Trading Forex – Common Terms You Need To Know About
Forex trading can be defined as the buying and selling of different currencies with the aim of making a profit.
The price of a particular currency is usually determined by its demand in the global market. In simpler terms, the higher the demand, the higher the price of a given currency. There are several terms associated with forex. These include moving average (MA), Bollinger bands, Fibonacci, and many more.
To trade forex successfully, it is important to understand these terms and what they mean.
A moving average is an indicator in stocks used in analyzing statistical trends. These trends are usually achieved by gathering activities of trading. These activities include the volume of trade and the movement of prices. It is important to calculate a moving average to achieve a constant price average over a specified period.
There are two types of moving average:
- Simple moving average (SMA)
- Exponential moving average (EMA)
Simple moving average is the mean calculation of a set of prices of a specified period of past days, while Exponential Moving Average (EMA) refers to the average of prices in recent times used to give an idea of the current market prices.
The term Bollinger is derived from John Bollinger, the man who came up with the Bollinger bands in the 1980s. Bollinger bands are charts that show the volatility and price of commodities over a period. Three arithmetic calculations determine Bollinger bands:
- The moving average of the closing price.
- The moving average of closing price and adding standard deviations from it.
- The moving average of closing price and subtracting standard deviations from it.
Bollinger bands have several characteristics. The most common ones include:
The Bollinger squeeze
When a break out is imminent, the bands are squeezed together. During an upward break out of candles towards the top band, the trend usually continues upwards. However, if the break out of candles is downwards towards the lower band, the trend continues downwards.
The Bollinger bounce
In a Bollinger bounce, the prices start high and candles on an upward break out trend. Suddenly, the prices drop, and the candles go on a downward break out. This forces the trader to wait for the bands to bounce back to the middle.
Bollinger and RSI (Relative Strength Index)
Introduced in 1978 by J. Welles Wilder, Bollinger and RSI attempts to highlight the past and current strengths and/weaknesses of a share or trading commodity. This is achieved by analyzing the closing prices of recent and specific trading periods by measuring the momentum, magnitude, and force of price.
The Fibonacci retracements use the Fibonacci sequence that was discovered by Mr. Fibonacci, an 11th-century mathematician. It is argued that there are Fibonacci numbers that occur everywhere in nature, and traders use this sequence in forex trading. Fibonacci retracements are identifiers of key support and resistance levels.
When a market curve has made a large upwards or downwards move and seems to flatten at a certain level, this is usually when traders are able to do the Fibonacci level calculations.
In Fibonacci retracements, traders set a target on a set of percentage points on a trade of a particular commodity. If the price falls beyond the last set percentage point, it is assumed the trade will continue in that particular trend until it stabilizes, be it on an increasing or decreasing trend.
This, therefore, influences the point at which a trader will want to buy or sell, ultimately influencing their bottom line.
The key percentage points at which most traders use the Fibonacci retracements are the 32.8%, 50%, and 61.8% marks. When these points are introduced in a trade graph, each percentage point coincides with a certain price of a commodity being traded.
The Fibonacci retracement levels are considered very important when a volatile market has reached a serious level of resistance or support.
Forex is not for the easily bored. To be able to trade successfully, you have to love numbers. The three terms highlighted above are some of the most commonly used terms in trading forex. By understanding the terms used in the trade, you will be better placed to make informed trading decisions likely to influence your bottom line positively.