In your first day of school, did your teacher give you a long para of chapter 7 in English subject to read aloud in class?
I guess the answer is, hard No.
Of course, she made you comfortable with letters, then she made you learn ABCs. And today you can pronounce all the difficult words and understand them as well.
Same goes for every other skill you learn in your life. Trading and Investing is also a kind of life skill that makes you capable to fulfill your financial goal.
Today we will learn about the basic terminology of Forex Trading that every trader should know.
Forex trading is the global level trading where you will be trading among millions of investors or forex traders around the globe. If you are thinking that you can enter this market because you have been doing “fine” in the equity market, you are not doing yourself a favor.
You need to understand the basics of forex and all the important terminology related to forex if you want to start with the right approach.
Lets first learn a few basics of forex and currency representation in forex trading.
In forex, currencies are always traded in pairs as you exchange one currency with other with the given exchange rate between the currency.
Suppose you are trading in Euro and US dollar, then the representation will be
Left-hand side will be the base currency(EUR) and the right-hand side is quote currency(USD).
Now moving ahead,
MMF Solutions have brought you the 19 forex trading terms to learn, that will help traders in 2019.
Short for Percentage in Point. It is a numerical value with decimal. In forex Pip or Pippet is the measure for exchange between currencies.
It is also a measurement for minimum price fluctuation in a forex transaction.
One Pip = 0.0001 (for most of the currency pair).
If a trader says he has made 50 pip in last trade that means he has gained 50 points in last hour.
Ask price is also known as the offer price at which you buy base currency in exchange of quote currency.
This is the quote of Euro and USD, right-hand side is of this quote is ASK PRICE.
It means you can buy 1 EURO at 1.1446 USD.
The bid price is the price at which you sell the currency you are holding.
The bid price is always less than Ask price. The left-hand side of the quote represents the bid price.
The difference between ask and bid price is known as the spread.
Spread is of two types. Fixed and Variable. As the name suggests fixed spread maintain the same number of pip, it does not change with the market.
Variable spread changes with the market.
Spread it basically brokerage service costs which replace transaction fees.
It is expressed in percentage. The minimum amount of fund you will need if you want to open a position and keep it open.
It is a kind of loan from the forex broker to the trader.
You can also say that it is a minimum guarantee or deposit to the broker.
This is how you will calculate margin
$ Margin = Current Market Quote * Volume/ Leverage
When traders/investors’ account runs low or out of sufficient funds to sustain their current open position then they are warned. This warning is known as Margin Call.
The trader has to borrow fund from the broker to buy and sell securities.
If the market goes against trader’s open positions, the find will be requested by this margin call.
A margin call is basically a demand to maintain the margin value in the trading account.
The amount of currency an investor/trader owned by him/her is called position.
A position trader is a trader who hold the position (currency or stock) for long-term like for weeks, month or year.
The position is of two type.
When a forex trader buys an assets(currency or security) and owns it expecting that value of that asset will rise in future, this is called Long Position.
When a forex investor or trader don’t own the asset and he/she is expecting to sell it and repurchase it in the near future when the price of the asset will go down.
The main difference in going long or short is the expectation of trader.
The number of units of currency you are trading is Lot Size in forex. You can also say this is the size of your trade.
Lot size comes in four types:
Standard Lot 100,000 units $10/ pip
Mini Lot 10,000 units $1.00/ pip
Micro Lot 1000 units $ 0.10/ pip
Nano Lot 100 units $ 0.01/pip
(Nano lot some broker measure it in 10 units and many brokers do not offer nano lot size.)
For example, suppose you bought $ 100,000 against Euro at rate 100.00 and exchange rate moves up to 100.40 which 40 pip movement. That means you have made $400 in this process. Or if exchange rate changes to 99.60 then you have suffered from a loss of $400.
Intelligence to use something small to manage something big is the basic definition of leverage.
In forex, leverage is favorite for many investors as it provides much higher value than other financial instruments.
In forex by leverage, you control the big amount of money with a small amount of money.
You borrow a certain amount of money from your broker to invest in currency.
Though there is a high profit there is also a high risk of losing money in leverage if you don’t use it wisely and carefully.
Brokers mainly offers 50:1, 100:1, 200:1, 400:1 leverage.
Slippage is the difference between executed price(the price at which trade happened) and the price you have expected. It is very common in forex trading.
It can happen negatively or positively. The reason could be market volatility and speed of execution.
Suppose you are trading in EUR/USD at an exchange rate of 0.8030.
You are expecting to raise the value at 0.8060 but price moved very quickly to 0.8070 but you have expected the price to at 0.8060 so now you are offered with the new available price at 0.8050.
Slippage = 0.8060-0.8050=0.0010 or +10 pip, this is the case of positive slippage.
Hedging is the strategy to protect trader’s position from an unfavorable move in a currency trading.
Hedging not only protects your investment but also help you to lock your profit.
To master in hedging you have to learn the game of forex trading.
As in forex, trading is done in the currency pair. There are also two interest rates.
When the interest of currency you bought is higher than the interest of currency you sold this is called Rollover or Swap.
In this, you will earn the interest and that is why it is called the positive rollover.
Rollover can increase profit and cost both. It changes with the change in position sizes.
Trading of secondary currencies which are less volatile in an uncertain market.
They are a low-risk instrument because of their issuing governments are stable and the economy is running strong.
But they are not inevitably safe.
Every forex broker takes the fee for the transaction. No matter how long the trade is being open the commission will be cut in the opening only.
That is how the broker remains in a win-win situation.
In forex, there are different types of orders to control your trade.
Stop loss in an order to close the trade as it reaches as a level which is analyzed to minimize your loss.
You can use software which can close your trade even when you are not watching the market or there are advisory services which provide forex signal with stop-loss order and they trade for you to minimize your risk.
When you want to buy or sell above or below the current price respectively you use stop entry order.
Buying above the current price is for a long trade and selling below the current price is for a short trade.
Suppose the US Dollar and Euro is quoted in Japanese newspaper paper, this is the situation of cross rate. As neither the dollar nor the Euro is the currency of Japan. If the currency quote was written in yen then it would not be a crossover.
Cross rate is the exchange rate between currencies other than the official currency of the country.
Are you feeling more aware than before?
There is much more to learn.
These are the 19 basic forex trading terms that every forex trader should know to get started with forex trading.
There many more on the advanced level but you can’t move to advance level if you won’t learn the basics.