As a beginner looking to invest in the forex markets, you must be holding a curiosity about understanding the basic forex trading terminologies. Well, herein this blog post, we will try to make things easy for you in the same regard. Later covered in the blog post, will be all the basic forex terminologies for beginners that are essential to understand before investing in the markets.
Let’s first understand the meaning of forex trading.
Forex is the abbreviation to foreign exchange markets, wherein people exchange different national currencies at a price specific to a particular time. As the prices relative to two currencies being exchanged, vary with each second that goes by, the profits are made by investors by predicting the monetary value of one currency against the other, in the immediate or near future.
People, banks, and companies extensively convert one currency into the other on the forex trading platforms to make a profit.
To know in detail about Forex, read also: https://www.exclusivemarkets.com/blog/what-is-forex
Okay, now that we are done with understanding what forex trading actually means, let’s move onto understanding its basic trading terminologies.
Currency
Currencies are a medium of circulation of money, for instance — coins and bank notes, that a country’s national government recognizes, e.g., US dollars (USD), Great Britain pound (GBP), Canadian dollar (CAD), etc.
The United Nations (UN) has recognized 180 currencies across 195 countries, globally, that can be traded in the forex markets.
Currency Pairs
A currency in the forex markets cannot be traded alone. You need to pitch it against some other currency to make a potential profit by placing your bet on one of the two currencies in the pair that you think will gain more value over the other one.
In the said pair, the first currency is known as ‘base currency’, and the second — ‘counter currency’. These two terms together, fall under the realm of “basic forex trading terminologies”.
To demonstrate it with the help of an example, let’s say you want to trade on GBP/USD pair. This means, if you are buying this pair, GBP is being bought and USD is being sold. Likewise, if you sell the same pair, GBP gets sold and the USD is bought.
Major Pair
In the forex trading terms, a major currency pair is the one that includes USD as a base or counter currency, and paired against it is, a currency constituting one of these seven — CAD, EUR, JPY, CHF, NZD, GBP, AUD.
Cross Pair
It is one of the very common basic forex terms that is used among investors in the forex markets. It constitutes two major currencies within a pair, minus the ‘USD’. Cross pairs, usually reflect a higher transaction cost, and are more volatile to trade into, compared to major pairs. Examples for cross pairs would comprise — AUD/NZD, EUR/CHF, EUR/GBP.
Exotic Pair
An exotic pair would constitute currencies that fall outside of the top ten among the most-traded currencies. For instance, Czech koruna, Turkish lira, and Mexican peso. Such currencies can be intensely volatile, and only the experts should trade into them.
Exchange rate
Among the most popular forex trading terminologies, comes ‘exchange rate’. It represents the value of the base currency against the counter-currency in the pair. For instance, an exchange rate of 1.2 for the GBP/USD pair, specifies that one GBP equals $1.2, or it costs $1.2 to buy one pound.
Ask/Bid Price
The bid price is what the buyers are agreeing to pay, and the ask price is what the sellers are demanding against the sale of a currency. A transaction occurs when a buyer meets the seller’s ask price.
Spread
Another common forex trading term is ‘spread’. Every single time you trade in the forex markets, you pay a transaction fee for that specific trade. While most forex trading platforms do not charge a fee or commission on trading these days, the ask/bid price persists as the primary cost to traders. When an individual buys at the ask price, his position, instantly goes in a loss, which determines the bid/ask spread.
Pip
Another of the popular forex trading terminologies constitute — pip. It is the abbreviation to — ‘Percentage in Point’, representing the lowest possible increment which an exchange rate can go up and down. In general, one pip is equivalent to the 4th decimal of a majority of currency pairs.
For instance, if GBP/USD is presently being traded at 1.1660 and hikes to 1.1665, that jump would be equivalent to a change of 5 pips.
Going short/long
When it comes to forex trading, it is one of the most common terminologies that traders use on a regular basis. Going long on a currency pair means that you are intending to sell. On the other hand, going short means, you intend to sell.
Leverage
Among other forex trading terminologies comprise — ‘leverage’. It means using the borrowed money to further invest in a stock, currency, or security. Forex investors, under leverage trading, borrow money from brokers to trade greatly larger positions on a currency.
Margin
While performing leverage trading, the brokers assign a part of the investor’s trading account size as a ‘collateral’ against the leveraged trade. The said collateral is known as the ‘margin’, and its magnitude depends on the ratio of leverage that one trades into.
That’s all for now. Hope you find the explanation to all the forex trading terminologies mentioned above, to be useful.
Cheers!
