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.
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
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