When you are new to forex trading, it can seem like a completely different language. The terms used are probably not familiar if you have not been in that realm before. Below, are Four Vital Terms for New Forex Traders to know. It not only serves to understand the forex market itself, but will help you understand training and teaching you might be receiving as well.
*Pip: This is the smallest distance price can travel in the forex market. This term is used to understand the movement in the market itself. For example if we are trading the Usd/Jpy and enter at 90.00 and exit at 90.05, the market in our trade has moved FIVE pips.
The pip is a universal term in forex and applies to each pair, although some pairs will have more digits than others, but regardless, the actual whole number movement is a pip. This is how you can determine your risk versus reward as well and has many applications in understanding the overall movement of any pair.
*Stop Loss: This is a VITAL subject to both use and understand. When you place a stop loss, you are essentially telling the market that at a certain point, the trade will close. Stop losses initially protect against losing trades taking too big of a loss, but as you move into profit, the stop loss can be moved to a profitable position. For example let’s say we have placed a long trade on the Gbp/Usd at 1.3000 and our stop loss is fifty pips below that @ 1.2950. IF the market goes against our position down to that level, then we will be taken out of the trade.
However, if the market races into profit to say 1.3200, we could move our stop loss to protect our gains instead of preventing further loss by moving it ahead or “above” our starting position at (for example) 1.3100, therefore guaranteeing us at least 100 pips should the market turn back around and take our trade out. Using a stop loss EVERY SINGLE TIME you take a trade is ESSENTIAL, and those who don’t usually have their accounts wiped out at some point. There are lots of events that can move the market dramatically and quickly. It’s good to know that you have a place that will get you out should the trade turn against you.
*Reward/Risk Ratio: This is a term that is vital to understand because it helps you factor into how good of a trade you might be taking or how good of a result you have had on a closed trade. The idea in trading to be profitable is that our wins should ideally be bigger than our losses, and Reward/Risk Ratio (also known as RR) tells us just how much that is. We take the pips gained divided by the initial stop loss risked to determine the RR. So if we took a trade that netted 100 pips and our initial stop loss was only 25 pips, then we had an RR of positive 4.
*Support and Resistance: These two terms are virtually the same thing and they comprise the most basic core of technical analysis (using the charts themselves to analyze what’s going on). Each of them are an area of price that price will potentially stop, stall, reverse or breakthrough. Support is any level underneath price at the moment, and resistance is a level that is above price. Once price breaks through one of these levels, it switches from support to resistance (if price has broken down through support), or it changes from resistance to support (if price has broken a resistance level above). Understanding where support and resistance is in a forex pair helps you understand the “structure” of the market so you can make decisions like where to place your stop, or take profit, or where the market is likely to have a hard time getting through, stall, etc….
Four Vital Terms for New Forex TradersSo for new forex traders these are four vital terms. Of course there is a lot more to understand in forex trading than just these terms, but I can’t imagine anyone starting out trading forex without understanding these four vital terms. This is a good starting point in your journey of trading and of course the education should continue indefinitely as we never “master” the markets, but can become profitable if we work at it hard and long enough.
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