Are you interested in investing in the forex market to gain some extra cash to your pocket? Well, that’s a good idea, but you need to have some knowledge before entering into the forex market, If not you may get confused once you start trading. So I have explained 8 most commonly used terms in forex trading that you must know before trading

Exchange Rate Pip and Pipette Bid and Ask Price Spread Leverage Margin Bulls and Bears Lot

First of all, what is a FOREX Market? Forex market also is known as the Foreign Exchange Market or the FX Market is the marketplace where the investors will buy, sell or exchange currency pairs. This is the world’s largest and most liquid market which has an average turnover of more than 3 trillion USD per day.

Forex is not traded via a centralized marketplace like the stocks are traded. Forex is traded ‘Over-The-Counter (OTC)’.

So let’s jump to the topic

1- EXCHANGE RATE

The exchange rate is the value of one currency in terms of another currency. For an example, if you need to purchase 1 GBP for USD, you need to pay 1.31 USD. That means 1 GBP is worth 1.31 USD. The standard way to express this exchange rate is GBP/USD = 1.3100. The currency left to the slash mark is called the ‘Base Currency” and the currency right to the slash mark is called the ‘Quote Currency’. Hence the value of 1 unit of base currency is 1.31 units of quote currency. The exchange rate should be expressed in 4 decimal numbers ( Eg: 1.3100 )

Currency pairs are categorized into 3 main parts. They are Major currency pairs, minor currency pairs, and the exotic currency pairs.

The major currency pairs are the currencies that are paired with USD. The minor currency pairs are those that do not associate with USD. These are also known as the cross-currency pairs The Exotic currency pairs represent developing countries, as well as several developed European countries and, are traded less frequently.

There are 4 Major currency pairs. They are,

1- USD/EUR

2- USD/GBP

3- USD/JPY

4- USD/CHF

Few of the Minor Currency pairs,

1- EUR/GBP

2- EUR/AUD

3- GBP/CAD

4- AUD/NZD

Few of the Exotic Currency pairs,

1- USD/BRL

2- USD/CZK

3- EUR/RUB

4- GBP/SEK

2- PIP AND PIPETTE

Pip is the smallest fraction that a currency pair can fluctuate. For an example, if the exchange rate for GBP/USD is 1.3100 and the currency pair value has increased to 1.3105, that means the value has gone up by 5 pips.

Forex platforms mostly use pips as the smallest fraction. But to gain more accuracy, some platforms use the fifth decimal as the smallest fraction instead of the 4th fraction, which is called the pipette. For an example, if the earlier currency pair has increased the same amount, that will be expressed as 1.31050 (5 decimal points), then the value of the currency has gone up by 50 pipettes

3- BID AND ASK PRICE

A bid is a Price what the broker/ market will buy a specific currency pair from you. In other words, the Bid price is the price at which you will sell the base currency to the broker.

Ask price is the price what the broker/ market will sell a specific currency pair to you. In other words, the Ask price is the price at which you will buy the base currency from the broker

4- SPREAD

A spread of a currency pair is the difference between the Bid and Ask price. Generally, the broker/market will buy a currency (Bid price) at a lower price and sell it (Ask price) for a higher price. Hence the difference between these two prices is the spread.

For an example, if the broker’s Bid price for GBP/USD is 1.3100 and the Ask price is 1.3110, the spread is 0.0010. That means the spread is 10 pips.

5- LEVERAGE

Leverage is the money that a trader is borrowing from the broker to invest in the market. This will help the trader to gain much higher profits/losses from a small initial capital.

For an example, if you invest your own 100$ with a 1:100 leverage ratio, it means that you are investing 10,000$ (100$x100) which includes your own 100$ and 9,900$ borrowings from the broker.

Assume that you only invested your own 100$ to the GBP/USD currency when the value was 1.3100. If the currency value went up to 1.3110 during the period and if you closed the position, the profit is 10 pips and let’s assume that the profit is equal to 1$. But if you have invested the entire 10,000$ including the leverage, the profit for the 10 pips will be 100$ and will result in a 100% profit increase. Once the position is closed you will return the leverage of 9,900$ to the broker and will show a closing balance of 200$ in your account instead of 101$.

But assume if the exchange rate decreased by 10 pips. This will result in a loss of 100$ which will result in a loss of your initial 100$ investment. Hence the leverage is very advantages in a rising market but very harmful in a declining market.

6- MARGIN

A margin is a deposit needed to open or maintain a position. The margin is not a fee or a transaction cost expenditure, but it is the traders own equity deposit invested to open a position.

7- BULLS AND BEARS

When you trade in the forex market you will hear the words bull market and bear market quite often. The ‘Bull Market’ is when a currency exchange rate is trending in an upward manner. The ‘Bear Market’ is when a currency exchange rate is trending in a downward manner.

8- LOT

A lot is also one of the most important terms what every forex traders should know. There are 3 types of lots used in trading.

1- Standard Lot

2- Mini Lot

3- Micro Lot

A standard lot is equal to the original trade size. This is equivalent to 100,000 units of the base currency in a forex trade. This is the most commonly known lot size. A one pip movement of a standard lot is equivalent to a 10$ change.

A Mini lot is equivalent to 10,000 units of the base currency in a forex trade. A one pip movement of a standard lot is equivalent to a 1$ change.

A Micro lot is equivalent to 1,000 units of the base currency in a forex trade. A one pip movement of a standard lot is equivalent to a 0.1$ change.

You may also check the Top ranking Forex brokers that we have listed in the below Link.

Top 15 Reliable FOREX Brokers to invest in

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