FOREX.
COM
Glossary of trading terms
Asian session
23:00 – 08:00 GMT.
Bid/Ask spread
The bid/ask spread is the difference between a market’s buy (bid) price and sell (ask) price. For example, if
the actual price of a market is $100, the bid price might be $101 and the ask price $99. This makes the
spread $2.
Every trade that is made requires one seller to be willing to offer the market or asset at the same price
that a buyer is willing to take that same market. Therefore, the bid price can also be considered as the
highest price a trader is willing to enter a market at. The ask price is the lowest price a trader is willing to
offer that market at.
As a market’s price moves, so too will the bid and ask prices. The spread often stays constant, even when
the price rises or falls. An exception to this is when volatility hits and there’s added uncertainty to the
markets.
Different markets will have different spreads. For example, spreads are often higher for volatile,
unpredictable markets. There’s a greater risk to the broker as prices are more likely to move heavily in
either direction.
To offset the increase in risk, market makers will set a higher spread by raising the buy price and lowering
the sell price. If a market is experiencing a lack of liquidity, spreads may also be larger as it’s more difficult
to match a buyer with a seller.
Scalpers, who look for small profits by opening and closing multiple trades over a short period, are
particularly impacted by the bid/ask spread. Every position traded will incur the cost of the spread, so the
small gains made from scalping must be greater than this cost to be profitable.
For those with a longer-term outlook, the spread is far less significant as it’s assumed the profit incurred
from any long-term price move will greatly outweigh the cost of the spread.
Buy dips
‘Buy the dips’ is a phrase used in trading, referring to opening a trade on a market as soon as it
experiences a short-term price fall. ‘The dip’ is quite literally a dip shown on a market’s chart when its
price falls after a bullish period.
The idea is to buy a market when it retraces after a period of strong growth, and then profit if the uptrend
resumes. For example, if Netflix’s stock is experiencing a long-term uptrend but then falls from $500 to
$460, at this point the stock could be bought in the hope that the strong growth resumes.
In theory, the risk is lessened as the long-term trend is bullish, so in buying a stock during a dip the
investor capitalizes on entering the market at a lower cost.
There is no guarantee that the long-term market trend will continue, though. Sometimes ‘the dip’ will be
the beginning of a prolonged downtrend, in which case investing at the lower price will still incur a loss.
Choppy market
A choppy market is when an asset’s price shows no clear trend but instead experiences many smaller
fluctuations.
A choppy market can occur when buyers and sellers of a market are at an equilibrium. If there is high
liquidity (large trading volumes) in a market and neither bears nor bulls can dominate, the result is often a
choppy market.
Choppy markets are associated with rectangular price ranges. A rectangular price range is a pattern that
occurs on charts that continuously hits the same support (the lower limit) and resistance (the upper limit)
levels. This prevents the market from breaking out into a trend, as its price is instead confined between
these two levels – creating a rectangle.
Traders often look to profit from price trends, so can find it difficult to successfully trade a choppy market.
Those who do trade choppy markets to try take advantage of small price movements over a short-term
period, but more volatile markets are likely to present greater opportunities for most traders.
Contracts for difference (CFD)
A contract for difference (CFD) is a financial contract in which you agree to exchange the difference in the
settlement price between the open and closing trades on a particular asset. CFDs enable traders and
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Glossary of trading terms
investors to speculate on whether a market will go up or down, and profit from the price movement
without owning the underlying asset.
CFD trading meaning
CFD trading is the buying and selling of CFDs with the aim of earning a profit. CFDs track live financial
markets. You trade them via your broker or derivatives provider just as you would buy and sell the
underlying market.
The value of a CFD does not consider the asset's underlying value: only the change between your entry
and exit prices. CFD trading is a popular method of speculating on the price movements of shares, indices,
forex, commodities and more over the short to medium term.
CPI (Consumer Price Index)
CPI stands for Consumer Price Index. It is the most popular reference for day-to-day inflation. CPI gets
calculated as a measurement of price change using a weighted average basket of consumer goods and
services purchased by households.
CPI rate meaning
The annual percentage rate change in CPI gets used as a measure of inflation to decide wages, salaries,
and pensions. Governments and central banks use the inflation rate to determine fiscal and monetary
policy.
National statistics agencies such as the ONS in the UK and BLS in the United States, usually calculate the
metric and publish their results monthly. Each month, both monthly and yearly CPI (inflation) figures get
published by the statistics agencies.
Divergence
Divergence occurs when a financial security’s price displays deviation from the indicator you might see on
your chart.
For example, a specific technical indicator might indicate bullish trading conditions, but the price is falling.
Alternatively, the indicator might be showing bearish signals, but the price is rising. Price is moving in the
opposite direction to the trade direction the indicators are suggesting.
Market divergence explained
Market divergence can be defined as the disagreement between price and indicators, and this deviation
may have implications on how traders manage their market positions.
Traders might recognize the following scenarios: a divergence pattern becomes visible as the market price
makes new highs, but the indicator doesn’t suggest remaining in or opening a long position. Alternatively,
divergence becomes evident in downtrends when the market price makes a new low, but the technical
indicator doesn’t suggest remaining in or opening a short position.
Divergence trading strategies are popular because market divergence can be a leading indicator of
sentiment change. A divergent market could be a warning that change is imminent. Accordingly, traders
might enter or exit their positions or adjust their stops.
European session
The European session is the second session of the forex trading day. While the FX market is open 24 hours
a day, it’s split into three major sessions – Asian, European, and North American, also known as Tokyo,
London, and New York.
The European session in forex runs from 2:30 am to 10:30 pm EST, while the City of London is within
business hours. This is the session that experiences the most volatility but is most active when it overlaps
with the other major session hours.
What are the best pairs to trade in the
European session?
The best pairs to trade in the European session will depend on your strategy. Ultimately, the sheer liquidity
of forex trading that takes place means that almost any pair can be traded. Typically, you find the most
movement among the major European currency-based pairs, which include EUR/USD, GBP/USD, USD/JPY,
and USD/CHF.
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Glossary of trading terms
Figure/the figure
Refers to the price quotation of '00' in a price such as 00-03 (1.2600-03) and would be read as 'figure-
three.' If someone sells at 1.2600, traders would say 'the figure was given' or 'the figure was hit’.
Flat Market
A flat market describes when the price for a certain security neither rises or falls for a significant time
period. Flat markets can occur when there is low trading volume or when increasing price movements on
some securities are offset by declining price movements of other securities in the same index.
In forex, a flat market occurs when a currency pair fails to move significantly up or down and does not
contribute a significant loss or gain to the forex trading position.
Gap/gapping
Gapping describes when the price action of a security jumps to a new price not directly adjacent to the
previous price, creating a gap between ticks on a price chart. Gapping can occur during a trading day,
often when there is low liquidity and the asset price is heavily affected by a lower level of trading.
More commonly, gapping occurs when a financial security opens above or below the previous day’s market
close. This gap is caused by the trading that has occurred outside normal hours which isn’t represented on
the price chart.
Gapping can be partial or full:
Partial gapping occurs when opening prices are lower or higher than the previous day’s close but inside the
last day’s price range.
Full gapping occurs when the open is outside of the previous day’s range.
Initial margin requirement
The initial margin requirement is the amount of money required to open a position in a given market
through a brokerage. It is usually represented as a percentage of the total amount you seek to open as a
position.
A trader looking to trade $100,000 in the forex marketplace may pay $10,000 to a brokerage as a 10%
initial margin requirement and would still get the total $100,000 exposure through the brokerage.
Leverage
Leverage is a trading tool that enables you to control a large amount of capital without paying for the full
value of your position upfront. Several financial products make use of leverage, including futures, options,
and forex trades.
Instead of paying for the total value of a leveraged trade, you put down a smaller amount known as your
margin. When buying $10,000 of EUR/USD, for example, you might only have to put down 5% of your
position’s value as margin ($500).
Your profit or loss would still be based on the $10,000, however. It's important to remember that leverage
will magnify both your profits and your losses.
Liquid market
A liquid market is any market with a high volume of activity, allowing traders ample opportunity to buy or
sell large quantities at any time and for low transaction costs.
While the exact requirements of a liquid market vary among securities, liquid markets generally have
tighter spreads, facilitate immediate transactions, have many available assets, and are resilient – meaning
the asset’s price is largely unaffected by purchases and sales of that asset.
Liquidity
means the ease with which a market can be traded without affecting its price. A market with lots of
buyers and sellers at any given time is said to be highly liquid because you'd be able to find a counterparty
to buy or sell it easily.
If there are very few people interested in an asset, then it is illiquid. In this case, you might find it tricky to
trade.
Major forex pairs are an example of a highly liquid market. The extremely high volume of FX trades each
day means that it is highly likely that you'll be able to find a buyer or seller to take the other side of a deal.
Unknown penny stocks, on the other hand, might be illiquid if few traders are interested in buying or
selling them.
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Glossary of trading terms
London session
The London session—also known as the European session—is one of three trading sessions responsible for
keeping the forex market open 24 hours a day. The session opens as the Tokyo (Asian) session winds
down and close several hours after the New York (North American) session begins. The London session
runs during the city’s official business hours: from 7:30 a.m. to 3:30 p.m. GMT.
The London session experiences the majority of forex trading of the three main periods and is known for
increased volatility and higher liquidity following a typically drowsy Tokyo session. London has long been
the hub of forex, with 43% of all transactions happening in London. The final four hours of the London
session experience the highest volume of trades due to its overlap with the New York session.
Forex lot
A lot is the typical unit amount of currency traded in forex and equals 100,000 units of whichever specific
currency is quoted. Lot sizes are so large in order to magnify the changes in currency values, which usually
occur in a matter of only a few pips.
For example, if the USD/JPY is trading at 119.80, a single pip change would amount in $8.34 difference
when multiplied against a single lot. The math is: (.01/119.80) x 100,000 = $8.34
What are lot sizes in forex?
While a typical lot represents 100,000 units of a given currency, they can be reduced for traders looking to
trade smaller amounts of currency. The names and unit sizes are as follows:
Standard Lot – 100,000
Mini Lot – 10,000
Micro Lot – 1,000
Nano Lot – 100
Margin call
Margin call is the term for when you no longer have sufficient funds in your account to keep a leveraged
position open. If you are placed on margin call then your positions are at risk of being closed automatically.
When you trade using leverage, you need to maintain a certain balance in your account as margin. If your
losses from a trade mean that you no longer have the required margin in your account, you'll be placed on
margin call.
Momentum
Momentum trading is a strategy that seeks to capitalize on momentum, or the rate at which a security’s
price accelerates, whether up or down. The idea is to enter a position as price begins to surge, often with
the help of technical indicators and recognized chart patterns.
New York session
The New York session is a trading session that opens at 8:00 AM ET and closes at 5:00 PM ET. Typically,
the first 45 minutes of the session are characterized by high volatility.
Sloppy market
A sloppy market describes a market with seemingly random trading patterns that lack meaningful trends
or behaviors. Often sloppy markets are neither bear nor bull but oscillate between the two. During sloppy
markets, traders typically wait for a breakout or a consolidation into a range before entering any trades.
Slippery market
A slippery market may also be used to describe a volatile market, especially when the high volatility
increases the risk of slippage when opening and closing trades. Additionally, a slippery market may
describe conditions in which the price has consolidated traders feel the market is poised to jump in either
direction.
Spread
The spread in forex is the difference between the prices at which a broker allows you to sell and buy a
currency. The price at which you buy the base currency is known as the “bid,” and the price at which you
sell the base currency is the “ask.” Together the prices are referred to as the bid-ask spread.
Brokers may widen the spread to make a profit from facilitating the trade, meaning the trader would pay
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Glossary of trading terms
more when buying or receive less when selling. The spread price may widen or narrow depending on the
market liquidity. Fewer traders placing buy and sell orders mean the spread will typically be larger, as
those sellers can ask for higher prices due to low demand.
The ever-changing spread seen in forex markets is called a variable spread. Spread in other markets can
be fixed, but forex will always exhibit variable spreads. Spread with FOREX.com can also vary depending
on the account you have. Standard accounts will have larger spreads compared with more professional
accounts. You can view .
Tokyo session
09:00 – 18:00 (JST).
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