Forex trading for beginners Part 1: Financial Markets
30 Rules of a Successful Forex Trader
Description
Dive into our comprehensive Forex Glossary, designed to help traders of all levels understand the essential concepts and definitions in the world of foreign exchange.
Whether you’re new to Forex trading or looking to refine your knowledge, this guide simplifies key terminology like pip, leverage, spread, and lot size.
Gain clarity on fundamental trading strategies, market analysis techniques, and the mechanics of currency trading.
Perfect for beginners and seasoned traders alike, this resource is your go-to reference for mastering the basics of the Forex market.
Basic Concepts
What is ARBITRAGE
Arbitrage is a financial transaction in which financial instruments are simultaneously bought and sold in two or more related markets or within the same market with a time difference, in order to capitalize on price discrepancies.
What is BASIS POINT
A basis point is one hundredth of a percent (0.01%). The term is usually used in relation to central bank interest rates. Any change in interest rates is measured in basis points. If the interest rate rises from 4.00% to 4.25%, then the rate is said to have increased by 25 basis points or 25 bp.
What is CURRENCY
Currency refers to any form of money issued by a government or central bank and used as legal tender. It also encompasses credit and payment instruments denominated in foreign currencies, utilized in international settlements.
What is RISK
Risk refers to the exposure to potential changes with uncertain probabilities. In trading, it is typically used to describe the likelihood of unfavorable changes in the market that could negatively impact the trader. Effective risk management is fundamental to the strategy of every Forex market participant.
What is LEVERAGE
Leverage is the ratio of the volume of a transaction to the required amount of security (collateral). It represents the ratio between the amount of collateral (the trader’s own funds) and the broker’s capital provided as a loan. Leverage indicates how many times profits can change relative to changes in revenue. When offering leverage, the broker ensures that the client does not lose their entire deposit by closing the client’s service after a certain loss.
What is MARGIN
Margin refers to the required amount of funds or collateral that a market participant must deposit to maintain an open position or to open a new position. For each financial instrument, the broker specifies the required margin, which is typically expressed as a percentage representing the ratio of collateral to the transaction amount (e.g., 25%) or as a leverage ratio (e.g., 1:4).
What is LOT
A lot is the standard unit of measurement for the volume of a trade. The size of a transaction is expressed in whole or fractional lots. Brokers define the lot size and specify the minimum volume of a currency contract required to execute a trade. Typically, trading is conducted in whole lots, where a standard lot equals 100,000 units of the base currency. Some brokers also offer the option to trade in fractional lots.
What is MARGIN TRADING
Margin trading involves conducting trading operations in financial markets using a margin account opened with a broker. When buying securities on a margin account, the client uses part of their own funds as collateral (the margin), while the broker provides the remaining funds on credit through leverage.
What is FIBONACCI SEQUENCE
The Fibonacci sequence is a series of numbers created by the Italian mathematician Leonardo Fibonacci. In technical analysis, Fibonacci numbers and ratios are widely used to identify potential support and resistance levels. The sequence is defined by each number being the sum of the two preceding ones, typically starting with 0 and 1. As the sequence progresses, the ratio of consecutive numbers approaches the “golden ratio” of approximately 0.618. This ratio is used to predict the extent of market retracements during trends, allowing traders to forecast potential reversal points.
Markets and Conditions
What is BULL MARKET
A bull market is characterized by a gradual increase in prices over a specific period. In a bull market, the major trends are upward. The primary participants in a bull market are the bulls, traders who aim to drive prices higher by buying and holding positions until they can sell at a profit.
What is BEAR MARKET
A bear market is characterized by a sustained decrease in prices over a specific period. In a bear market, the primary trends are downward. Due to the common belief that markets should generally rise, bear markets are often viewed negatively. Most traders see bear markets as opportunities to profit from the anticipated uptrend that may follow, rather than focusing on the ongoing downturn.
What is OTC MARKET
The over-the-counter market (OTC market) refers to any financial transactions that occur outside of formal exchanges, conducted directly between parties. It can also denote a network of dealers who buy and sell securities. In the OTC market, transactions with securities are often executed using electronic communication methods.
What is SPOT MARKET
The spot market is where goods are sold for cash and delivered immediately, and it is also recognized as the international currency market for current conversion transactions.
What is TRADING SESSION
A trading session is a designated period during which transactions are conducted with securities and financial assets. The highest volumes of foreign exchange transactions typically occur during the European trading session, as banks from the Eurozone, Great Britain, Russia, as well as American and Asian divisions, are active during this time.
What is TRADING CORRIDOR
A trading corridor, also known as a trading range or channel trading range, is a price channel within which exchange rates fluctuate between established support and resistance levels. The lower boundary represents the support level, while the upper boundary indicates the resistance level. This range defines the corridor or channel in which prices move sideways without breaking out of the established boundaries.
What is MARKET VOLATILITY
Market volatility is a statistical measure of the price fluctuations of a financial instrument over a specified period. It captures the magnitude of price movements, both upward and downward, regardless of the trend direction. Volatility calculations are based on historical price data. Future volatility cannot be predicted precisely, as it is influenced by the emotions and behaviors of market participants.
What is RANGE
A range is the distance between the highest and lowest prices during a specific trading session. Throughout the session, rates fluctuate within this defined price range.
What is DOWNTREND
A downtrend is a sustained, directed decline in the price of a financial asset over a specific period. It is also known as a bearish trend. In a downtrend, the trend line serves as a resistance level and is drawn along the asset’s price highs.
What is UP TREND
An uptrend is a sustained increase in prices, marked by a series of higher highs and higher lows. The rising lows of market swings characterize an uptrend. A trend line that supports the uptrend from below by connecting the lows serves as the main support line.
Currency Pairs and Rates
What is BASE CURRENCY
The base currency is the first currency in a currency pair. A trade is executed by buying or selling the base currency in exchange for the quote currency. The deal volume is always calculated in the base currency, while the point value is in the quote currency. For example, in the EUR/USD pair, the base currency is EUR, and the quote currency is USD.
What is COUNTER CURRENCY
The counter currency, also known as the quote currency, is the second currency in a currency pair. For example, in the EUR/USD pair, the USD is the counter currency, and in the USD/JPY pair, the JPY is the counter currency. The value of a point (pip) is measured in the counter currency.
What is CURRENCY PAIR
A currency pair consists of two currencies that make up a quote on the Forex market. For example, EUR/USD is a currency pair. A currency pair is a financial instrument used in trading on the Forex market, representing the value of one currency relative to another.
What is CROSS RATE
A cross rate is the exchange rate between two currencies, neither of which is the US dollar. Examples include EUR/GBP, CHF/JPY, and AUD/NZD pairs. Cross rates are calculated by comparing the rates of each currency in the pair to a third currency (typically USD), and discrepancies between direct and cross rates can be exploited through currency arbitrage.
What is SPOT PRICE
The spot price is the current market price at which a real commodity or financial asset is sold for immediate delivery at a specific time and place. Spot trades typically settle two business days after they are initiated.
What is RATE
A rate is the price of one currency expressed in units of another currency. Typically, exchange rates are quoted relative to the US dollar. For example, if the exchange rate for the British pound sterling is 1.57 USD, it means that 1 GBP is equivalent to 1.57 USD in the Forex market. Exchange rates can be either floating (fluctuating) rates established through market auctions or fixed rates determined by currency parity set by international bodies.
What is FREELY CONVERTIBLE CURRENCY
A freely convertible currency (also known as a hard currency) is a currency that is universally accepted in international payments at the prevailing market rate. Freely convertible currencies can be used by holders for settlements in any international transactions, including trade, investment, and credit, without any restrictions. These currencies typically belong to countries that have eliminated currency controls, at least for current transactions. There are fewer than 20 leading countries worldwide that have fully convertible currencies, which include the US dollar, the euro, the Canadian dollar, the British pound, the Swedish krona, and the Japanese yen. A special category of freely convertible currencies is known as reserve currencies.
What is SPOT
A spot transaction is executed immediately, with the transfer of funds typically occurring within two business days from the transaction date. The spot date refers to the value date, which is two business days after the transaction.
Trading Operations
What is LONG POSITION
A long position is a trading position where profits increase as the market price rises. For example, when a trader buys the base currency of a pair to open a position, they are establishing a long position. Typically, a long position involves purchasing financial assets (such as commodities, currencies, or securities) with the expectation that their value will increase. However, a long position can also be used to cover a previously opened short position.
What is SHORT POSITION
A short position is a position where profits increase as the market price decreases; in other words, the amount of currency sold exceeds the amount bought of the same currency. When a trader sells the base currency of a pair to open a position, they are establishing a short position. For example, selling GBP/USD means that a short position on the pound is open, indicating that the pound is being sold. Simultaneously, this implies that a long position on the dollar is open, as dollars are being bought.
What is OPEN POSITION
An open position refers to a trade to buy or sell a financial asset that has not yet been closed by a reverse transaction. A position is considered open once an order to buy or sell has been executed with a broker. At this stage, the actual delivery of the currency is not yet completed, necessitating the eventual closure of the position to realize profits or losses.
What is CLOSED POSITION
A closed position is a market position that has been reversed by executing an opposite trade, resulting in the calculation of profit or loss. Once a position is closed, it no longer responds to currency fluctuations. In the trading terminal, closed positions are displayed in the “Account History” tab of the “Terminal” window.
What is MARKET ORDER
A market order is a client’s order to open or close a position on a selected financial instrument at the current market price. Unlike a pending order, a market order is executed immediately. In the MetaTrader 4 terminal, you can use commands to execute trading operations and monitor and manage open positions. The terminal supports market orders such as buy orders and sell orders. Other types of orders are considered pending orders.
What is SWAP
A swap is the simultaneous sale and purchase of the same amount of a currency with different value dates. Typically, swapping occurs when an open position is rolled over to the next day. Swapping an open currency position involves maintaining the position (both size and direction) for an additional period. In a swap, the date of the initial transaction is called the value date, while the date of the reverse transaction is referred to as the swap end date or maturity date.
What is CLEARING
Clearing, also known as settlement, refers to the completion of mutual obligations in a transaction. Clearing can be described as a system of non-cash payments for goods, securities, and services, based on the offsetting of mutual claims and obligations. Types of clearing include bank clearing, currency clearing, simple clearing, and multilateral clearing.
What is COMMISSION
A commission is a fee charged by a broker (or other intermediary) for executing transactions on behalf of the client. The amount of the commission is typically based on the number of shares, bonds, options, and their total dollar value. Forex Ltd does not charge a commission for transactions involving Forex market instruments, and the commission for CFD contracts is 0.1% of the transaction amount.
What is ROLLBACK
A rollback (also known as a rebound) is a change in the direction of market price movements following a long-term trend of growth or decline, leading market participants to perceive current price levels as too high or too low. Terms such as correction, consolidation, and rollback are often used interchangeably and can be distinguished primarily by the shape of the technical analysis patterns on the chart.
Financial Instruments
What is DERIVATIVES
Derivatives are financial instruments whose value is derived from underlying tradable assets such as options, futures, warrants, or swaps based on exchange rates, securities, or commodities. For example, the prices of futures contracts are determined by the value of the underlying goods. Derivatives allow their owners to lock in favorable prices for buying or selling from their perspective. Sellers are typically brokerage houses or banks that assume the risk of unfavorable price movements on behalf of their clients. Derivatives can be used to hedge existing positions or to create “synthetic” open positions.
What is CURRENCY INTERVENTION
Currency intervention is the active action taken by a central bank in the market to influence the exchange rate of its currency. Typically, such interventions involve large-scale buying or selling of the currency, securities, or providing loans, in order to tightly control the exchange rate and stabilize the financial system.
What is TECHNICAL ANALYSIS
Technical analysis is a method used to predict future price movements in financial markets by analyzing historical price charts and technical indicators. It involves forecasting price changes based on past price patterns using various tools such as chart patterns, indicators, signals, and oscillators. Technical analysis relies on the study of time series and price charts.
What is TECHNICAL INDICATOR
A technical indicator is a mathematical calculation based on the price and volume of a financial instrument, used to predict future price movements. Traders use signals from technical indicators to decide how and when to open or close positions. Examples of technical indicators include momentum indicators such as RSI, stochastic oscillators, and MACD, among many others. Standard charting tools often include moving averages.
What is OSCILLATOR
An oscillator is a technical indicator used in the analysis of financial markets that fluctuates within a specified range, such as between 0 and 100%, to indicate whether a market is overbought or oversold. When an oscillator reaches its maximum value, it suggests that the market may be overbought; when it hits its minimum value, it indicates that the market may be oversold. Oscillators are considered secondary indicators in the Forex market, meaning that their signals often require confirmation from other independent indicators or trend models.
What is FIBONACCI SEQUENCE
The Fibonacci sequence is a series of numbers created by the Italian mathematician Leonardo Fibonacci. In technical analysis, Fibonacci numbers and ratios are widely used to identify potential support and resistance levels. The sequence is defined by each number being the sum of the two preceding ones, typically starting with 0 and 1. As the sequence progresses, the ratio of consecutive numbers approaches the “golden ratio” of approximately 0.618. This ratio is used to predict the extent of market retracements during trends, allowing traders to forecast potential reversal points.
What is WEIGHTED MOVING AVERAGE
A weighted moving average is a type of moving average where each price value is assigned a specific weight. Typically, more recent prices receive higher weights. Several types of moving averages are used, including the simple moving average, which is calculated by summing prices over a user-defined number of periods and dividing by the number of periods. The moving average is plotted over the price chart, and points of intersection between the price chart and the moving average are analyzed. When the price is above the moving average, it indicates market strength. Conversely, when the moving average crosses below the price chart, it suggests a decrease in prices and market weakening. Moving averages are considered lagging indicators as they summarize past price information.
Technical Patterns
What is DOUBLE TOP
A double top is a reversal pattern in technical analysis. In this pattern, the price reaches a certain level twice before reversing downward. A double top signals a potential reversal of an uptrend and resembles the letter “M” on a chart. The double top level represents a resistance level for the financial instrument. It is considered a weaker signal compared to a triple top.
What is DOUBLE BOTTOM
A double bottom is a reversal pattern in technical analysis that is meaningful only when there is a clearly defined previous trend. This pattern indicates a potential reversal of a downtrend and resembles the letter “W” on a chart. The double bottom level represents a support level for the financial instrument. A double bottom is considered a weaker signal compared to a triple bottom.
What is BREAKDOWN
A breakdown occurs when the price of a financial instrument moves below a support level, indicating a potential continuation of a downward trend. In this scenario, the broken support level may become a new resistance level.
What is FALSE BREAKOUT
A false breakout is a short-term price movement of a financial asset that breaches a certain level—such as support or resistance—but then reverses and moves in the opposite direction. In contrast, a true breakout involves a continued movement in the direction of the initial breakout.
What is CONSOLIDATION
Consolidation is a pattern in technical analysis where the price of a financial asset moves sideways without a clear upward or downward trend. This lateral price movement occurs within a defined price corridor or represents a stabilization of rates following a directional movement.
Market Participants
What is BROKER
A broker is an individual or organization that buys and sells securities (such as commodities and other assets) in financial markets on behalf of third parties, earning a commission for their services. Brokers act as intermediaries, facilitating trades between buyers and sellers.
What is MARKET MAKER
Market makers are large banks and financial institutions that set the current exchange rates due to their significant share of market operations. They continuously monitor the buy and sell rates of various currencies and execute transactions accordingly. A market maker commits to providing liquidity for a particular instrument by placing both buy and sell orders throughout a trading session.
What is BULL
Bull – a market participant who believes that the price of a particular financial instrument will rise and executes trading operations accordingly. In the Forex market, participants are categorized as bulls or bears. Bulls aim to drive prices up, in contrast to bears who seek to push prices down. The term “bull” is derived from the animal’s characteristic of attacking by thrusting its horns upward.
What is BEAR
Bear – a market participant who believes that the price of a specific financial instrument will decline and engages in trading operations accordingly. In the Forex market, participants are categorized as either bulls or bears. Bears aim to drive prices down, in contrast to bulls who seek to push prices up. The term “bear” is derived from the animal’s characteristic behavior of swiping downward with its paws.
Charts and Analysis
What is CHART
A chart is a graphical representation of price changes of a financial asset over a specific period, such as a currency pair, stock, stock index, or any other instrument. In the MetaTrader 4 terminal, you can display Forex and CFD instrument changes using various chart types, including line charts, bar charts, candlestick charts, tick charts, volume charts, and indicator charts.
What is LINE CHART
A line chart is a graph that displays the price changes of a financial instrument in the form of a continuous line. Closing prices for each period (e.g., minute, hour) are used to plot the chart, with straight lines connecting each successive point. In MetaTrader 4, you can switch to a line chart using the Alt+3 key combination or by selecting Charts → Line from the menu.
What is BAR CHART
A bar chart is a graph that displays the price changes of a financial instrument in the form of bars representing fluctuations for each equal time period. The bar chart shows four key prices: high, low, open, and close. A vertical line represents the high and low prices, while horizontal ticks indicate the open and close prices. You can switch to a bar chart in MetaTrader using the Alt+1 key combination or the Charts → Bars menu option.
What is CANDLESTICK CHART
A candlestick chart is a graph that displays the exchange rate changes of a financial instrument using candlesticks, which show fluctuations for each equal time period. Like a bar chart, a candlestick chart indicates four key prices: high, low, open, and close. Each candlestick typically consists of a body (the thick part) and two wicks (the thin parts). A candlestick with a filled body indicates that the rate increased during the period, while a candlestick with a hollow body indicates a decrease. In MetaTrader 4, you can switch to a candlestick chart using the Alt+2 key combination or by selecting Charts → Candles from the menu.
What is TREND LINE
A trend line is a straight line drawn on a price chart that connects a series of rising or falling highs and lows. Constructed using at least two significant points, trend lines represent support or resistance levels. For an upward (bullish) trend, the trend line is drawn through the local lows and lies below the price chart. For a downward (bearish) trend, the trend line is drawn through the local highs and sits above the price chart. Geometrically, trend lines indicate the direction of the trend and serve as a tool in technical analysis.
What is SUPPORT AND RESISTANCE
Support and resistance levels are key concepts in technical analysis. Support is the price level at which demand is strong enough to prevent the price from declining further. Resistance is the price level at which selling pressure is strong enough to prevent the price from rising further. These levels help traders identify potential entry and exit points.
Economic Indicators
What is INFLATION
Inflation is an economic condition characterized by rising prices of consumer goods and services, leading to a decline in consumers’ purchasing power. It represents the depreciation of money when price increases are not accompanied by improvements in the quality of goods and services. Inflation is typically caused by an excess supply of money in circulation without a corresponding increase in the production of goods and services.
What is interbank RATE
The interbank rate is the average interest rate at which major international banks lend to one another. It also refers to the exchange rates of currencies relative to each other, as declared by large international banks among themselves. The list of banks that can quote interbank rates is regularly reviewed to meet rating requirements.
Currency Systems
What is EURO
The euro is the currency of the European Monetary Union and the single European currency that replaced the ECU (European Currency Unit). The euro was introduced into non-cash circulation on January 1, 1999, and into cash circulation on January 1, 2002. Its official ISO-4217 code is EUR. The official symbol for the euro is €, representing the continuity of European unity.
What is EUROPEAN MONETARY UNION
The European Monetary Union (EMU) aims to establish a single European currency, the euro, which officially replaced the currencies of EU member countries in 2002. The first stage of the euro’s introduction began in January 1999. Today, the euro is fully used as a means of payment and is in circulation across EU countries. The primary objective of forming the EMU was to create a unified market for over 370 million Europeans, ensuring the free movement of people, goods, services, and capital. The EMU has facilitated mutual settlements between member countries, stabilized exchange rates, and established a strong and stable European currency capable of competing on equal terms with the dollar in global markets.
What is ECB
The European Central Bank (ECB) is the central bank of the European Monetary Union. Founded on January 1, 1999, in Frankfurt, Germany, the ECB oversees the European System of Central Banks (ESCB), which unites the central banks of all member countries.
- The National Bank of Belgium (Banque Nationale de Belgique);
- Bundesbank (Deutsche Bundesbank);
- Bank of Greece;
- Bank of Spain (Banco de España);
- Bank of France (Banque de France);
- The Monetary Institute of Luxembourg.
However, only the ECB is a legal entity. The European Central Bank administers the ESCB. Christine Lagarde is the current head of the European Central Bank. The ECB’s primary objective is to maintain price stability in the Eurozone, ensuring that the inflation rate does not exceed 2%.
Economic Terms
What is VALUATION DATE
The value date is the date on which the parties to a financial transaction agree to fulfill their obligations, such as making payments. The value date must be a business day in the countries issuing the base currency and the counter currency. For arbitrage currency transactions, the spot settlement date is the second business day after the transaction date. Changes to the value date globally occur simultaneously at 00:00 Kyiv time. All financial statements are generated based on the value date.
What is DEPOSIT
A deposit refers to funds that a client deposits into their trading account. The company requires a minimum initial deposit of $100 for Business accounts and $1,000 for VIP accounts. There is no maximum limit on the deposit amount.
What is ACCOUNT STATEMENT
An account statement is a document (hard copy or electronic) that provides information about executed trading operations, cash flow, and the status of the client’s account for a specific period. Real account holders receive monthly account statements (Monthly Statement) and daily account statements (Daily Confirmation) if at least one transaction occurs each day.
Trading Strategies
What is INTRADAY TRADER
An intraday trader (also known as a day trader) is a financial market participant who opens and closes positions within the same trading session, without holding positions overnight. In the Forex market, intraday trading involves executing trades within a single day.
Interesting posts
- “30 Rules of a Successful Forex Trader”
- Forex trading for beginners Part 1: Financial Markets
- Forex trading for beginners Part 2: Currency, Hedge
- Forex trading for beginners Part 3: Activities, Quotes
- Forex trading for beginners Part 4: Fundamental analysis, Rates
- Forex trading for beginners Part 5: Exchange rate, Manufacturing indicators
- Forex trading for beginners Part 6: Consumer demand indicators
- Forex trading for beginners Part 7: Market psychology, Types of charts, Trend Analysis
- Forex trading for beginners Part 8: Trendlines
- Forex trading for beginners Part 9: GRAPHIC PRICE MODELS
- Forex trading for beginners Part 10: MATHEMATICAL ANALYSIS, Indicators
- Forex trading for beginners Part 11: Trade Patterns
- Links to banks, stocks, exchanges…
- We are searched for by such words
- Market History
- Support and Resistance Levels
- Auto Trading and Trading robots
- CFD – Contract for Difference
- What is hedging
- Forex Market – Origins
- Futures Market
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