Entering the world of Forex trading can be a daunting experience for anyone who has not previously been exposed to the workings of the financial markets. Forex terminology can seem like a foreign language to beginners. There are a variety of buzz words and common market terms that are used daily to discuss the state of the Forex market and the methods employed to trade within it. It can often be helpful to look over the general and more complex Forex market terms before immersing yourself in educational material. There are a few common buzz words that are worth familiarising yourself with in order to better understand how the Forex markets work.
General Forex Market Terms
Liquidity – The measure of price changes in relation to trading volume.
Volatility – The measure of price changes over a period of time for a particular currency.
Market Price – The current price for which any given currency is traded for on the market.
Currency Exchange Rate – The value of one currency expressed in terms of another. This can fluctuate and the change in value can depend on numerous factors both political and economic.
Ask and Bid – The ask price is the price you buy for, the bid price is the price of the demand or the you sell for.
Spread – The difference between the bid and ask prices.
Currency Pairs – Currencies are traded in pairs. The base currency is the first currency in the pair. The quote is the second currency in the pair. View more detailed information on (FX) Currency Pairs.
Approaches to Forex Trading
Forex trading is speculative. As a result, Forex traders must make informed trading decisions based on what they can currently deduce from the markets, what has happened previously and what they expect to happen in the near future as a result of changes to economic and political circumstances within their chosen currencyâ€™s country. Fundamental and technical analyses are the two most common methods for forecasting the Forex market. By taking either of these approaches or using a combination of the two, Forex traders can build a picture of potential movements in the market and subsequently discover profitable trading opportunities. Technical indicators help understanding trends and behaviours of the financial markets and fundamental analysis can help traders forecast future price movements.
Fundamental Analysis – Fundamental analysis involves forecasting the price movement and trends in the market by analysing economic indicators, political and social factors
Technical Analysis – Traders use technical analysis and past market data to predict future price movements and market direction. By analysing price and volume charts, traders can identify trends in the market and subsequently, the right entry and exit points to make a successful trade.
Forecasting the Forex Market
Some experienced Forex traders will talk about looking for 5 alarm trades. These are trade opportunities that arise from identifying key indicators that suggest when a trader should enter a trade.
Momentum – Momentum indicators evaluate the speed at which price moves over a given period of time and indicate the strength or weakness of a particular trend. Traders will look for a strong trend in order to make a successful trade.
Trend and Direction – Moving averages can help to identify a trend or market direction that will help traders to find sensible entry and exit points.
Fractals – Chart intervals that may indicate a good time to trade.
Volatility – The degree to which prices fluctuate can help traders anticipate future price changes.
Oscillations/Cycles – Repeated patterns, cyclical market movements or trends within the market can be identified in order to time entry and exit points that they expect will be most beneficial to a trader.
Forex Trading Strategies
Scalping – Scalping is a quick trading method where traders only hold their positions open for short periods of time in an attempt to make small profits quickly.
Swing Trading -Â Swing trading involves buying or selling currencies at or near the end of up or down price swings. Swing traders look for violent swings in order to trade more profitably.
Trend Following – Trend following involves focusing on the price, picking a suitable entry point, waiting for the trend to carry a position into profit and waiting until an actual change has occurred in the trend before exiting a particular position