This article was specifically designed for beginners in terms of forex trading. We won’t jump into subjects like technical analysis, or fundamental analysis, but we will, however, try to explain the basic terminology any beginner needs to understand. We’ll try to make it clear as water so even a person who just started to study the forex market will be able to understand the terms.
Leverage – in the forex market, thanks to your broker, you have the ability to trade more money than you have deposited. Basically, the broker lends you money so are able to trade bigger volumes. However, you need to understand that leverage is risky and you need to learn how to manage risk like a pro. Traders that use excessive leverage are usually tempted to open large positions. Keep in mind that the broker cannot lose any of the money he lent you.
Margin – this is the money you are actually depositing in your brokerage account. Margin requirements are the minimum amount you need to have in order to be able to trade a certain amount of currency. A margin call is an operation which closes all your open trades. This happens when you are losing money and the broker automatically cancels all the orders, so there won’t be a situation when your balance will become negative.
Stop loss – a limit that you can set for the maximum loss. If the market will trade in the opposite direction of your order, when the price reaches the stop loss, the order will be automatically closed.
Take profit – as opposed to the stop loss, this is a limit for your profits. Your trades will automatically close, even if you are not online and you don’t have the platform running. It is essential to have a take profit, so you will avoid market reversal and losing all your profits.
Swap rate – a commission imposed by the broker, which is deducted at midnight each day. It is a tax for keeping your position open. Depending on the benchmark rate of each central bank, swap rates could be negative or positive (in this case you will earn interest).
These are just some of the basic terms any trader should know. In another article will dig deeper into the subject and talk about more advances notions.