Key Terms in Forex Trading: Want to get started on Forex? We’ve created a listing of the very crucial Forex currency trading terminology to help get you started on the marketplace.
Although currency is traded on the foreign exchange market, we’re not able to sell or buy a single currency. Every time we place a trade on the market, we’ve to trade on currency pairs. Currency pairs consist of two currencies — the primary one is the base currency, and the second one the counter-currency.
An example is the EUR/USD pair. Whenever you buy the EUR/USD pair, you’re buying the Euro and selling the US dollar. Similarly, whenever we sell the EUR/USD pair, we’re selling the Euro and buying the US dollar.
Generally, currency pairs can be grouped into pairs that were exotic groups and pairs. Major pairs are currency pairs including the US dollar as either the base currency or counter-currency and one of the other seven major currencies (EUR, CAD, GBP, CHF, JPY, AUD, NZD.)
If you’re beginning with trading, you must concentrate on the significant pairs since they generally offer very low transaction costs and enough liquidity to prevent high slippage. Samples of major pairs include EUR/USD, GBP/USD, and USD/JPY.
Cross Pairs and Exotics
Cross pairs, and on the other hand, include any two currencies except the US dollar. Unlike pairs that are “cross pairs” and have higher transaction costs, and, at times of liquidity, traders can face slippage. Cross pairs are generally more volatile than pairs. Samples of pairs that are cross comprise GBP/AUD, EUR/NZD, and USD/ZAR.
Lastly, exotic pairs include an exotic currency that isn’t in the Top 10 of the most traded currency, like the Mexican peso, Turkish lira, or Czech koruna. Since those currencies can be extremely volatile, they should be left to be traded with the professionals.
At any moment, each currency pair has two market rates or prices — the bid price and the ask price. What’s the distinction between those two? The bid price is the price at which buyers are ready to purchase, although the ask price is the price at which sellers are willing to market.
Given its nature, the bidding price is always lower than the ask price. Once those two prices meet, either when sellers lower their ask price to match a purchaser’s bidding price or when buyers increase their rate, they’re inclined to pay for a currency and meet a seller’s ask price, a transaction occurs.
In conclusion, buyers buy at the ask price, and sellers sell at the bid price. This implies that each price plotted on your chart represents the industry equilibrium at the period of time — the price where the majority of market participants are ready to transact.
Each time you enter into a trade, you have to pay transaction costs for this trade. Most brokers don’t charge commissions and prices on placing trades, the bid/ask spread stays the main cost to Forex traders. When bulls buy at the ask price (the price at which sellers are willing to market ), their position is immediately in a loss that equals the bid/ask spread.
If you’re a day trader or scalper, you ought to pay attention to the bid/ask spread because it can consume a portion of your gains towards the end of the day. Swing traders and position traders who have a longer-term approach to trading are impacted by the spread as they start several positions and have relatively higher gain targets.
What’s the Pip?
When Forex traders talk about losses or profits, they generally use the term “pips.” A pip is short from Percentage in Point and also represents the smallest increment that an exchange rate can move down or up. Typically, one pip equals to the 4th decimal of most currency pairs.
Going Long or Short
Going long means to BUY while going short means to SELL. In equity markets, traders are long in anticipation of rising prices. Nevertheless, in markets, like options and futures, there’s always an equivalent number of longs and shorts in the current market, because each new contract that’s purchased needs a corresponding seller that wants to go short, and also vice-versa.
Since Forex is mostly traded with CFDs, traders can TRADE on both sides, on rising prices and falling prices. When purchasing, they’re going “long,” and when short-selling, they’re going “short.”
The exchange rate of a currency pair is what all traders follow. The exchange rate is frequently called the price tag, as it shows the price of the base currency expressed concerning the counter-currency. For instance, if the exchange rate of EUR/USD is 1.18, this suggests that one euro prices $1.18, or it can take $1.18 to purchase one euro.
An increase in the exchange rate of a currency pair shows that the base currency is appreciating against the counter-currency. Or the counter-currency is depreciating against the base currency.
Similarly, a drop in the exchange rate indicates that the base currency is depreciating against the counter-currency, or the counter-currency is enjoying against the base currency.
The Forex market is open around the clock and provides traders to gain not only on increasing prices but additionally on falling ones. Nevertheless, there’s one more reason why a lot of traders feel attracted to the Forex market — leverage.
Trading on leverage allows traders to open a larger position size compared to their trading account size would otherwise enable, and the Forex market is known for high leverage ratios offered by brokers.
Nevertheless, bear in mind that trading on quite high leverage is quite dangerous, as it boosts not only your profits but additionally your own losses.
Beginners should consider trading on leverage until they gain enough expertise and screen time. This will reduce losses and make sure you stay in the game in the long term.
When trading on leverage, your agent will allocate part of your trading account size as the collateral to the regulated trade. This collateral is called margin, and its size is dependent upon the leverage ratio that you’re trading on. A leverage ratio of 100:1 asks for a perimeter that equals 1% of your position size.
When trading on leverage, always watch your free margin. Your free allowance equals your total equity (account size + any unrealized profits/losses), minus your employed margin. In case your free margin falls to zero, then you’ll get a margin call, and all your open trades will be closed at the current market rate.
The position size you take on the market determines the size of your own profits and losses in dollar value by affecting the value of a single pip. At the Forex market, one standard lot (normal position size) equals to 100.000 units of the base currency.
Luckily, traders with smaller account dimensions may take smaller trades with mini-lots (10.000 units of the base currency) and micro-lots (1.000 units of the base currency.) Some brokers even allow you to trade on nano-lots (100 units of the base currency.)