Finance

Forex Trading Terminologies: Beginners Guide

There are some essential forex trading terminologies one should know before starting trading in the currency pair market. 

1) A pair of currencies

Despite the fact that the foreign exchange market is known for currency trading, no one currency can be bought or sold. Every time an order is placed in the financial market, it must be for the entire currency pair. The currency pairs are made up of two different currencies: the base currency is on the left, and the counter currency is on the right.

Let’s use the EUR/USD currency pair as an example. When you buy the EUR/USD pair, you aren’t selling your US dollar and buying the euro. Similarly, selling the EUR/USD pair is not the same as purchasing the dollar and selling the euro. Best Forex Broker UK

2) Major pairs 

The currency pairs are categorised into three pairs:

1) Major pairs

2) Exotic pairs

3) Cross pair

Main pairs are those that have the US dollar as the counter-currency or base currency and one of the other major seven currencies as the counter-currency or base currency, such as the CAD, EUR, CHF, GBP, AUD, NZD, and JPY.

If you’re a beginner and want to start trading, stick to the big pairs because they usually have enough liquidity to avoid slippage and cheap transaction fees. USD/CHF, EUR/USD, and GBP/USD are examples of prominent currency pairs.

3) Cross pairs and exotics

Except for the US dollar, cross pairs are any two currencies from the major pairs. They have greater transaction costs than the other major pairs, and investors may experience slippage in times of low liquidity. In comparison to the main ones, they have a higher level of volatility. EUR/CHF, AUD/NZD, and EUR/GBP are examples of these pairs.

4) Exchange rate 

Because it represents the price of the base currency versus the counter or quote currency, the exchange rate is also known as the price. Consider the following example: if the USD/EUR exchange rate is 2.15, one USD costs $2.15, or it costs $2.15 to buy one USD.

The rise in the pair’s exchange rate indicates that the base currency is strengthening against the quote currency, while the counter currency is weakening against it.

A fall in the exchange rate, on the other hand, indicated that the base currency was losing ground against the counter currency or that the counter currency was gaining ground against the base currency.

5) Bid/Ask price 

Every currency pair has two prices or exchange rates at any one time: one is the bid price, and the other is the ask price. The distinction between the two is that the bid price is the price at which the buyer is willing to buy, while the ask price is the price at which the seller is willing to sell.

6) Spread 

A transaction charge for the supplied order must be paid every time a trader launches a deal. Because most brokerage firms do not charge fees or commissions for placing orders, the bid/ask spread is the principal cost for a forex trader. When investors buy at the ask price (the price at which the seller is willing to sell), they are immediately losing money equivalent to the bid/ask spread.

7) PIP 

When discussing losses or profits, we’ve heard many forex traders use the phrase “pips.” A pip is a small fractional or percentage point that represents the tiniest fluctuation in a price or exchange rate. In most pairs, one pip is equal to the fourth decimal point.

For example, if the USD/EUR pair is now trading at 1.6225 and rises to 1.6230, the difference is 5 pip.

Some currency pairs, however, have their pips set in the second decimal place (for yen pairs). Consider the case where the USD/JPY is currently trading at 210.25 and drops to 210.15, a shift of 10 pips.

8) Going long/short 

It’s a common piece of forex trading jargon that most of you are familiar with. Going short means selling, and going long involves buying.

The majority of stock market investors are long in anticipation of rising prices. There are always an equal number of shorts and longs in derivative markets that include futures and options.

Investors can bet on both rising and falling prices because forex is commonly traded using complicated financial derivatives. They take long positions when buying and short positions when selling.

9) Leverage 

The forex market is accessible to all types of investors and allows them to earn not only from falling but also from rising prices. The leverage, on the other hand, is the most appealing feature that makes it stick out on the list.
Trading using leverage allows investors to open a trade with a higher volume than their initial trading account volume would permit. The forex market is recognised for the greater leverage ratios that brokers offer.

10) Margin 

When investors trade on margin, the broker sets aside a portion of his trading account activity as the leveraged deal’s collateral. Margin is the term for this type of collateral. If the leverage ratio is 100:1, the margin is equivalent to 1% of the trader’s total position volume.
For example, if an investor opens a $100,000 trading position with a leverage ratio of 100:1, the margin will be $1000, or one percent of the position volume.

11) Lot size 

The “lot size” is the next crucial term in the list of basic forex trading terms. The size of a position volume trader’s losses and profits in greenback value (dollar) affects the quantity of a single pip. One standard lot in the foreign exchange market is equal to 100,000 units of the base currency. Aside from the regular lot, some brokers now offer Mini, Micro, and Nano lot sizes of 10,000, 1,000, and 100, respectively.

The Bottom line

Because the broker is the most important aspect of trading in the forex market, you’ve probably read the words broker and brokerage business several times in this essay. As previously said, it provides basic services like leverage and margin. So, if you’re looking for the ideal broker for you, NordFX is a good choice. It is the most well-known VFSC-regulated brokerage firm. This broker’s minimum deposit is $100, and there are no commission fees. Wish Posting

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