Babypips - Forex Trading Dictionary
- Babypips - Forex Trading Dictionary
This article serves as a comprehensive glossary of terms used in Forex (Foreign Exchange) trading, heavily inspired by and referencing the excellent resources found on Babypips.com. It is designed for absolute beginners with no prior knowledge of the Forex market. Understanding these terms is crucial for navigating the complexities of currency trading and making informed decisions.
- What is Forex? A Quick Overview
Before diving into the dictionary, let's briefly define Forex. The Forex market is a global, decentralized marketplace where currencies are traded. Unlike stock exchanges, Forex doesn’t have a central location. Trading happens electronically over-the-counter (OTC), meaning directly between participants. It's the largest and most liquid financial market in the world, with trillions of dollars changing hands daily. Currency pairs are traded – for example, EUR/USD (Euro versus US Dollar). Traders aim to profit from fluctuations in exchange rates. Trading psychology plays a significant role, as emotional control is essential.
- The Babypips Forex Trading Dictionary
This dictionary is organized alphabetically for ease of use.
A
- **Ask Price:** The price at which a broker is willing to *sell* a currency pair.
- **ATR (Average True Range):** A technical analysis indicator that measures market volatility. A higher ATR suggests greater volatility. Technical indicators are essential for analysis.
- **Account Leverage:** The use of borrowed funds from a broker to increase the potential return of an investment. While it can amplify profits, it also magnifies losses.
- **Action:** Common slang for a trading opportunity. "There's some action on EUR/USD!"
- **Arbitrage:** Exploiting price differences for the same asset in different markets to generate risk-free profit.
B
- **Bid Price:** The price at which a broker is willing to *buy* a currency pair.
- **Base Currency:** The first currency in a currency pair. For example, in EUR/USD, the Euro (EUR) is the base currency.
- **Broker:** A firm that facilitates the buying and selling of currencies on behalf of traders. Choosing a reliable Forex broker is paramount.
- **Bearish:** A market sentiment indicating an expectation of declining prices. A bearish trader believes a currency pair will fall in value. Trend following is common in bearish markets.
- **Backtesting:** The process of applying a trading strategy to historical data to assess its potential profitability. Trading strategies must be backtested rigorously.
- **Break Even:** The point at which a trade has neither made a profit nor a loss.
- **Bullish:** A market sentiment indicating an expectation of rising prices. A bullish trader believes a currency pair will increase in value. Candlestick patterns can signal bullish trends.
C
- **Candlestick:** A visual representation of price movements over a specific period, displaying the open, high, low, and close prices. Japanese Candlesticks are a core concept.
- **Chart Patterns:** Recognizable formations on price charts that suggest potential future price movements. Examples include head and shoulders, double tops/bottoms, and triangles. Chart pattern trading is a popular technique.
- **Close Price:** The final price at which a currency pair traded during a specific period.
- **Contract Size:** The standardized amount of currency traded in a single contract.
- **Counter Currency:** The second currency in a currency pair. For example, in EUR/USD, the US Dollar (USD) is the counter currency.
- **Correlation:** The statistical relationship between the movements of two or more currency pairs. Currency correlation can be used to diversify risk.
- **Carry Trade:** A strategy involving borrowing a currency with a low interest rate and investing in a currency with a high interest rate.
- **Central Bank:** An institution that manages a country's currency, money supply, and interest rates. Monetary policy significantly impacts Forex.
D
- **Day Trading:** A trading style where positions are opened and closed within the same day, avoiding overnight risk. Day trading strategies require quick decision-making.
- **Divergence:** A discrepancy between price movement and a technical indicator, often signaling a potential trend reversal. RSI divergence and MACD divergence are common examples.
- **Drawdown:** The peak-to-trough decline in an investment's value during a specific period. Managing risk management and drawdown is vital.
- **Double Top/Bottom:** A chart pattern resembling two peaks or troughs, often indicating a potential trend reversal.
E
- **Economic Calendar:** A schedule of upcoming economic news releases, such as GDP, inflation, and unemployment data. Economic indicators significantly influence currency values.
- **Entry Point:** The price at which a trader opens a position.
- **EUR/USD:** The most heavily traded currency pair, representing the Euro against the US Dollar.
- **Exchange Rate:** The value of one currency expressed in terms of another.
- **Expert Advisor (EA):** An automated trading program that executes trades based on pre-defined rules. Algorithmic trading utilizes EAs.
F
- **Fibonacci Retracement:** A technical analysis tool based on Fibonacci numbers used to identify potential support and resistance levels. Fibonacci trading is widely used.
- **Forex (Foreign Exchange):** The global market for trading currencies.
- **Fundamental Analysis:** Evaluating a currency's value based on economic factors, political events, and other qualitative data. Fundamental trading focuses on long-term trends.
- **Forex Factory:** A popular website providing a Forex calendar, news, and a forum for traders.
- **Fixed Spread:** A spread that remains constant regardless of market conditions.
- **Floating Spread:** A spread that varies depending on market volatility and liquidity.
G
- **Gap:** A significant price jump or drop that occurs when trading resumes after a period of inactivity.
- **GDP (Gross Domestic Product):** The total value of goods and services produced in a country, a key economic indicator.
- **Going Long:** Buying a currency pair with the expectation that its value will increase.
H
- **Hedging:** A strategy used to reduce risk by taking offsetting positions in related assets.
- **High-Frequency Trading (HFT):** A trading style characterized by extremely fast execution speeds and high turnover rates.
- **Harmonic Patterns:** Advanced chart patterns, like the Gartley and Butterfly patterns, used to identify potential trading opportunities.
I
- **Inflation:** A general increase in the prices of goods and services, eroding the purchasing power of a currency.
- **Interest Rate:** The cost of borrowing money, a key factor influencing currency values.
- **Interbank Market:** The network of banks that trade currencies with each other.
- **Ichimoku Cloud:** A comprehensive technical indicator used to identify support, resistance, trend direction, and momentum. Ichimoku Cloud trading is a complex but powerful method.
- **Indicator:** A mathematical calculation based on price data used to generate trading signals. Moving Averages are a common example.
J
- **Japanese Candlesticks:** A visual representation of price movements, as described above.
K
- **Key Level:** A significant price level on a chart that has historically acted as support or resistance.
L
- **Leverage:** See "Account Leverage" above.
- **Liquidity:** The ease with which an asset can be bought or sold without affecting its price. Higher liquidity generally leads to tighter spreads.
- **Long Position:** See "Going Long" above.
- **Lot Size:** The standardized unit of trading volume in Forex. Mini lots, Micro lots, and Standard lots are common sizes.
M
- **Margin:** The amount of money required in a trading account to open and maintain a position.
- **Margin Call:** A notification from a broker that a trader's account has insufficient margin to cover potential losses.
- **Market Order:** An order to buy or sell a currency pair immediately at the best available price.
- **Moving Average:** A technical indicator that smooths out price data to identify trends. Simple Moving Average (SMA) and Exponential Moving Average (EMA) are popular types.
- **MetaTrader 4 (MT4):** A widely used electronic trading platform.
N
- **News Trading:** A trading strategy based on reacting to economic news releases.
- **Non-Farm Payrolls (NFP):** A key economic indicator that measures the number of jobs added or lost in the US economy (excluding farm jobs).
O
- **Open Price:** The first price at which a currency pair traded during a specific period.
- **Order Block:** A specific candlestick pattern identified in institutional trading strategies.
- **Overbought:** A condition where a currency pair has risen too quickly and is likely due for a correction.
- **Oversold:** A condition where a currency pair has fallen too quickly and is likely due for a bounce.
P
- **Pip (Point in Percentage):** The smallest unit of price movement in a currency pair.
- **Position Sizing:** Determining the appropriate amount of capital to allocate to each trade. Risk per trade is a key consideration.
- **Price Action:** Analyzing price movements directly on a chart, without relying heavily on indicators. Price action trading is a popular approach.
- **Profit Factor:** The ratio of gross profit to gross loss, used to evaluate a trading strategy's profitability.
- **Pullback:** A temporary reversal in a trend, offering potential entry points.
Q
- **Quote Currency:** The second currency in a currency pair. For example, in EUR/USD, the US Dollar (USD) is the quote currency.
R
- **Range Trading:** A trading strategy based on identifying and exploiting price movements within a defined range.
- **Resistance Level:** A price level where selling pressure is expected to overcome buying pressure, preventing further price increases.
- **Risk/Reward Ratio:** The ratio of potential profit to potential loss on a trade.
- **RSI (Relative Strength Index):** A momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions.
S
- **Scalping:** A trading style characterized by making numerous small profits from tiny price movements.
- **Sell Stop Order:** An order to sell a currency pair when it reaches a specific price.
- **Short Position:** Selling a currency pair with the expectation that its value will decrease.
- **Stop Loss Order:** An order to automatically close a position when it reaches a specified price, limiting potential losses.
- **Support Level:** A price level where buying pressure is expected to overcome selling pressure, preventing further price decreases.
- **Swap (Rollover):** Interest paid or charged for holding a position overnight.
T
- **Take Profit Order:** An order to automatically close a position when it reaches a specified price, securing profits.
- **Technical Analysis:** Analyzing price charts and using indicators to identify trading opportunities.
- **Trend Line:** A line drawn on a chart connecting a series of highs or lows, indicating the direction of a trend. Trend analysis is crucial for identifying opportunities.
- **Trading Plan:** A detailed strategy outlining a trader's goals, risk tolerance, and trading rules.
- **Trailing Stop Loss:** A stop loss order that adjusts automatically as the price moves in a favorable direction.
U
- **Uptrend:** A series of higher highs and higher lows, indicating a rising market.
V
- **Volatility:** The degree of price fluctuation in a currency pair.
W
- **Whipsaw:** A volatile market condition characterized by rapid price reversals, making it difficult to trade.
X
- **XAU/USD:** The symbol for Gold priced in US Dollars. While not a currency pair, it’s often traded alongside Forex.
Y
- **Yield:** The return on an investment, often expressed as a percentage.
Z
- **Zero Spread:** A spread of zero pips, typically offered by brokers during specific market conditions.
- Resources for Further Learning
- Babypips.com - The primary source of inspiration for this glossary.
- Forex Trading Strategies - A deeper dive into popular trading methods.
- Risk Management in Forex - Essential techniques for protecting your capital.
- Understanding Technical Analysis - A comprehensive guide to chart patterns and indicators.
- Forex Economic Calendar - Stay informed about upcoming news releases.
Start Trading Now
Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)
Join Our Community
Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners