To walk on the slippery path of Forex and be a successful trader, we need to know the fundamental technical languages used frequently in this market. We have compiled some technical terminologies that we should know before starting trading.Try to read this article carefully as it will improve your basic skills at trading.
Basic Forex Terminology
- Currency pair: The currency pair represents the exchange rate between two different currencies. It consists of three parts – Exchange Rate, Base Currency, and Quote Currency.
- Exchange Rate: It shows us the current exchange rate of ‘Base’ and ‘Quote.’ (Example, ‘EUR/USD = 1.22’. In this Pair, 1.22 is the exchange rate. We can assume it as the value of the product (money).
- Base Currency: The first part of the Pair. It sits before the slash (/). We can assume it as the product of Forex trading. (Example, ‘EUR/USD = 1.22’ In this Pair, EUR is the Base Currency)
- Quote currency: The second part of the Pair sits after the slash (/). We can buy and sell the ‘Base’ by exchanging the ‘Quote.’ (Example, ‘EUR/USD = 1.22’ In this Pair, USD is the Base Currency)
- Position: Position reflects your prediction. Suppose, as a trader, you predict that the value of EURO relative to USD will increase. So, you decide to buy more EUR. That means you are taking the ‘long’ position.
There is another position called ‘short.’ This is just the opposite of the ‘Long’ one. For example, we have EUR, and we predict that EUR’s market rate relative to USD will decrease. So, you decide to sell the EUR to prevent the probable loss. That means we are taking the ‘Short’ position. And to execute the trade, you need a professional trading platform. Feel free to get it from here as Saxo provides high-end tools to retail traders.
Bid price: It indicates the current market rate of selling. Brokers fix this price for the traders. If you want to sell your currency, the broker will buy it at this rate. Usually, this price is a bit lower than the ‘ask price.’
Ask price: It indicates the current market rate of buying. Brokers define this for the traders. If you want to purchase a specific currency, you have to pay the broker according to the ‘ask price.’
Depreciation: It is the opposite of Appreciation. That means when the price in the pair decreases is called Depreciation. Many FX experts name it ‘devaluation.’
Pips: Pip means ‘Price interest Point.’ However, many FX experts address the PIP as ‘Percentage in Point.’ Pip is used to measure the slightest movement of the exchange rate. For example, say, last week, the GBP/USD was 1.4138. And today it has gone down to 1.4136. That means the value has decreased to 2 pips. You must know that the price usually does not goes up or down drastically; instead, it changes slightly. And to address this slightest change, pip plays an important role.
Lot: In FX, we cannot trade as many units as we want; instead, we have to choose a set of fixed unit numbers to trade. Before you start trading with real money, read more about the lot size calculations at your broker website.
Margin: To start trading, we need to open a position. And to open it, we need to invest or deposit a minimum amount. For example, we want to open a position in Forex of 100000 USD with the leverage of 10, so the margin for us is 10,000 USD.
Leverage: Leverage is an opportunity for lower investors given by the broker. Suppose you have 5000 USD. While opening a position in the FX market, you notice that the price of EUR/USD is now down. And there is high chance the price move north shortly. So, you want to open a long position of 1, 00,000 USD. In this case, your broker can give you an opportunity of leverage of 20. As a result, your investment will be 5000 USD × 20 = 1, 00,000 USD.
These are the fundamental terminologies of Forex. So before starting our trading, we need to be sure that you know these term very well.