Arguably one of the most popular markets, the foreign exchange market is an online platform which brings together buyers and sellers who monitor and trade in currency pairs. The enormity, liquidity and depth of this market require discipline and strategy if you are to achieve tremendous success trading in it. Some of the common terms likely to be encountered in the course of Forex trading are explained below.
Forex order types
Forex trading orders are made and processed through brokers. There are a variety of order types in currency trading and the main factor which determines the order type a trader will settle for is their trading style. Some of the common currency order types include:
Market order-this refers to a Forex order that is executed immediately following its placement at the current market price.
Limit order-this refers to an order that is executed when certain pre-agreed conditions are met. Before its execution, it is considered a pending order and it targets mostly a certain level of exchange rate.
Take profit order-this is a type of Forex trading order that closes an existing order when a special threshold of exchange rate is attained. It is mostly used by traders to lock in profits.
Stop-loss order-contrary to a take-profit order, this kind of order is defensive in nature. It closes an open position should the exchange rate move against you and reach a given level.
Resistance and Support Levels
The Forex market moves in oscillations with alternating up and down movements. Periodically the market moves up and then down forming a zigzag kind of pattern. Resistance points refer to the highest points reached while support levels refer to the lowest points reached when the market pulls back.
When the highest points are joined together using a straight line, they form a resistance level while the bottom points joined form a support level.
Currency trading involve the movement of a currency pair over a given time period. It forms an uptrend, downtrend or consolidation. Time frame refers to the duration of currency pair movement and it captures the trend, the duration and the prices. It should be noted that the prices recorded are lagging or past prices. Time frames vary from one minute to a whole week of currency movement.
The choice of one time frame over the other is majorly influenced by the trading goal to be attained. Due to the fact that time frames can give conflicting views for instance the daily time frame may show and uptrend while the hourly time frame may show a downtrend, multiple frame analysis is used. The longer chart shows the general trend while the shorter chart gives the trader an opportunity to enter a trade.
Swaps and overnight positions
Similar to commodity trading, currency trading also has positions. A position is basically a transaction. A position can be closed or remain open. A position that remains open for the whole night meaning it is not closed within the same trading day is known as an overnight trading position. Swap which is also called overnight interest refers to the charges paid or received for overnight positions.
The magnitude of a swap is determined by factors such as the weight of days, the number of open positions and the constant rate. The rate varies for each currency pair and for every BUY and SELL positions.
Mike Jefferson is a senior Market Analyst and Financial Writer for NetoTrade , a global forex brokerage and investment company.
Image courtesy of worradmu /FreeDigitalPhotos.net