Below are most used explanations regarding the “Primary Terminology” used to define the “Binary Options & Forex (FX)” market.
Let us start with “Binary Options Trading Terms”
Binary Options: The basic explanation is similar to the meaning of the word “Binary”, in Binary Options, there are only two possibilities that can outcome. You could be either correct in your selection and in accordingly you make the profit, or you chose the wrong choice, in which condition you lose your invested money. How much can you make profit maximum or lose from Binary Options trading? To be honest, that is directly in correlation with your initial investment, but there is no possibility of realizing enormous unmeasured losses or making astounding profits.
Call Option: When a trader foresees that the financial asset’s price will rise. Even if the price of that particular asset then increases by 10% of a cent, you make a profit from such a Binary Options trade.
Put Option: When a trader envisions that the asset will decline in price. Even if the asset then falls by 10% of a cent, you gain profit from such a Binary Options trading transaction.
In the Money: If a trader “WINS” the trade, then it is named “In the Money”. For Example: If the trader executed a “Call Option”, and the price raised, the trader is then “In the Money” in that Binary Options trade. On the contrast side, if a trader placed a “Put Option” and the price lowered, that trader is also “In the Money”.
Out the Money: If a trader “CAN NOT WIN” the trade, it is called as “Out the Money”. For Example: If the trader executed a “Call Option”, and the price lowered, then the trader is then “Out the Money” in Binary Options trade. On the contrary, side, if the trader executed a “Put Option” and the price elaborated, that trader is also “Out the Money”.
At the Money: If the price of the financial asset is alike at the “Expiry Date”, with the price that it was at the initial trading time. At this sequence of events, the trader was neither right nor wrong, in which case, the trader’s investment is returned to him/her completely with Binary Options trading transaction.
Expiry Date: The exact date & time at which the “Binary Options” trading transaction expire and the price will be compared with the market price to claim if you are “In the Money” or “Out the Money”.
Let’s continue with “Forex (FX) Trading Terms”
The very first terminology, OBF Team want to explain is “Forex” itself. It comes from the abbreviation of “Foreign Exchange Market” where the “Forex (FX) Traders & Brokers” trade the foreign currency pairs for the purpose of making profits. Rarely, you can see a shorter abbreviation as “FX” to it but “FOREX” is the most used and popular one. After defining the term, let us briefly explain the most used and crucial basic terms a trader will need from the start of his/her demo/real trading in the FOREX (FX) market.
Every Forex lexicon begins with this term, designating the price level using of which forex trader can buy the “Base Currency”. Hence, for EUR/USD, the base currency is “EUR”. For Example: If you think that USD currency value will raise in foresight then you can select to purchase this currency against any other currency like EUR, GBP, JPY according to the price level that was displayed in the so-common “ASK” quote.
There is another popular term called “Bid Price” which most of the Forex (FX) rookies cannot understand and describe. The “Bid Price” (showed often as the left quote) signifies the price level, which traders may use in order to “Sell” any currency base.
If we want to define what the “Base Currency” is, we should first know that it means the first currency single which is listed in any currency pair traded in the Forex (FX) market. For Instance: If the USD/GBP currency pair rate is 1.3124 then the USD becomes the “Base Currency” and its price level is 1.3124 GBP.
The “Bear” term according to the Forex (FX) vocabulary points a market with pessimistic/negative diagnoses and declining market price levels.
While the “Bull” according to the same Forex (FX) vocabulary signifies to a financial trading market with increasing price levels and more positive/optimistic trends.
The other term in “Forex Glossary” is the “Counter Currency”. The counter currency is simply the 2nd currency single in a pair. And the usual value of it is predefined by the opposite base currency’s value. In a brief explanation: In the pair GBP/EUR the 2nd which means EUR is the “Counter Currency”.
Regarding the “Cross Rate”, it is a “Price Quote” composed of any currency which is quoted against any other currency which is not in relation with USD. This quote is the mixture of the individual rates for exchange two currency singles against USD.
There are many methods to trade in the Forex (FX) market but all of them are relying on specific strategies and the most famous type of Forex “Day Trading” strategies which stand for a trader uses the trading method by opening and closing her/his trading positions during 1 trading day (24 hours) and to the end of this particular day, the trader has not got any other open positions.
Federal Reserve (FED)
Another important term in the “Forex (FX) Word Index” is “FED” derives for “Federal Reserve” which itself defines the “Central Banking System” effecting compellingly on the price trends of the “Foreign Exchange Market”. Announcements of “FED (Federal Reserve), has always been followed strictly and carefully by the FX (Forex) traders from all around the world.
Every Forex (FX) vocabulary includes the term “Leverage” as it is one of the most basic terms in Foreign Exchange glossary. It points to the “Loan” a trader takes for the Forex broker which enables trading with a small capital in a preferred “Leverage Ratio” of the traded amount. In such a mechanism, traders can increase their profits but the risks get higher in the same proportion. For Example: Let us assume that the leverage ratio is 1:40 and the deposited fund is $100. Your tradable total asset value equals to $4,000. Please keep in mind that you will realize the profit and loss of $4,000! This clearly means that leveraged trading may involve an extreme amount of profits and losses.
The margin is another crucial term which each and every “Forex Trader” should clearly be aware of and it points to the minimum amount of “Deposited Cash” a trader can invest for a certain transaction. Trade losses increased but the trade profits as well so every trader should definitely think twice before trading Forex on margin.
Having known the meaning of “Margin”, we should explain the term “Margin Call”. A trade may experience a “Margin Call” with a broker if one or more of the securities he/she had bought (with leveraged fund) decreased in amount past a specific point. The trader would be obliged either to deposit more funds in his/her account or to sell-off some of the assets in his/her portfolio. If the trader would not act to find a solution in either way, then the trading platform will automatically close the open positions with the realization of the accrued losses. This is a nightmare for all traders of course. In order to minimize the “Margin Call Risk”, traders should carefully balance their total open trade amounts with their “Net Assets”. Hint: For obtaining this balance, the trader can set a “Total Trades Value/Net Assets Value” trading ratio principle for them and strictly stick to this ratio.
Pip is the smallest price value which can be obtained from the last number digit of the forex currency pair rate. Generally, it is the fourth digit which is located after the decimal point of the rate.
Regarding the “Price Trend”, it means a stable market price activity of the currency pair prices with a foreseeable direction. Defining the trends can strength the traders’ hand and increase the possibility of a profitable Forex trade execution.
“FX Spreads” describes the gap between the “ASK” and the “BID” price levels. For Example: If GBP/USD currency pair “ASK” price level is 1.4901 and “BID” price level is 1.4903 then the “Forex Spread” equals to: “0.0002”. The more the spreads are tighter, the most a trader can earn from that particular foreign exchange currency pair trading. So it is advised to choose the Forex Brokers which have tight trading spreads.
Our next term in “OBF Forex (FX) Glossary” is “Stop Loss” which means the trade order executed by a trader which closes an open FX trading position in an automatic way for defending against more losses if the Forex market shows fluctuation against this open trading position. For Example: If a trader bought EUR/USD at a rate of 1.3123 and entered a “Stop Loss” rate for that trade at 1.3024, this simply means that trading platform will close the trader’s open position at the rate of 1.3024 to prevent a further loss.
Last but not the least, “Take Profit” is the term which describes the “Trade Order” at which the trader can set a profit target to close his/her open trading position and enters this take profit rate level to the trading platform. For Example, A trader sold the EUR/USD currency pair at the price rate of 1.2542 and he/she entered a “Take Profit” currency pair price rate of 1.3013. Whenever the market price of EUR/USD reaches 1.3013, the open position will be closed and the trader will realize the profit of that particular Forex trade.