Forex Trading Terms: Glossary and Definitions
This page defines every core forex trading term you will encounter — from your first login on MT4 to advanced risk management concepts. Definitions are direct and practical. Each entry explains the term, not just restates it. Use this as a reference throughout your learning.
Key Takeaways
- A pip is the standard unit of price movement; a lot is the standard trade size.
- Leverage amplifies position size; margin is the deposit required to open a trade.
- The spread is the difference between bid and ask prices — your entry cost.
- Stop-loss and take-profit orders automate your exit at predetermined price levels.
Currency Pair Terms
Currency pair: Two currencies expressed as a ratio. EUR/USD is the euro measured in US dollars. Buying the pair = buying the base currency (EUR) with the quote currency (USD). Selling the pair = selling the base currency.
Base currency: The first currency in the pair (EUR in EUR/USD). One unit of the base currency is the reference point for the exchange rate.
Quote currency (counter currency): The second currency in the pair (USD in EUR/USD). The exchange rate shows how much quote currency one unit of base currency costs.
Exchange rate: The current price of the base currency expressed in quote currency. EUR/USD = 1.1050 means 1 euro = 1.1050 US dollars.
Major pairs: Currency pairs involving the US dollar on one side: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD. The most liquid pairs with lowest spreads.
Minor pairs (cross pairs): Pairs between two major currencies without USD: EUR/GBP, EUR/JPY, GBP/JPY. Slightly wider spreads than majors.
Exotic pairs: One major currency + one emerging market currency: USD/TRY, EUR/ZAR, USD/MXN. Lower liquidity, wider spreads, higher volatility.
Price and Spread Terms
Bid price: The price your broker will buy the base currency from you. The lower of the two quoted prices. You sell at the bid.
Ask price (offer price): The price your broker will sell the base currency to you. The higher of the two quoted prices. You buy at the ask.
EUR/USD is quoted at 1.10480 bid / 1.10500 ask.
- Spread = (1.10500 − 1.10480) ÷ 0.0001 = 2 pips
- You buy at 1.10500. The current sell price is 1.10480. Immediate floating loss: 2 pips.
- Cost on micro lot ($0.10/pip): 2 × $0.10 = $0.20 per trade
- Cost on standard lot ($10/pip): 2 × $10 = $20.00 per trade
Pip: Price Interest Point. The smallest standard price movement. For most pairs (non-JPY), a pip = 0.0001 (4th decimal place). For JPY pairs, a pip = 0.01 (2nd decimal place). See: What Is a Pip?
Pipette (fractional pip): A tenth of a pip — the 5th decimal place for non-JPY pairs (e.g., 1.10502 shows 2 in the 5th decimal = 0.2 pipettes). MT4/MT5 displays 5 decimals by default.
Quote: A live price showing bid and ask simultaneously. A forex quote always shows two prices.
Trade Size Terms
| Lot Type | Units | EUR/USD Pip Value (USD acc.) | Common Use |
|---|---|---|---|
| Standard (1.00) | 100,000 | $10.00/pip | Accounts $10,000+ |
| Mini (0.10) | 10,000 | $1.00/pip | Accounts $1,000–$10,000 |
| Micro (0.01) | 1,000 | $0.10/pip | Beginner / small accounts |
| Nano (0.001) | 100 | $0.01/pip | Very small accounts (if supported) |
Position size: The number of lots you trade. “Opening a 0.05 lot position” = 5,000 units (5 micro lots).
Volume: On MT4/MT5, the “Volume” field equals lot size. Volume 0.01 = 1 micro lot.
Leverage and Margin Terms
Leverage: The ratio of total trade value to your required deposit. Leverage 1:100 means $1 in your account controls $100 of trade value. Amplifies both profits and losses proportionally. See: What Is Leverage in Forex?
Margin: The deposit required to open a leveraged position. At 1:100 leverage on a EUR/USD mini lot (10,000 × 1.10 = $11,000 value): margin = $11,000 ÷ 100 = $110. Margin is reserved — not a fee.
Free margin: Account equity minus used margin. Available to open new positions or absorb floating losses.
Margin level: (Equity ÷ Used Margin) × 100. Brokers issue a margin call or stop-out when margin level drops below a set threshold (often 20–100%).
Margin call: A warning that your margin level has fallen below the required threshold. You must deposit more funds or close positions.
Stop out: Automatic closure of your most losing positions by the broker when margin level reaches the stop-out level. Prevents balance going negative.
Negative balance protection: A feature (required by regulators for retail clients in many jurisdictions) that prevents your account balance going below zero.
Equity = Balance + Floating P&L
Free Margin = Equity − Used Margin
Margin Level = (Equity ÷ Used Margin) × 100%
Example: $1,000 balance, −$30 floating, $110 used margin → Equity = $970 → Free Margin = $860 → Margin Level = (970 ÷ 110) × 100 = 882%
Order Type Terms
Market order: Executes immediately at the current market price. You pay the spread. Used when you want to enter or exit now.
Limit order: Pending order to buy below or sell above the current price. Executes only when price reaches your specified level.
Stop order (stop entry): Pending order to buy above or sell below the current price. Used for breakout entries.
Stop-loss order: An automatic exit order at a price less favourable than your entry. Limits maximum loss on a trade.
Take-profit order: An automatic exit at a target price more favourable than entry. Locks in profits when price reaches your target.
Trailing stop: A dynamic stop-loss that follows price automatically as it moves in your favour. If set to 20 pips, the stop trails 20 pips behind the best price reached.
GTC (Good Till Cancelled): An order that stays active until filled or manually cancelled. Most MT4/MT5 pending orders are GTC by default.
Trade Management Terms
Long (going long): Buying a currency pair. Profit when price rises. “Long EUR/USD” = bought EUR, sold USD.
Short (going short): Selling a currency pair. Profit when price falls. “Short EUR/USD” = sold EUR, bought USD. In spot forex, shorting is as easy as going long.
Open position: A trade currently active — not yet closed. P&L is floating (unrealised).
Closed position: An exited trade. P&L is realised and permanently added to or subtracted from the balance.
Floating P&L (unrealised P&L): Current profit/loss on open trades at current market price. Changes every tick. Visible in MT4/MT5 Terminal panel.
Rollover / Swap: When a position is held past end of trading day (5 PM New York time), interest is charged or credited based on the interest rate differential between the two currencies. Can be positive or negative. See: Forex Swap Explained
Risk and Account Terms
Balance: Total account value from closed trades only. Does not include floating P&L from open trades.
Equity: Balance + floating P&L. The true current value of your account.
Drawdown: Peak-to-trough decline in equity. If your account went from $1,000 to $700 during a losing period, that is a 30% drawdown. Maximum drawdown = the worst decline over a defined period.
Risk/reward ratio (R:R): Ratio of potential loss to potential gain. 1:2 = risk $30 to target $60. A positive R:R improves mathematical expectancy over many trades.
Win rate: Percentage of trades that close in profit. Win rate alone does not determine profitability — R:R matters equally.
Expected value (EV): (Win rate × avg win) − (Loss rate × avg loss). Positive EV = profitable strategy over many trades. Example: 50% win rate, 1:2 RR, $30 risk/$60 win → EV = (0.5×$60) − (0.5×$30) = +$15 per trade. See: Can You Make Money Trading Forex?
Slippage: The difference between your expected execution price and actual price. Common during high volatility or news events. Market orders are susceptible; limit orders are not.
Requote: When the broker cannot fill a market order at the requested price and asks if you accept the new price. Less common with ECN/STP brokers.
Market Structure Terms
Bullish: Expectation that a currency pair will rise in price.
Bearish: Expectation that a currency pair will fall in price.
Liquidity: How easily an asset can be bought or sold without moving the price. Major pairs (EUR/USD) are the most liquid — tight spreads, fast execution. See: Forex Liquidity Explained
Volatility: The size and speed of price movements. Higher volatility increases both opportunity and risk. See: Volatility in Forex
Trend: A sustained directional price movement. Uptrend = higher highs and higher lows. Downtrend = lower highs and lower lows.
Support: A price level where buying has historically exceeded selling, causing price to bounce upward. Acts as a floor.
Resistance: A price level where selling has historically exceeded buying, causing price to reverse downward. Acts as a ceiling.
Hawkish: Central bank stance favouring higher interest rates to control inflation. Typically strengthens the related currency. See: Hawkish Meaning in Forex
Dovish: The opposite of hawkish — favouring lower interest rates to stimulate growth. Typically weakens the related currency.
Broker and Platform Terms
Market maker (dealing desk): A broker that takes the opposite side of your trade internally. May profit from client losses; potential conflict of interest. Often offers guaranteed fills with no slippage.
ECN broker: Routes orders to a network of liquidity providers. No dealing desk. Prices come from the interbank market. Typically charges a commission per lot.
STP broker: Passes orders directly to liquidity providers without a dealing desk. Usually no commission; markup built into the spread.
MT4 / MetaTrader 4: The world’s most widely used retail forex trading platform. Supports manual and automated trading (Expert Advisors), custom indicators, and backtesting.
MT5 / MetaTrader 5: The newer MetaTrader version with more order types, more timeframes, a built-in economic calendar, and multi-asset support.
Expert Advisor (EA): An automated trading script on MT4/MT5 that executes trades based on programmed rules without manual intervention.
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