A List of Forex Terms – Part Two

In the second part of this two-part series, we continue to look at common terms that often confuse those who are just getting started in forex trading.

Loonie

This is a nickname for the Canadian dollar, which has a picture of a loon on the one dollar coin. For those that are not familiar with lumens, these are iconic water birds found in Canada and throughout North America, with a booming, haunting cry that has come to symbolize the Canadian wilderness. The common loon is the one portrayed on the Canadian one dollar coin – this is the official bird of Ontario, the most populous Canadian province. The Canadian two dollar coin is called a toonie, although this is a made-up name and not a bird.

Long and short

These describe two different positions in the forex market – and in other financial and equity markets as well. When a trader has a long position, they have bought a currency pair because they believe its value will rise. With a short position, the trader has sold the currency pair in the belief that its value is likely to drop.

Pip

A pip is a small measure of currency pair movement and is equivalent to 1/100 of a basis point. For example, a movement of one cent in a US-denominated currency pair is a move of one basis point, or 100 pips. In fact, a pip is the smallest amount that any currency exchange rate can move.

Spread

This is the difference between how much traders pay for a currency pair and how much the seller receives. For example, if the bid price is 1.4005 and the ask price is 1.4009, then the spread is 0.0004 – or 4 pips. Since forex brokers do not charge commissions, the spread is one way that they make money.

Stop loss

A stop loss is a secondary order placed with a primary trade in order to limit risk. For example, a trader could buy a currency pair at 1.4271 with the expectation that it is going to rise. However, they can limit risk by placing a sell order at a level below the price at which they purchased – for example at 1.4250. This limits how much they can lose, since the sell order will execute once the price drops to this level. Similar approaches are available to limit risk when a trader enters a short position.

Trend

This is when a currency pair tends to move in a particular direction for an extended period of time – either upward or downward. Following trends is a very popular forex trading strategy, and often involves significant technical analysis to determine when a trend may be underway and when it may be coming to a conclusion.