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9 Basic Forex Terms You Should Know Before Trading
These common terms used in forex trading are the starting point for every novice trader. They will help you understand the forex market better.
Updated June 13, 2024.
Trading in the foreign exchange (forex) market can be a daunting experience for a beginner. Forex terminology can push everybody off.
But, with a basic understanding of terms used in forex trading and concepts, you can quickly become comfortable trading fiat currencies.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should not be considered advice.
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1. Currency Pairs
Currency pairs are the two currencies that make up a currency exchange rate.
A currency pair is expressed as the amount of base currency units needed to purchase one unit of the quote currency.
They are divided into three main categories:
- Major pairs
- Cross pairs
- Exotic pairs
Major Pairs
Major Pairs are the pairs of currency that are most commonly traded.
They include:
- EUR/USD
- USD/JPY
- GBP/USD
- AUD/USD
Cross Pairs
Cross Pairs are currency pairs that do not include the US dollar.
They most commonly include:
- EUR/GBP
- NZD/JPY
- CHF/JPY
Exotic Pairs
Exotic Pairs are currency pairs that involve less commonly traded currencies.
Some examples are:
- EUR/TRY
- USD/MXN
- CAD/JPY
» Learn more about CFDs on forex currency pairs available for trading
2. Exchange Rate
An exchange rate is a price for exchanging one currency for another.
Exchange rates are determined by a variety of factors, such as supply and demand, economic conditions, and political stability.
Exchange rate can be:
- Floating
- Fixed
Floating exchange rate
The value of the currency is determined by the market.
It can change from moment to moment.
The EUR/USD has a current exchange rate of 0.97. This means that one euro is worth 0.97 US dollars.
Fixed exchange rate
The value of the currency is set by a central bank.
It remains constant.
For example, the Danish Krone is fixed to the euro at 7.4 DKK per 1 EUR.
3. Leverage
Leverage is the use of borrowed capital to increase one's buying power.
You can use leverage to trade larger amounts of currency than what you have in your trading account.
Let's say you have a trading account with a brokerage that offers 50:1 leverage.
It means that you can trade up to the value of $50 for every $1 in your account.
If you’re still a forex beginner, it wouldn't be the best idea to start using leverage.
It is safer to start with a demo account that offers leverage and practice trading without risking capital. Create a free demo account with Fortrade and start practicing now.