So in order for you to be able to ‘converse’ with your Broker, we have provided detailed explanations of some of the key Forex terms below. Take time to understand these terms and how they are used in relation to your brokerage account (especially Leverage!).
Bid Price
The Bid Price is the price that the market is prepared to buy a specific currency pair for on the Forex markets. For the Forex trader this is the ‘sell’ price of the base currency.Example: In the quote EUR/USD 1.4510/13 the bid price is 1.4510. This means you can sell one Euro for 1.4510 dollars.
Ask Price
The Ask Price is the price that the market is currently prepared to sell a currency pair for in the Forex market. For the Forex trader this is the ‘buy’ price of the base currency.Example: In the quote EUR/USD 1.4615/18 the ask price is 1.4618. This means you can buy one Euro for 1.4618 dollars.
Bid/Ask Spread
The bid/ask spread is simply the difference between the bid and ask price; or if you like, the buying and selling price.The bid/ask spread = (Bid price –Ask price)
The spread on a particular currency pair will vary from broker to broker although typically will tend to be less than 0.1%.
The spread is also sometimes referred to as the transaction cost as it is this spread that the Forex broker keeps as commission for executing the deal.
Market order
A Market Order is probably the simplest of the execution orders to understand. When you execute a market order you are buying or selling at the current market price(spot price)from your broker. Market Orders are executed though the ‘Buy’ and ‘Sell’ buttons on your trading platform.Example: A market order on a EUR/USD spot price of 1.4500/1.4503 will either buy the EUR at 1.4500 or sell it at 1.4503
Limit order (Entry Order)
A limit order is an order you can place to buy or sell the market at a pre-designated price target. There are two key variables with limit orders; price and time. The price is the level that you want the order to execute. The time is the duration that you want the order to run for before it expires.Limit orders help to get rid of the ‘screen watching’ and manual trade entry that is common among traders waiting for a level to be reached before they enter a trading position.
Let’s use an example:
The USD/JPY is currently 90.25 and you want to buy the USD/JPY if the market hits 90.50. So you execute a ‘buy’ limit order for the USD/JPY at 90.50. You are now free to leave the trading screen, knowing that if your predefined level is triggered, then your broker will execute the order. If the order is not ‘filled’ in your allotted time period you can ‘pull’ the order, preventing it from being executed.
Stop-loss order (Exit Order)
A stop-loss order works the same as a limit order but it is placed on an ‘open’ trading position to prevent losses. Similarly a stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order.Again let’s use an example:
You go ‘long’ the EUR/USD at 1.4525 expecting it to go up. When placing the trade you also set a stop-loss order at 1.4500. This gives your trade a bit of space to cope with the market fluctuations. It also means that if the trade moves against you and the EUR/USD heads ‘down’ then your trading platform would automatically execute a sell order at the predefined level.
In the above example your position would be closed if the market touches 1.4500, limiting your loss to 25 pips.If the market continued to fall beyond this level you would no longer be liable because your Broker would have limited your loss by executing the sell order.
Stop losses are used to protect trading positions and prevent sudden market movements from racking up huge losses. They can also be used for locking in profits. Moving trades to break even and the use of ‘trailing’ stops can help secure profits while letting your trades run.
rom: http://www.forextechnicalchartist.com
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