Basic Forex Trading Terminology

Basic Forex Trading Terminology

If you are new to forex trading, you must have noticed many terms that you are finding hard to understand. Among all the frequently asked questions about forex trading, the most commonly asked question is about the meaning of the different terms used.

Well, forex traders often use a technical language that you might find intimidating especially when you are starting out. This article will outilne all these terms together with their meaning. After you familiarize yourself with the language, you will find it easier to understand the basic concepts in forex.

  1. Currency Pairs

A currency pair is a term used to describe two currencies with rates that are traded in the retail foreign exchange market. A good example of a currency pair is EUR/USD . In this case, the EUR is said to be the base currency while the USD is the quote currency. If you buy a currency pair, it simply means that you are buying the base currency and selling the quote currency.

  1. Leverage

Leverage in forex means that foreign exchange is a leveraged/margined product. This means that you are only required to deposit a small a little percentage of the full value of your position to place a trade. This simply means that the potential for profit or loss from the initial deposit is higher than in traditional trading.

  1. Pip

A pip is basically a small measure of the currency pair movement that is equivalent to 1/100 of a basis point. All currency pairs are quoted to five decimal places. The change is usually from the forth decimal place in price i.e -0.0001. For example, if the price of the EUR/USD pair moves from 1.359200 to 1.35600, the pair can be said to have climbed 32 pips.

  1. Long and Short

Both terms are used to describe two different positions in the forex market. For example, when a trader has a long position, it means that he has bought a pair because he believes that there is a possibility of its value rising. When a trader is in a short position, it means that the trader has bought a currency pair because he believes that its value will most likely fall.

  1. Spread

The spread is simply the difference between the current bid and the current ask. In other words, the difference comes in where a trader may purchase or sell the underlying assets. For example, if the bid price (buyer’s price) is 1.3004 and the ask price (seller’s price) is 1.3008, then the spread is 0.0004.Forex traders make money through spreads because they don’ charge commission.

  1. Trend

Trend is a term used to refer to a particular course of direction in which the forex market is moving in.

  1. Spot Deal

A spot deal is when a deal happens between two different parties where specific amounts of different currencies are delivered to each other within two business days. The only exception here is the Canadian dollar in which any transaction needs to be fully completed within one business day.

Categories: Forex terms, Tutorials


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