Forex without riddles: Unravelling the language of traders

Trading is a world full of uniquely evolving vocabulary and terms that can sometimes confuse not only beginners, but also more experienced people. If you've heard expressions like ‘long’, ‘short’ or ‘bull market’ but aren't sure what they mean, this article will be your guide. We will cover the key terms that will help you step into the world of Forex and other financial markets with confidence.

What is trading: The Basics

Before delving into the terms, it's important to have at least a superficial understanding of what trading is. This process involves buying and selling financial assets such as stocks, bonds, currencies and commodities. Trading can be done either on exchanges or through online platforms. The trader's goal is to make money on the price changes of these assets.

Financial markets offer many instruments, including derivatives (futures, options, CFDs) that allow speculation on the price of an asset without actually owning it. Online trading makes this process accessible to everyone, but carries risks such as volatility, excessive leverage and the possibility of fraud. In addition, trading is often taught in business schools and specialised courses. These programmes cover technical analysis, risk management and market mechanisms. 

Understanding the basics is essential, as trading can involve serious financial risks if you don't have sufficient knowledge, so it's not worth taking risks. Some of the trading styles include scalping, day trading, swing trading and position trading. Each is suitable for different strategies and time horizons, from a few seconds to months.

Long and short positions: How to make money on the upside and the downside

The terms ‘long’ and ‘short’ are fundamental concepts in trading, so it's worth taking a closer look at these terms:

• Long position (long): A trader buys an asset in the expectation that its price will rise. When he sells the asset at a higher price, he makes a profit. By owning the security, the trader may also receive dividends, making a long position particularly attractive in an up market;
• Short position (short): Here, a trader borrows an asset, sells it and buys it back later at a lower price, counting on a decline in value. The difference between the selling and buying price becomes his profit.

Positions remain open until they are closed by an opposite trade. For example, a long position is closed by selling the asset and a short position is closed by buying it. And the interesting aspect is that traders can choose a strategy depending on their view of the market. For example, in a rising market, long positions are preferred while in a falling market, short positions are more effective.

Bull and Bear Markets: When the Beasts Attack

‘Bull’ and “bear” are not just the names of animal species, but symbols of market trends. These terms help traders navigate the market and choose strategies based on investor sentiment and trends. For example, a bear market may offer opportunities for short positions, while a bullish market is favourable for long-term investments. Now you can learn more about the meaning of these terms:

• Bull market: Characterised by rising prices, optimism and active purchasing power of investors. A bull market is usually associated with economic growth and positive news that stimulates demand for assets;
• Bear market: Characterised by falling prices and pessimism. A market is generally considered to become bearish if its decline is more than 20 per cent of its recent peak. However, it is important that the decline is sustained, otherwise it is only a temporary correction.

Bid, Ask and Leverage : Basic Market Concepts

The terms bid and ask reflect current price offers:

• Bid: The price a buyer is willing to pay for an asset. The buyer specifies both the price and the volume of the asset he wants to purchase;
• Ask: The price at which the seller is willing to sell the asset.

The difference between the bid and ask is called the spread. In liquid markets, the spread is minimal, which makes trading more profitable. It is important for a trader to consider the spread, as it affects the cost of entering and exiting a trade. And the peculiarity of these concepts is that they depend on the liquidity of the market. The higher the liquidity, the lower the spread, which makes trading more convenient and less costly for participants.

Leverage is a financial instrument that allows traders to operate with larger amounts of capital than they have. For example, with 1:100 leverage, a trader can control a position with 100 times their funds. However, leverage increases not only profits but also risks. If the market moves against your position, losses also increase in proportion to the leverage. This makes risk management a must for all traders.

In leveraged trading, it is important to put in place protective mechanisms such as stop orders to avoid significant losses. Such strategies are especially relevant for novice traders who are just learning how to manage their capital.

Stop orders and limit orders: Your defence in the market

An order is a trader's command to buy or sell an asset. These tools are particularly useful for protecting capital and controlling trades in high volatility environments. Traders using stop orders can protect their positions during periods of inactivity. Limit orders, on the other hand, allow traders to avoid overpaying for assets, making them particularly useful in high volatility markets. Here's a clearer explanation:

• Stop order: Automatically closes a position if the price reaches a set level. This helps to minimise losses;
• Limit order: Sets the price at which a trader is willing to buy or sell an asset.

Conclusion: Unravelling the language of traders

Forex is a dynamic market where success depends on understanding basic terms and mechanisms. By mastering concepts such as long, short, bid and ask, you will be able to better navigate the world of trading. Remember that trading is not only an opportunity to earn money, but also the art of risk management. Develop your knowledge, practice and use the tools available to build a successful trading career.