In Forex market, traders will encounter terminologies used to describe particular things. It is a very important thing to lean about these terms in order to make the trading easier. The followings are a collection of terminologies of Forex trading.
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Cross Rate – The exchange rate of two unofficial currencies of a country in which the quote is given. Sometimes, it also refers to currency quotes those don’t involve the US dollar no matter in what country the quote is released.
Example: American Newspaper quoted the exchange rate of Swiss franc and New Zealand dollar. This is a cross rate because none of the currencies are US standard currency. However, when the US dollar is also quoted in the similar newspaper, it is not cross rate due to the involvement of official currency of the US.
Exchange Rate – A currency value expressed in the terms of another.
Example: EUR/USD is 1.3200. It means that 1 Euro is US$1.3200.
Leverage – A trader’s ability to position his account to the greater position than the total account margin. For an instance, a trader is able to leverage his account 100:1 or 100 times when he has $1,000 margin and opens a position of $100,000. Gains and losses are magnified by the increased of leverage. Calculate the used leverage by dividing the total value of opened position by the balance of total margin in the account.
Example: A trader has $10,000 margin in his account and opens a standard lot of USD/JPY (100,000 units of currency’s base) for $100,000, the leverage ratio becomes 10:1 ($100,000/$10,000). If he opens standard lot of EUR/USD for $150,000 (100,000XEURS/USD 1.5000); then the leverage ratio becomes 15:1 ($150,000/$10,000).
Margin – A deposit required in opening and maintaining position. It can be “free” or ”used”. The “free” margin is the available amount for the opened new position. “Used” margin is the amount used to maintain the open position. With 1% margin requirement and $1,000 margin balance, a trader is able to sell or buy position of $100,000 notional. It allows leverage rate of 100:1.
Pip – Smallest price movement increment that can be made by a currency. It also refers as called point or points.
Example: 1 pip of USD/JPY I 0.01 and EUR/USD is 0.0001.
Spread – Difference of buy quote and sell quote or the bid and offer price.
Example: EUR/USD quotes read as 1.3200/03. The spread will be 3 pips or difference of 1.3200 and 1.3203. To break even on trades, one position needs to move in a direction of trade by the equal amount of the spread.
Ask and Bid Price
Ask Price – The buying price of specific currency pair that traders need to pay to the market or broker.
Bid Price – The selling price of specific currency pair that market or broker needs to pay to traders.
Ask/Bid Spread – Difference between ask and bid price. The spread of currency pair varies between brokers.
Major Forex Pairs and Nicknames
|PAIRS & NICKNAMES||CURRENCIES|
|EUR/USD = “Euro”||USD = US Dollar|
|USD/JPY = “Dollar Yen”||EUR = Euro|
|GBP/USD = “Sterling” or “Cable”||JPY = Japanese Yen|
|USD/CHF = “Swissy”||GBP = British Pound|
|USD/CAD = “Dollar Canada”||CHF = Swiss Franc|
|AUD/USD = “Aussie Dollar”||CAD = Dollar Canada (“Loonie”)|
|NZD/USD = “Kiwi”||AUD = Australian Dollar|
|NZD = New Zealand Dollar|
Understanding the Currency Pair Quotes
It’s important to understand the currency pair quotes. It is something common in Forex trading to see exchange rate of currencies quoted as one. It’s not something difficult to be understood.
EUR/USD = 1.32105
The first currency or the currency on the left is the base currency. The second currency or the currency on the right is the quote currency.