Forex Glossary

Jargon is how this industry keeps beginners dependent on it. Nothing below is complicated once it is said plainly.

Reading a quote

Base currency — the first currency in a pair. In EUR/USD it is the euro, and the price tells you what one euro costs.

Quote currency — the second. The price is expressed in it. See reading a currency pair.

Bid — the price you can sell at.

Ask (or offer) — the price you can buy at. Always higher than the bid.

Spread — the gap between bid and ask, and your cost of entering. You start every trade down by the spread.

Pip — the standard increment a pair moves in: 0.0001 for most pairs, 0.01 for yen-quoted pairs.

Pipette — the fifth decimal some brokers quote. One tenth of a pip; extra precision, not a new unit.

Major pair — a pair involving the US dollar and another large economy's currency. The dollar was on one side of 89% of all FX trades in April 2025, which is why these have the tightest spreads.

Minor / exotic pair — no dollar leg, or a smaller economy's currency. Wider spreads and sharper moves on less news.

Long / short — buying the pair, or selling it. Every forex position is long one currency and short the other at the same time.

Size and leverage

Lot — the unit of position size. A standard lot is 100,000 units of the base currency; a mini lot 10,000; a micro lot 1,000. Gold is the exception: a standard XAU/USD lot is 100 troy ounces.

Pip value — what one pip is worth at your size. $10 per standard lot on EUR/USD. Work it out with the pip value calculator.

Leverage — the ratio between the position you control and the money posted for it. Retail clients are capped at 30:1 on major pairs.

Margin — the deposit your broker requires to hold a position. At 30:1 that is 3.33% of the position's value. Margin is not your risk; see position sizing.

Free margin — account funds not currently supporting an open position, and therefore what is available for the next one.

Margin close-out — the rule requiring your broker to close positions when account funds fall to 50% of the margin needed to keep them open. It decides when a loss stops; it does not prevent one.

Negative balance protection — you cannot lose more than the funds in your CFD account, so a market gap cannot leave you owing the broker.

Risk and outcomes

Position sizing — choosing lot size so that a stop being hit costs a fixed, small fraction of the account. The one lesson that keeps beginners solvent.

Risk per trade — that fraction. Usually 1%, occasionally 2%.

Stop loss — an order closing the position at a level that proves your idea wrong. See stop losses that mean something.

Take profit — the mirror image: an order closing at your target, decided before you enter and therefore before you can talk yourself out of it.

Trailing stop — a stop that follows price as it moves in your favour, locking in progress. Only ever moves to reduce risk.

Slippage — the difference between your stop's price and the price you actually got. A stop is an instruction, not a promise about price.

Gap — price jumping without trading in between, typically over a weekend or on a shock announcement. The reason slippage exists.

Drawdown — the fall from an account's peak to its trough, in percent. The number that decides whether recovery is realistic; see drawdown math.

Balance vs equity — balance is your account with positions closed; equity is balance plus or minus what open positions are currently worth. Margin rules act on equity.

Revenge trading — increasing size to win back a loss quickly. It is common enough to have a name, and it is the mechanism behind most blown accounts.

Costs

Commission — a per-trade charge, usually on accounts that advertise raw or near-zero spreads. The cost moved, not removed.

Swap (rollover) — the financing charge or credit for holding a position overnight, from the interest-rate difference between the two currencies. It can quietly dominate the economics of a position held for weeks.

CFD — contract for difference. An agreement with your broker to exchange the difference in a price between opening and closing. What most retail "forex trading" actually is, which is why the broker's regulation matters as much as your analysis.

Testing a strategy

Backtest — running rules against historical data. Tells you what would have happened, not what will; see backtesting honestly.

Overfitting — tuning until the rules fit past data's noise. The more variants tried, the more likely the best result is an accident.

Out-of-sample — data held back from development, used once to check the result. Tuning after seeing it destroys its value.

Expectancy — average profit or loss per trade across many trades. A system can win 30% of the time and be profitable, or win 80% and not be.

Getting funded

Prop firm — a firm that gives traders access to its capital, usually after a paid evaluation.

Evaluation (challenge) — a test with a profit target and hard loss limits. Rules change often enough that any review of one needs a date on it.

Daily loss limit — the maximum an evaluation account may lose in a day, breach of which usually ends the attempt. It is why position sizing matters more, not less, on a funded account.

Maximum drawdown limit — the equivalent ceiling over the life of the account, sometimes measured from the starting balance and sometimes trailing the peak. The difference between those two is significant and worth checking before paying for anything.