ou are not an experienced trader, but do you want to get involved in conversations about trading?
You need to know forex lingo if you don’t want to sound ridiculous in front of people.
Major and Minor Currencies
Currencies are traded in the form of currency pairs, and the movement of currency pairs measures the value of one currency against another.
There are eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD), known as “majors.” These are the most liquid.
All other currencies are referred to as minor currencies.
It means literally what it sounds. Base = first
The base currency is the first currency in any currency pair. The base currency worth is measured against the second currency.
For example, if the USD/CAD rate equals 1.28316, then one USD is worth 1,28316 CAD
In the forex market, the U.S. dollar is the king, who is considered to be the “base” currency for quotes.
However, the British pound, the euro, the Australian and the New Zealand dollar are exceptions of this rule.
The quote currency, also known as counter currency, is the second currency in any currency pair.
Pips are the units used to measure movement in a forex pair.
A forex pip is usually equivalent to a one-digit movement in the fourth decimal place of a currency pair.
So, if GBP/USD moves from $1.35361 to $1.35371, then it has moved a single pip.
To be specific, one pip always equals 1/100 of a cent, if the quote currency in the pair is USD.
Exceptions of the rule are the pairs that include the Japanese yen where a pip equals 0.01.
The decimal places are shown after the pip are called fractional pips, or sometimes pipettes.
One-tenth of a pip.
For example, if EUR/USD moved from 1.19662 to 1.19664, it moved 2 pipettes.
The selling price of a currency quote is called the BID. This is the lowest price that a currency pair can be offered for sale. BID is always lower than ASK.
It is shown on the left side of the quotation.
To illustrate it, we use the quote GBP/USD 1.3654/1.3659, the BID price is 1.3654. This means you sell ONE British pound for 1.3654 U.S. dollars.
The exchange rate applied to a customer wishing to purchase currency is called the ASK. This is the highest price that can be purchased by the currency pair.
At this price, you can buy the base currency. It is shown on the right side of the quotation.
For instance, in the quote USD/CHF 0.9035/0.9039, the ASK price is 0.9039. This means you can buy ONE USD for 0.9039 Swiss Francs. The ASK price is also known as the offer price.
Take, for example, physical exchange offices.
You know that there is a difference in the buy/sell prices in the exchange offices.
This is because the exchange office buys the currency from you at a cheaper price so that it can make a profit, and when it sells currency to you, it sells it at a lower price also in order to make a profit.
The principle in Forex trading is the same.
You will notice that there are two prices for each currency pair.
One is the price at which you can buy the currency pair, and the other is the price at which you can sell it.
The difference between the two prices is called the “spread” and represents the broker’s profit from each transaction you enter into.
You have to remember that when you buy a currency pair, you are actually buying the first currency and selling the second.
For example, the EUR/USD rate might be 1.1962/1.1964
In this example, EUR/USD has a 2-pip spread.
This is how exchange rates are expressed in the FX market using the following format:
Base currency / Quote currency = Bid / Ask
This is the cost referred to any commission fee, exchange fee, market impact costs and bid/ask spreads during a financial transaction.
Here there is a new phrase: Round-turn. It means a buy trade and an offsetting sell trade of the same size in the same currency pair.
Transaction cost (spread) = Ask Price – Bid Price
Transaction cost needs to be as low as possible if you don’t want to pay extra money to the broker.
These currency pairs that don’t contain the U.S. dollar (USD).
They are known as cross-currency pairs or simply as the “crosses.”
While not as frequently traded as the majors, the crosses are still pretty liquid and still provide plenty of trading opportunities.
The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.
Cross-currency pairs frequently carry a higher transaction cost.
Margin is a key part of leveraged trading.
It is the term used to describe the initial deposit you put up to open and maintain a leveraged position.
When you are trading forex with margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.
It can be as low as $100 to as high as $100,000.
When you execute a new trade, an initial margin requirement will be set aside for the new trade. This will be a certain percentage of the account balance in the margin account.
The amount is based upon three factors: the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency.
In the case when you open a mini account that provides a 100:1 leverage or 1% margin, those mini accounts trade mini lots(mini lot equals $10,000).
If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $100 ($10,000 x 1% = $100).
Leverage is the means of gaining exposure to large amounts of currency without having to pay the full value of your trade upfront.
Instead, you put down a small deposit, known as margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.
Leverage varies dramatically with different brokers, ranging from 2:1 to 500:1.
Now when people talk about trading, their words don’t sound like Chinese to you. If you want to continue showing off, see the different types of trade orders.