Basic Forex Terminology & Key Forex Terms

Forex and CFDs are popular financial markets. In time, traders who regularly and professionally exchange currencies, stocks and indices have developed a terminology. It is essential for understanding the markets and the analysis. Learn the Forex lingo before advancing into the next sections.

Currency Pair

One currency quoted against another. The most common pair example is Euro & US Dollar: EURUSD The former is called the Base Currency, while the latter is Quote Currency. CFDs for stocks, indices or commodities are paired against U.S. Dollar.

Contract for Difference (CFD)

CFDs are financial derivatives allowing traders to take advantage of prices both increasing and decreasing for profit. Financial markets such as Forex are built on the idea of exchanging CFDs. Spread The difference in buying and selling prices for any currency pair.

PIP

Point in Percentage. It represents the minimum amount change in a currency pair’s price.

Bid / Ask Price

For how much you can sell / buy a currency pair in a financial market.

Margin

Minimum amount of funds you need to open a trading position. This amount is set aside by your broker, GKFX Prime, so that you can start trading larger volumes. Used Margin is the amount currently being used to maintain your open position. Free Margin is the amount still available for new trading positions.

Equity

It is the total amount of money in your trading account, including your profit and losses. Equity= Used Margin + Free Margin + Floating P/L

Lot

The standardized sizes for trade units. In Forex trading, a lot is 100,000 units of currency. There are also mini (10,000) and micro (1,000) lots available for certain trading instruments. Our Market Information Sheets contain this information.

Leverage

Margin creates leverage. It is the ability to trade larger positions than your actual account balance. Your broker, GKFX Prime, offers leverage in certain amounts for certain instruments. Let’s say your account type has 100:1 leverage for a currency pair, namely EURUSD. You deposited $2000 into your trading account. And the price for EURUSD is 1.1000 at the moment.

You wish to trade 1 Lot: 100,000 units. One lot of EURUSD costs $110,000 at the moment. GKFX Prime only asks for 1% as margin for this pair. Therefore, we set aside $1,100 in your trading account and provide you 100:1 leverage as a result.

Major / Minor / Exotic Pairs

Major currency pairs contain USD and are paired against other currencies from major economies: EURUSD: euro dollar, USDJPY: dollar yen, GBPUSD: pound dollar, USDCHF: dollar swissy, USDCAD: dollar loonie, AUDUSD: aussie dollar, NZDUSD: kiwi dollar

Minor currency pairs are also called cross-currency. They are commonly traded, but they do not contain US Dollar. Examples: EURJPY, GBPCAD, EURNZD
Exotic currency pairs include one major economy’s currency and one developing country’s currency like USDBRL: dollar real or EURTRY: euro lira.

Minors and exotics usually have a larger spread, simply because more traders are interested in trading EURUSD rather than USDBRL. Less available traders mean larger transaction costs. Nevertheless, GKFX Prime will strive to serve you with the lowest spreads possible.

Margin Call

A warning call from your broker that your available margin has fallen below the minimum level to keep a position open.

Going long / Going short

Going long or entering the market with a long position means you buy a base currency. You are expecting that the base currency will gain value over the quote currency. Going short is the opposite. That means you are expecting that the base currency will lose value compared to the quote currency.

Order Types: Market, Limit, Stop-Loss, Take Profit, Trailing stop

A market order is instantly buying or selling at the current market price.
A limit order is placed when the market price reaches a limit set by you. As a result, a buy limit is always below the actual price while a sell limit is always above it.
A stop-loss order closes your open trade as soon as it hits a preset level of loss. The idea is to minimize your losses.

Trailing stops are also similar but instead of a set price, they focus on pips. If you set a 20-pips trailing stop and the market price moves against you by 19 pip, your position will remain open. However, if you are profiting, the stop level will move along with it. Basically, if you lose more than 20 pips, your position is automatically closed.
A take profit order closes your open trade once a set level of profit is obtained.