.
Monday, November 12, 2007
Glossary of Forex Terminology
Time to open a forex demo account
Now that you have a basic understanding about the forex market and how it works, it's time to open a forex demo account. Demo account means that you will not trade using real money, instead the forex broker will fund your account with virtual money - if you lose this money doing bad trades, there's no problem, you can contact the broker and ask for more virtual money.
There are many forex brokers out there and most of them offer demo accounts. I use and recommend forex.com - they are very good to start with. After you will learn more about the forex market, you should try some of the other forex brokers and choose the one that works best for you. You can even use more than one broker at the same time. I will explain in a future post why you would want to do that.
After you set up your forex demo account, you can immediately start carrying trades. However, at this point, you will not understand much about what a pip is, what is the difference between going long and going short or how to follow the trend. Trading in the forex market is not so hard as it might seem in the beginning, but even so, you will still need to read about it for a couple of hours (or even a day or two).
The site at forex.com has a very good tutorial about how to use their forex trading platform (the program you will use to carry trades), so you should start by watching it. You will learn exactly what to do to buy or sell a currency, how to use the forex charts or to place a limit or stop loss order.
However, do not try to understand everything the first time you read about it. It will take a few days before things will start to make sense.
Tuesday, November 6, 2007
What moves the Forex market
Currency prices are the result of supply and demand forces. Supply and demand for any given currency are influenced by several factors which fall into these three categories: economic factors, political conditions and market psychology.
Economic factors include government fiscal policy, monetary policy (reflected by interest rates), government budget deficits or surpluses, balance of trade levels and trends, inflation levels , economic growth, employment levels, retail sales. The more healthy and robust is a country's economy, the better its currency will perform, and the more demand for it there will be.
Political conditions: political upheaval and instability have a negative impact on a nation's economy and vice-versa.
Market psychology influences the foreign exchange market in many ways:
- When currencies are perceived as stronger over their weaker counterparts, there will be a greater demand and a higher price for them.
- "Buy the rumor, sell the fact" is a market truism that demonstrates how psychology can move the market: the price of a currency usually reflects the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in the opposite direction.
- There is a cognitive bias called anchoring: investors tend to focus too much on the relevance of outside events to currency prices.
- Some economic reports and numbers (trade balance figures, money supply, employment and inflation) take on a talisman-like effect: the number itself becomes important to market psychology and have an immediate impact on short-term market moves.
What is the Forex market
Forex means foreign exchange and it is a market where one currency is traded for another. It is the largest financial market in the world and includes trading between banks, currency speculators, large corporations, governments and other financial institutions. In this market the average daily trade is over US$ 3 trillion. Individual traders are a small fraction of this market and can only participate indirectly through brokers, who charge a small fee, usually called "spread".
The foreign exchange market has some characteristics which makes it unique:
- the extreme liquidity of the market
- the large number and variety of traders
- its geographical dispersion,
- long trading hours: 24 hours a day (except weekends and holidays)
- the large variety of factors that affect exchange rates
- EUR/USD: 28 %
- USD/JPY: 18 %
- GBP/USD: 14 %
Start trading in the Forex market!
Learn about the Forex market and start trading today. Years ago only banks, corporations and professional traders were allowed to trade in the Forex market. Today anyone with a computer and an internet connection can take advantage of this opportunity. In this easy to follow tutorial you will learn what is the Forex market, how you can benefit from it and how to trade forex in order to make money consistently.