Jayden As with any new skill you need to master the terminology, especially if you want to become a forex trading professional. As a beginner, it is important to know certain forex trading terms and to be very familiar with them. Here we will only cover some basic terms.
1. Major and Minor Currencies in Forex Trading
The eight most frequently traded currencies are known as the major currencies, they are USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD. All other currencies are known as minor currencies.
Don’t worry about not understanding the secondary currencies as they are only for the very professional. In fact, the five currencies we analyze are the USD, EUR, JPY, GBP, and CHF. These are the most liquid currencies and certainly the best to trade.
2. Base Currency in Forex Trading
The “base currency” is not the base currency in monetary policy, but the first currency in any currency pair. The exchange rate shows how much the first currency is worth in terms of the second currency.
For example, if the USD/CHF exchange rate is 1.0350, this means that one USD equals 1.0350 CHF.
In the forex trading market, if the USD is considered the base currency in quotes, means that quotes indicate how much one USD is worth in other currencies. In a currency pair, the base currency always equals 1, regardless of the value of the quote currency.
3. Quote Currency in Forex Trading
The quote currency is the second currency in any currency pair. The first part of a forex trading currency pair is called the base currency, and the second is called the quote currency.
4. Pip in Forex Trading
A pip is the smallest unit of a quotation. The vast majority of currency pairs are quoted in 5 digits and have a decimal point in the first, and a number follows.
Most major currencies define a pip as the fourth decimal place, so a one pip change is equivalent to 0.0001. But there are some exceptions, such as the JPY where a pip is the second digit after the decimal point.
E.g. EUR/USD is quoted at 1.2538. In this case, a change of one pip equals a change of 1 in the fourth digit after the decimal point, so one pip equals 0.0001. Thus, if a currency the quoted currency is USD, so one pip is usually equal to one-hundredth of a percentage point.
5. Bid Price in Forex Trading
The bid price is the price at which the forex trading market will buy a specific currency pair at this position. At this price, traders can sell the base currency. It is generally displayed on the left side of the quote.
For example, in EUR/USD, the bid price is 1.17206. This means that you can sell the EUR and buy the USD at 1.17206.
6. Ask Price in Forex Trading
The Ask price is the price at which the forex trading market sells a specific currency pair. At this price, traders can buy the base currency. It is generally displayed to the right of the quote.
For example, in EUR/USD the Ask price is 1.17210. This means that you can buy EUR at 1.17210 and sell USD at the same time. This quote is also known as the Offer Price.
7. Spread (Bid/Ask Spread) in Forex Trading
The spread is the difference between the bid price and the Ask price. A large number quote is the first few digits on a dealer’s quote. These figures are often omitted from traders’ quotes. For example, the full quote for USD/JPY is 118.30/118.34, But this quote is often omitted by traders as 30/34.
8. Trading Cost in Forex Trading
The bid/ask spread, or spread, is the cost of forex trading, so in forex trading, this is the difference between the bid and offer price. For example, in the case of EUR/USD, where the exchange rate is quoted at 1.2821/20, the cost of this trading is one pip.
The formula for calculating transaction costs is as follows.
Trading costs = selling price – buying price
9. Cross Currency in Forex Trading
A cross-currency pair is a currency pair that does not have a US dollar. Since trading a cross-currency pair is equivalent to trading two straight currency pairs, the price performance of these crosses is usually more mixed. For example, buying GBP/CHF cross currency pairs is usually traded with higher spreads than straight currency pairs.
10. Margin in Forex Trading
When you open a margin account with a forex broker, you are required to deposit at least a minimum amount of money. This minimum opening capital requirement varies between brokers from $100 to $100,000.
Any time you place a new trade, a percentage of your account will be used as Initial Margin. The exact amount taken depends on the currency pair, the current exchange rate and the number of trades you are making, and the lot size of the contracts traded are often indicated in the base currency.
For example, suppose you open a mini account that offers a leverage ratio of 2:1 or a margin that takes up the requirement of 0.5%. The mini account trades in mini lots, which is $10,000 per mini lot. If you want to use the margin to open a mini lot, you would only need to provide an initial margin of $50 ($10,000 x 0.5% = $50).
11. Leverage in Forex Trading
Leverage is the ratio between the trading volume and the required margin. With leverage, we can buy and sell relatively large amounts for very little money. Leverage varies from forex trading brokers, ranging from 2:1 to 500:1, and some brokers provide as high as 2000:1.
Margin + leverage = a potentially deadly combination
Trading currencies on margin increases your ability to access your funds. If you have $5,000 in a margin account that allows 100:1 leverage, you can buy up to $500,000 worth of currency, because you only need to pay a 1% margin as collateral. In other words, you have the ability to buy US$500,000.
Having more buying power allows you to get more out of your investment with less capital. However, it is important to note that trading on margin can also increase your losses.
12. Margin Call in Forex Trading
All traders really hate margin calls. When your broker notices that your margin deposit has fallen below the required minimum level, they will ask you for a margin call. This happens when the market moves against your holding position.
While trading on margin is a profitable investment strategy, it is more important that you take the time to carefully understand the risks inherent in it. Make sure you understand how your margin account works and understand your broker’s margin agreement.
If you are in doubt about the agreement, then make sure you are very clear. If the margin in your account drops to a predetermined benchmark, then the positions you have built up will be partially or fully closed out.
You may not receive any margin calls until your position is liquidated. If you regularly monitor your account profit and loss and set up stop orders for each position, then you will not in this predicament. This is because stop orders can limit the risk associated with your positions.
