In this article we’ll focus on Forex terminology, or the fundamental terms that you’ll need to know. Before starting to trade in demo mode, it is important to know these Forex terms in order to understand what you are dealing with. A bit like the player who must know the rules of the game before playing, anyone who wants to start trading must know the rules of the financial vehicle and its terminology.
What is Forex? This word is in fact a shortened form of Foreign Exchange Market or “Foreign Currency Exchange Market”, also known as the “currency market”. This is the largest financial market out there, with an incredible number of transactions which never stop. Every day the volume of trades is about 2,000 billion dollars, involving large banking institutions, investment banks, governments, multinationals, and also small investors who can only operate through brokers and banks. For this very reason, if you want to trade on the Forex, you’ll have to contact a broker (even a much cheaper online broker) or a bank (with very high commission costs).
The exchange rate refers to the relationship between two currencies. For example, taking a currency pair such as EUR/USD, that bar is just like a divider. This is a relationship between the euro and the dollar, so there is a numerator (the euro) and a denominator (the dollar). The purchase or sale order is relative to the currency in the denominator.
Taking the EUR/USD currency pair as an example, when we say “buying”, it means that you buy the euro and sell its value in US dollars at the same time.
Now, pay close attention to the following terms:
- He who buys EUR/USD is commonly referred to as “EUR/USD bullish”, i.e., “goes long”.
- He who sells EUR/USD is called “EUR/USD bearish” and “goes short”
Get used to these ways of saying things because in Forex, these terms are your daily bread.
Go Long, Go Short
Going long and going short are two simple Forex terms that you will always see. We have already seen them in the previous section but you may think that it is only used with the EUR/USD pair. In reality, every purchase is a “go long”, just as every sale is a “go short” position.
Remember that in online trading you can open “short” positions even without previously buying anything. This is a feature that allows you to earn both by focusing on increases and decreases in currency values.
In fact, in CFD trading:
- Clicking on “Buy” opens a long, or bullish position
- Clicking on “Sell” opens a short, or bearish position
When selling, you are not intending to sell something that you already own, but rather indicate the opening of a downward position, also known as the open position. So if you want to “bet” on the downside of a currency pair, you will have to open a “Sell” position.
Why EUR/USD and not USD/EUR?
Each currency pair has a denominator and a fixed, immutable, non-commutable numerators. When referring to the Euro Dollar pair, one refers to the EUR/USD and the same happens in other pairs. The main ones, called primary or major currencies are:
Remember, the euro will always be in the numerator field.
In the next lesson, we’ll find out what Forex prices are and we’ll show you some examples in order to explain them better.
Go to the next lesson – Forex Quotes