Forex Terms to Remember When Trading

When you learn a new skill, you need to learn the lingo, especially if you hope to win the heart of your lover. You, as a novice Forex speculator, must learn some specific professional terms before you make your first transaction. There are some terms you may already know, but it doesn’t hurt to go over them again.

"What's your leverage? " The man obviously misunderstood the woman's meaning, so he still needs to learn more Forex terminology!

Major and minor currencies

The eight most commonly traded currencies in Forex trading (US Dollar, Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Canadian Dollar, New Zealand Dollar and Australian Dollar), also known as the major currencies, are the most liquid and commonly used. All other currencies are called secondary currencies.

base currency

The base currency is the first currency in any currency pair. Currency quotes show the value of a base currency when measured against a secondary currency. For example, if the USD/CHF rate is equal to 1.6350, then one dollar is worth 1.6350 Swiss francs.

In the Forex market, the U.S. dollar is usually considered the "base" currency in quotations, that is, in the quotation of a currency pair, one dollar is used as the quotation unit to exchange with other currencies. The main exceptions to this rule are the British Pound, the Euro, the Australian Dollar and the New Zealand Dollar.

Quote currency

The quote currency is the second currency in any currency pair. It is often called the spread currency from which any unrealized profits or losses are expressed.

Point

A pip is the smallest unit of currency for any currency pair. Almost all currency pairs contain 5 significant figures, and after the first number, there are digits after the decimal point. For example, the EUR/USD quote is 1.2538. In this case, one point is the fourth decimal place, which is 0.0001. Therefore, one pip is equal to 1/100 of a cent in any currency pair with the US dollar as the quote currency.

The only exception is the Japanese Yen currency pair, in which case one pip equals 0.01.

0.1 points

One-tenth of 1 point is 0.1 point. Some brokers offer currency pair quotes at 0.1 pip. For example, if EUR/USD fluctuates from 1.32156 to 1.32158, its fluctuation is 0.2 points.

Buying price

The bid price is the price at which the market intends to purchase a certain currency. At this price level, traders are able to sell the base currency. It is displayed to the left of the currency pair quote.

Taking GBP/USD as an example, if the GBP/USD quotation is 1.8812/15, then the buying price is 1.8812. This means that the price you sell 1 pound is $1.8812.

Selling price

The ask price is the price at which the market intends to sell a particular currency pair. At this price, you can buy the base currency. It is displayed to the right of the currency pair quote.

For example, the quote of EUR/USD is 1.2812/15 and the selling price is 1.2815, which means that you need to pay US$1.2815 to buy 1 euro.

​Buy/Sell Spread

The spread is the difference between the buying price and selling price. In dealer quotes, the digits before the decimal point are usually omitted. For example, the USD/JPY exchange rate may be 118.30/118.34, but the verbal quote may omit the first three digits and say "30/34". In this example, the USD/JPY spread is 4 pips.

Quotation equation

The usage format of Forex market exchange rate is as follows:

Base currency/quote currency = buying price/selling price

Transaction costs

The distinctive feature of the bid/ask spread is that it is also the transaction cost required for a complete transaction process. A complete transaction means that when buying (or selling) a certain currency pair, the same currency pair of the same size is sold (or bought) through hedging. This complete transaction process is called a complete transaction. For example, if the EUR/USD exchange rate is 1.2812/15, then the transaction cost is 3 points.

The formula for calculating transaction costs is: transaction cost (spread) = selling price - buying price

Cross currency pairs

A cross currency pair refers to a currency pair that does not include the U.S. dollar. When an investor conducts a cross-currency pair transaction, it is actually equivalent to conducting two U.S. dollar-related transactions. For example, initially buying EUR/GBP is equivalent to buying EUR/USD and selling GBP/USD. Cross currency pair trading is generally more costly.

Deposit

When you open an account with a Forex broker, you must deposit the minimum funds required by the broker. The minimum capital varies from broker to broker, ranging from a minimum of US$100 to a maximum of US$100, 000.

Every time you make a new transaction, a portion of the funds in your margin account will be used as the initial margin for your transaction. The size of the initial margin depends on the currency pair you trade, the current exchange rate, and the number of trading lots. Trading lot size always refers to the base currency trading lot size.

For example, if you open a mini account with 200 times leverage, or the margin requirement for this account is 0.5%. Mini accounts trade mini lots. One mini lot is equal to $10, 000. If you plan to trade a mini lot, you do not need to provide the full $10, 000, you only need $50 ($10, 000 * 0.5% = $50).

Leverage

Leverage is the ratio between the capital required to conduct Forex transactions and the required margin. With the help of leverage, Forex investors are able to conduct large-scale Forex transactions with relatively small capital. The leverage ratio of Forex margin trading varies between different brokers, ranging from 2: 1 to 500: 1.

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