Some Key Terminology and Concepts of the Forex Market

The foreign exchange (forex) market, also known as the currency or foreign currency market, is the most lucrative trading market at the moment. It has seen an influx of traders which have been growing exponentially since the rise of online trading. Specifically, the trading forums and sites are filled with forex trading guides for beginners as they recognise the growing interest among new traders. 

However, simply reading these guides aren’t enough as you will have to be familiar with some concepts and terminology before moving forward. This article aims to discuss certain terms and concepts in the FX trading market. 

  • Pips

Pips refer to the smallest fluctuation in an exchange rate which is generally quoted to four decimal places for most currency pairs. The value of a pip depends on both the currency pair being traded and what lot size is traded. Its value varies slightly depending on the currency pair being traded. 

  • Liquidity

In the context of the FX market, liquidity refers to a currency pair’s ability to be bought and sold without creating a major impact on its exchange rate. High liquidity makes for low bid-ask spreads and allows traders to easily enter and exit trades.  Traders prefer higher liquidity as it makes markets trade in long-term trends. These can easily be analysed by charting and technical analysis. 

  • Slippage

Slippage occurs when a market order is executed or a stop loss closes the position at a different rate than set in the order. Traders use limit orders instead of market orders to help eliminate or reduce slippage. 

  • Orders
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There are many different order types in the FX market. For instance, limit orders are common in both retail and wholesale FX. A limit order is placed at a specific level and will only be triggered when the market moves to or through your level. A pending order is an instruction to execute a buy or sell trade. A market order automatically searches for the best possible price available in the market and books your order at that price. 

  • Volatility

Volatility refers to a measure of the amount by which price fluctuates over a given period. Combined with high leverage, the daily volatility of the FX market makes produces significant profits simply within the range of price fluctuations that occur within a day. 

How to select a good broker?

To select a good broker to get the most out of your forex investment, there are some considerations you have to make. 

  • Appropriate trading conditions

When choosing a broker, one of the most important considerations is trading costs. There are two key trading costs to research before selecting a broker, being spreads and commission fees. Spreads are expressed in pips or points and equate to the difference between the bid and ask prices for a financial instrument.

  • Speed of trading execution

To ensure quick order execution, many brokers place their servers at data centres near major liquidity providers. Faster execution reduces the risk of slippage and a good broker will advertise their average execution speed that is typically expressed in milliseconds (ms).

  • Regulations and licensing

Financial regulation varies between jurisdictions, and it is recommended to use a broker that uses the regulator of your country of residence. Always choose brokers which comply with local rules and regulations. If a broker does not use the local financial regulator of your country, then you may still be able to trade with that broker, but there is no guarantee of what protection you will receive. You will not receive any type of compensation if anything goes wrong. 

  • Provides customer service
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Whether you are a high-volume trader or a beginner with account queries, getting in touch with your broker should be quick and easy. When researching a brokers’ customer support, it is important to note the hours of operation as well as contact methods. Some methods of customer service and query solving include email, phone, live chat (via the website or trading platform), support via social media (Facebook, Twitter, line), faq, glossaries and forums.

You should always research a broker if you want to be absolutely sure of the security of your fund and want to have a good trading experience. 

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