Understanding Forex Terminology

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Forex trading is possible for anyone who knows the forex terminology used to explain the market’s functioning. So, people wishing to become a part of this market need to first become aware of terms like currency pairs, spreads, bid and ask price, margin call, rollover, swaps and other regularly used terms. Here’s a look at the most commonly used forex terms.

Some Common Yet Important Forex Terminology

Forex trading is expanding due to growing awareness and the advent of online forex trading platforms, which have made trading more accessible. However, before you embark on your forex trading journey, knowledge of some key terms is essential.

  • Currency Pair: Currencies are always traded in pairs, with the first currency being the base currency and the second one the quote currency. So, when we write EUR/USD, Euro is the base currency and the US dollar is the quote currency.
  • Exchange Rate: This is the value of one currency, expressed in terms of another. For example, when we say EUR/USD is 1.42000, it means €1 is worth US$1.4200 or we need US$1.4200 to buy €1.
  • Quote: This is the market price that consists of the bid and ask price for a currency pair. For instance, the EUR/USD quote is 1.2345/1.2354.
  • Pip: This is the smallest change in the price of a currency and is also called the percentage in point.
  • Leverage: This is the ability to trade at a scale that is much larger than the funds available in a trader’s account. Brokers allow traders to take positions that are many times more than the funds deposited by the trader in their trading account. Leverage can boost one’s profitability as well as amplify the risk involved.
  • Bid and Ask: Bid is the price at which the market or broker is ready to buy a specific currency pair, while Ask is the price at which the market or broker is ready to sell a specific currency pair.
  • Spread: This is the difference between the Bid and Ask price for a currency pair and can be viewed as the fee charged by the broker for trading.
  • Margin: This is the minimum amount that a trader must deposit into their trading account to start trading.
  • Lot: Currencies are traded in lots, with one standard lot having 100,000 units of the base currency and a micro lot having 1,000 units.
  • Margin Call: This is a call for the trader to deposit additional funds in their trading account, as the earlier funds are inadequate to sustain the current open positions on the market.
  • Rollover or Swap: This refers to the interest paid or received for holding a position overnight. Every forex trade involves two currencies as well as two interest rates. In case the interest rate on the currency that is bought is higher than the interest rate on the currency sold, the trader earns rollover or positive roll. On the other hand, if the interest rate on the currency purchased is lower thanthe rate on the currency sold, the trader pays rollover or negative roll.
  • Hedging: This refers to opening new positions in the opposite direction of an existing position on the same currency pair to balance the risk.
  • Slippage: This refers to the slight difference between the price expected and the execution price for a trade. This could be positive or negative and is due to market volatility and the speed of execution of a trade.

Knowledge of forex terminology ensures a better understanding of the forex markets. For more in depth information, visit our Learn Forex page or chat with a member of our team.

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