When you enter the forex market, you will come across a lot of jargon that might catch you off guard, including bulls and bears, hawks and doves, pips and ticks, and more. To understand the market, you must have a solid knowledge of regularly used market jargon.
Here are several terms you will encounter when foraying into the world of trading.
The spread is the difference between the Bid and the Ask Prices. In forex, a lower spread is considered preferable. Generally, when a market is “liquid” (there are a large number of traders), spreads are lower.
Usually, Major currencies have a lower spread because it’s more popular. On the other hand, exotic currency pairs have a wider spread because there are fewer traders.
Market sentiment provides insight into the performance of an individual asset or the broader market. When the market sentiment is bullish, the price is increasing. When the market sentiment is bearish, the price is declining.
Unlike Bullish and Bearish, Hawkish and Dovish refer to the central bank’s attitude toward the country’s monetary policy. When the central bank takes a Hawkish stance, such as allowing higher interest rates to achieve the central bank’s inflation target, the market sees this as something positive and generally causes prices to rise.
On the other hand, when the central bank takes a Dovish stance, such as keeping interest rates low to stimulate the economy, the market sees this as something negative and generally causes prices to fall.
As the name implies, a safe-haven means “safe assets”. Traders and investors seek them out to limit their exposure to or losses during a market slump. The US Dollar and the Japanese Yen are examples of safe-haven currencies. An instrument that is most often considered a safe-haven is Gold.
Hedging is when you start a new trading position on the same currency pair in the opposite direction of an existing position. Traders frequently do this to hedge against or limit prospective losses.
This is the procedure by which an open position’s settlement date is extended. If you want to hold a position overnight, rollover fees are determined at the end of each trading day.
Leverage enables you to take on larger positions than would be achievable with your limited capital. For instance, if you wish to start a position on AUD/USD with $100 of your capital, 100:1 leverage allows you to open a position worth $10,000 ($100*100).
Naturally, traders must utilize this with caution. While leverage can dramatically boost earnings, it can also magnify losses.
Commissions are the payments to a forex broker when you trade. Varying accounts frequently charge different commissions, so be sure to select the one that is most advantageous to you.
Now that you’ve deciphered the perplexing world of forex jargon, it’s time to learn more about the fundamentals of forex trading: when to buy and when to sell.