Forex terminology

Forex Terminology

Usually, you will find that Forex market has it own set terms and jargons. Therefore to understand Forex deeper you must learn Forex terminology. Let us introduce you, probably to most important of them…

Basic Forex terms Part 1:

Cross rate – The currency exchange rate between two currencies. Also, currencies are not the official currencies of the country in which the exchange rate quote is given in. This phrase likewise to refer to currency quotes which do not involve the U.S. dollar.

For example, let‘s say, the rate between the British pound and the Japanese yen quote published in an American newspaper. That would be considered a cross rate in this context. A pound and a yen would not be the standard currencies of the U.S. Another case if the exchange rate between the pound and the U.S. dollar quote published in the same newspaper. It is not a cross rate. The quote involves the U.S. official currency (dollar).

Exchange Rate – The value of one currency expressed in terms of another. For example, if EUR/GBP is 0.876251, 1 Euro is worth GBP 0.876251.

Pip – The smallest, possible, currency increment of price movement. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.

Leverage – Leverage is the ability to gear your account into a position higher than your total account margin. For instance, if a trader has EUR 1 000 of margin and he opens an EUR 100 000 position.

leverage

It means that his account increased by 100 times, or 100:1. If he opens an EUR 200 000 position with EUR 1 000 of margin, the leverage is 200:1. Pay attention, that increases in margin account size, increase profit. Therefore loose increases as well.

Basic Forex terms Part 2:

Margin – The deposit required to open or maintain a position. There are two types of margin: “free” or “used.” The used margin is the amount which is being used to hold an open position. Meanwhile, the free margin is the amount available to open new positions. With an EUR 1 000 margin balance account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional EUR 100 000. It allows a trader to leverage his account by up to 100 times. It means a leverage ratio is 100:1.

If a trader’s account falls below the minimum amount required to keep an open position, he will receive a “margin call.” It means that he should close the opened position either add more money to his or her account. Usually, brokers will automatically close a trade when the margin balance falls below the amount required to hold it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

Spread – The difference between the sell quote and the buy quote. Sometimes so-called the bid and offer price. For example, if EUR/USD quotes read 1.23536, the spread is the difference between 1.23536 and 1.23539, or 3 pips. In order get in a chance to open a deal, a position must move by an amount equal to the spread in the direction of the deal (sell or buy).

The major Forex pairs and their nicknames:

Forex terminology

Learning currency pair quotes Forex terminology:

quote currency

You must understand how to read a currency pair correctly. After, you can start trading, only. Let’s get started with this:
The exchange rate of two currencies is quoted in a pair. It could be EURUSD as well as others such as the USDJPY. It is because in any foreign exchange transaction you buy one currency and sell another. If you buy the EURUSD and the euro strengthened against the dollar, you will be in a profitable trade then. An example of a Forex quote for the euro vs. the U.S. dollar:

It shows that if you buy the 1 EUR with the exchange rate 1.23536, you will pay 1.23536 dollars for it.

The opposite If you sell the EUR/USD. The exchange rate tells you how much of the quote currency you receive for selling one 1 EUR. In other words, in the example above, you will receive 1.23536 dollars if you sell 1 euro.

An easy way to think about it is like this: the BASE currency is the BASIS for the trade. So, if you buy the EURUSD you are buying euro’s (base currency) and selling dollars (quote currency), if you sell the EURUSD you are selling euro’s (base currency) and buying dollars (quote currency). So, whether you buy or sell a currency pair, it is always based upon the first currency in the pair – the base currency.

Bid and Ask price

bid price

Bid Price – The bid is the price at which the market (or your broker) will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker.

Ask Price – The ask price is the price at which the market (or your broker) will sell a specific currency pair to you. Thus, at the ask price, you can buy the base currency from your broker.

Bid/Ask Spread – The spread of a currency pair varies between brokers and it is the difference between the bid and ask the price.

More terminology you can find here.