Basic terms of forex described in detail with examples.
Table of Contents
Bid Price and Ask Price
The Bid price is the price a forex trader is willing to sell a currency pair for. Ask price is the price a trader will buy a currency pair at. Both of these prices are given in real-time and are constantly updating. So for example, the British pound against the US dollar has a bid price of 1.20720, that’s the price a trader wants to sell the GBPUSD. A seller who thinks a currency will decline, might sell at the bid price to take advantage of the fall. If the British pound against the US dollar has an ask price of 1.20740, that’s the price a trader wants to pay in order to buy the currency pair. The difference between the ask and the bid price is the spread.
In other words:
The price we pay to buy the pair is called Ask. It is always slightly above the market price.
The price, at which we sell the pair on Forex, is called Bid. It is always slightly below the market price.
The price we see on the chart is always a Bid price. Ask price is always higher than the Bid price by a few pips. Spread is the difference between these two prices. In other words, it is a commission you pay to your broker for every transaction.
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency.
Forex trading is the simultaneous buying of one currency and selling another.
Currencies are traded through a broker or dealer and are traded in pairs. Currencies are quoted in relation to another currency.
For example, the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).
Note: The EUR/USD currency pair is considered the most liquid currency pair in the world.
When you trade in the forex market, you buy or sell in currency pairs.
There are three categories of currency pairs:
- The “majors“
- The “crosses“
- The “exotics“
The major currency pairs always include the U.S. dollar. For example EURUSD, GBPUSD, USDCAD, AUDUSD, NZDUSD etc.
Cross-currency pairs do NOT include the U.S. dollar. Crosses that involve any of the major currencies are also known as ” minors”. For example Euro cross pairs are EURJPY, EURCAD, EURCHF and Yes cross pairs are EURJPY, GBPJPY, CADJPY etc.
Exotic currency pairs consist of one major currency and one currency from an emerging market (EM). For example USDBRL, USDZAR, USDMXN etc.
An order is an offer sent using your broker’s trading platform to open or close a transaction if the instructions specified by you are satisfied.
Basically, the term “order” refers to how you will enter or exit a trade.
Here we discuss the different types of orders that can be placed in the forex market.
The market order is probably the most basic and often the first FX order type traders come across. Just as the name implies, market orders are traded at market. This means if you want to get into the forex market immediately, you can trade a market order and be entered at the prevailing price.
Typically, scalpers and day traders rely on market orders to enter and exit the market quickly, in accordance to their strategy.
The next most common FX order type is the entry order. These orders are unique in that they can be set away from present market prices. If price trades at the pre-selected price, the criteria for the entry order will be met and a new position will be created. There are many benefits to trading with entries, including not having to be in front of your computer to execute your trades.
Normally entry orders can be used for breakouts or with other strategies that demand execution when price passes a certain point.
There are two types of limit orders involved in forex trading:
1. Limit orders to open a trade
The first is a limit entry order to get a better entry price. If the EUR/USD is trading at 1.1294 and you thought it would trade down to 1.1200 before rallying, you would place your limit order to buy at 1.1200.
If the EUR/USD is trading at the 1.12939 level and you thought it would rally up to 1.1300 before selling off, you would place your limit order to sell 1.1300. When using a limit order, you will only be filled at the price you designated or better.
2. Limit orders to close a trade
You can also use a limit order to close a trade when the market moves a specified amount in your favor. If you bought the EUR/USD at 1.1300 and wanted to exit when your trade showed a profit of 100 pips, you would place your sell limit order 100 pips above your entry or at the 1.1400 level.
If you sold the EUR/USD at 1.1300 and wanted to exit when your trade showed a profit of 100 pips, you would place your buy limit order 100 pips below your entry or at the 1.1200 level.
1. Stop orders to open a trade
The first is a stop order to enter into the market. These orders can be used for trading breakouts. If you thought the EUR/USD would rally further after a move above the 1.1500 level, you would place a buy stop for entry at 1.1501. As the market printed 1.1501, your buy stop would become a market order and be filled at the next best price available.
If you thought that the EUR/USD would continue moving down if it traded down through the 1.1200 level, you would place your sell stop for entry at the 1.1199 level. As the market printed 1.1199, your sell stop would become a market order and be filled at the next best price available.
2. Stop orders to close a trade
You can also use a protective stop order to close a trade when the market moves a specified amount against your position. If you bought the EUR/USD at 1.1500 and wanted to limit your risk to 50 pips, you would place your protective sell stop 50 pips below your entry or at the 1.1450 level.
If you sold the EUR/USD at 1.1400 and wanted to limit your risk to 50 pips, you would place your protective buy stop 50 pips above your entry or at the 1.1450 level.
How To Place A Forex Order
Forex orders are relatively simple to place, subject to the broker. The following guidelines should be comparable throughout all major platforms:
- Open a deal ticket and select the “Order” tab.
- Choose the direction of the trade (Buy or Sell).
- Specify the price level which will consequently determine the type of order depending on whether the level is above/below the current market price.
- Place stops or limits.
- Submit order.
It’s important to remember that you should familiarize yourself with the platform you are working with before undertaking any form of trading activity. This can help minimize any impractical errors when executing or managing a trade.
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