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Freshest Forex Lingo

Forex Lingo – Only the Freshest Terms to Impress your Date

In every skill that you’ll learn, you also need to learn the language or lingo to be able to have a smoother communication. As a newbie, it is very imperative for you to learn and understand certain terms like the back of your hand before you go into trading forex. You have already learned some of these terms, but it would be a good idea to review & freshen up your minds and memories before dealing anything about forex trading.

Forex Lingo

Major and Minor Currencies in Forex

Among the most traded major currencies in forex also known as “majors” are USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD. They are considered to be the most liquid and sexiest currencies.  All of the other currencies in forex are referred to as minor currencies.

Base Currency in Forex

The first currency in any currency pair is called the base currency. The currency quote presents how much the base currency is worth as measured versus the second currency. Let’s take this as an example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350.

When we talk about the forex market, normally, the U.S. dollar is considered the “base” currency for quotes. This means that the quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. British pound, the euro, and the Australian and New Zealand dollar are among the primary exceptions to this rule.

Quote Currency in Forex

The second currency in any currency pair is called the quote currency. This is also known as the pip currency. Remember that any unrealized profit or loss is expressed in this currency.

Pip in Forex

The smallest unit of price for any currency is called a pip. Nearly all currency pairs consist of 5 significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this situation, a single pip is equal to the smallest change in the fourth decimal place – that is, 0.0001. You have to remember that if the quote currency in any pair is USD, then one pip is always equal to 1/100 of a cent.

Pairs like  the Japanese yen where a pip equals 0.01 are considered to be the notable exceptions .

Pipette in Forex

Pip is a term used to describe one-tenth of a pip. In this instance, fractional pips, or pipettes, for added precision in quoting rates are being quoted by some brokers. For example, if EUR/USD moved from 1.32156 to 1.32158, it moved 2 pipettes.

Bid Price in Forex

If the market is prepared to buy a specific currency pair in the forex market, then they need to have a bid price.  At this price, the base currency can be sold by the trader. You can see it on the left side of the quotation.

Let’s take this as an example, in the quote GBP/USD 1.8812/15, 1.8812 is the the bid price. This means one British pound can be sold for 1.8812 U.S. dollars.

Ask/Offer Price in Forex

If the market is prepared to sell a specific currency pair in the forex market, then they need to have an ask or offer price. At this price, the base currency can be bought. You can see it on the right side of the quotation.

For example, in the quote EUR/USD 1.2812/15, 1.2815 is the the ask price. This means that one euro can be bought for 1.2815 U.S. dollars. The ask price is also called the offer price.

Bid/Ask Spread in Forex

The difference between the bid and ask price is called the spread. The first few digits of an exchange rate is a dealer expression called “big figure quote” . These digits are often omitted in dealer quotes. Let’s take this as an example, the USD/JPY rate might be 118.30/118.34, without the first three digits  it could be quoted as “30/34.” In this example, USD/JPY has a spread of 4-pip.

Quote Convention in Forex

Exchange rates in the forex market are expressed using the following format:
Base currency / Quote currency = Bid / Ask

Transaction Cost in Forex

The transaction cost for a round-turn trade is also considered as the the critical characteristic of the bid/ask spread . Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. Let’s take this as an example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is 3 pips.

The formula for computing the cost of transaction  is:

Transaction cost (spread) = Ask Price – Bid Price

Cross Currency in Forex

When neither currency is the U.S. dollar, it is called a cross currency. These pairs may show unpredictable changes in price behavior since the trader has, in effect, initiated 2 USD trades. Let’s take this as an example, initiating a long (buy) EUR/GBP is equal to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs usually carry a transaction cost that is higher.

Margin in Forex

You must deposit a minimum amount with a broker to be able to open a a new margin account . This minimum deposit varies from one broker to another broker and can be as low as $100 to as high as $100,000.

Each time you make a new trade, a definite percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The base currency always refers to the lots size.

Let’s take this as an example, if you are going to open a mini account which provides a 200:1 leverage or 0.5% margin. Mini accounts means trading mini lots as well. Let’s say one mini lot is equivalent to $10,000. If you decide to open a one mini-lot, then instead of providing the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).

Leverage in Forex

The ratio of the amount capital used in a transaction to the required security margin is called the Leverage. It is considered to be a powerful process since it has the ability to control large amounts of dollars of a security with a relatively smaller amount of capital.  Leveraging varies significantly from one broker to another broker, ranging from 2:1 to 500:1.

These are just among the most common forex lingo. With that, I think it’s time to  learn the different types of trade orders?

Proceed to the Next Lesson: Different Types of Trade Orders

Go Back to the Previous Lesson: Trading Lots, Leverage, and Profit & Loss

Trading Lots, Leverage, and Profit & Loss

Trading Lots, Leverage, and Profit and Loss

Before now, spot forex was traded in specific amounts called lots. 100,000 is a standard size for a lot. In line with this, mini, micro, and nano lot sizes are considered to be 10,000, 1,000, and 100 units respectively.

Trading Lots

Pips is a term used to measure currencies in forex trading. It is also considered to be the smallest increment of that currency in trading forex. To be successful in taking these tiny increments, you as a market player needs to trade huge amounts of a particular currency in order to see any significant profit or loss.

Let’s make this as an example. We will be using a standard lot size which is 100, 000 unit. We will now recompute some examples to see its effects on pip value when trading.

  • USD/JPY at an exchange rate of 119.80 (.01 / 119.80) x 100,000 = $8.34 per pip
  • USD/CHF at an exchange rate of 1.4555 (.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

  1. EUR/USD at an exchange rate of 1.1930 (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
  2. GBP/USD at an exchange rate or 1.8040 (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

Brokers are different so as their ways of computing and recomputing pip value in relation to the lot size in trading. However, it needs to be made clear that whichever way they do it, they’ll be able to present you what the pip value is for the currency you are trading is a that specific time. Remember that when the market moves, pip value also moves depending on the current currency you are trading.

What is Leverage

I know you are wondering how come a small investor like yourself can trade such huge amounts of money.  Well, think of your broker who will serve as a transition and will front you $100,000  to buy currencies. When it comes to banks, a bank will ask you to give it $1,000 as a good faith deposit, which it will hold for you but necessarily keep. Doe it sound so good to be true? Well, that’s how trading forex using leverage works.

In line with this, the amount of leverage you will use in trading will depend on your broker and what you feel comfortable with.

Basically, a trade deposit is required by many brokers when trading. This trade deposit is known as ” account margin” or “initial margin”. You can start trading once you have deposited your money. Along with this, brokers will also specify how much position (lot) is required when trading.

Let say for example, if 100:1 (or 1% of position required) is the the allowed leverage is, and you wanted a position worth $100,000 to trade , but you only have $5,000 in your account. No worries! Your broker would set aside $1,000 as down payment, or the “margin,” and let you “borrow” the rest. However, you need to remember that any losses or gains will be deducted or added to the remaining cash balance in your account.

Also, you have to bear in your mind that the minimum security (margin) for each lot differs from one broker to broker. If you’ll look at the example above, a one percent margin was required by the broker. This means that for every $100,000 traded, the deposit on the position that the broker wants is $1,000.

How do I calculate profit and loss when trading forex?

After learning how to calculate leverage and pip value, it is now time to learn and understand how you compute your profit or loss.

In this example, we are going to buy US dollars and sell Swiss Francs. Let the trading begin!

1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ask”or sell price of 1.4530.

2. So you buy 1 standard lot, that is 100,000 units at 1.4530.

3. After a few hours, the price moves to 1.4550 and you decide to close your trade.

4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the “bid” or buy price of 1.4550. The price traders are prepared to buy at.

5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

One thing you need to remember when entering or exiting in  trading forex, you are subject to the spread in the quote of bid or offer. Therefore, if you plan to buy a currency, you will use the offer or ask price. On the other hand, when you sell, you will use the price of the bid.

In our next lesson, you will learn some of the freshest and famous forex lingos in trading.

Proceed to the next lesson: Freshest Forex Lingo in Trading Forex

Back to the Previous lesson: Pips & Pippetes

How You Make Money in Forex

Forex – How You Make Money in Trading Forex?

When we talk about Forex market, it means you buy or sell currencies like Yen, Dollars, Euro and many more.

In the forex market, placing a trade is pretty simple: the mechanics is almost similar to the mechanics that you can find other markets like the one in stock market. So, having an experience in trading stocks gives you an advantage in trading forex.

The object of forex trading is to exchange one currency for another in the expectation that soon prices will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

Make Money in Trading Forex

An exchange rate is simply the ratio of 1 currency valued against another currency. Let say for example, the USD/CHF exchange rate suggests how many U.S. dollars can buy one Swiss franc, or how many Swiss francs do you actually need to buy one U.S. dollar. Let’s take a look at the example below on how to read Forex quote.

How To Read a Forex Quote

In the world of market and trading, currencies are always quotes in pairs. Most common pairs are GBP/USD or USD/JPY. NOw, what’s the reason why these currencies come in pair? They are quoted in pairs because in every forex transaction, you are simultaneously buying one currency and selling another. Below is an example of a forex rate for the British pound versus the U.S. dollar:

Forex Quote

The GBP currency to the left of the slash (“/”) is known as the base currency, while the USD on the right is called the counter or quote currency.

When you are buying, it is the exchange rate that tells you how much you need to pay in the units of the quote currency in order to buy one unit of the base currency. Just by looking at the example above, it clearly indicates that you have to pay 1.51258 USD to be able to buy one British pound.

Always remember that the basis for the buy or the sell is the base currency. If you buy EUR/USD, that simply means that you are buying the base currency while simultaneously selling the quote currency. In simpler terms, “buy Euro, sell US Dollars.”

As a market player, you would always want to buy the pair if the base currency will gain value relative to the quote currency. On the other hand, you would want to see the pair if you think that the base currency will lose value relative to the quote currency.

Long/Short

Before everything else, it is imperative for you to know and determine whether you want to buy or to sell.

If you want to buy the base currency and sell the quote currency, you want the base currency to rise in value  and then you would probably sell it back at a higher price. As a market player, this process is called “going long”or taking a “long position. All you have to remember is long = buy. 

On the other hand, if you want to sell the base currency and buy the qote currency, you want the base currency to depreciate in value and then you would purchase it back at a lower price. In a trader’s talk, this is what we call “going short”or taking a “short position”. Always remember: short = sell

Bid/Ask

EUR-USD Forex Market

In forex market, all foreign exchange quotes are always quotes with 2 prices: the bid and ask. For the most part, the ask price is higher that the bid price.

What is a Bid in Forex Market?

The bid is the value at which your broker is inclined toward buying the base currency in exchange for the quote currency. This only means that the bid is the best available value or price at which the trader will sell to the forex market.

What is an Ask in Forex Market?

The ask is the value at which the broker will sell the base currency in exchange for the quote. This only means that the ask price is the best available value at which the trader buys from the forex market. In a much simpler term, ask price is the offer price. 

Now, what’s the difference between the bid and the ask price?

The difference between the 2 is popularly known as the spread.

When we talk about the EUR/USD quote as indicated above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.

This is what will happen. If you are going to click the “Sell” button, then you are selling the Euros at 1.3456. On the other hand, if you are going to click the “Buy” button, then you are buying the Euros at 1.34588.

In the next lesson, we will find more examples about trading forex. Are you ready to make some money?

Proceed to the Next Lesson: Time To Make Some Money or Dough

Go Back to the previous Lesson : How Do You Trade Forex?