Important Terms Used in Forex Trading

Important Terms Used in Forex Trading

Forex trading is growing in popularity with traders across the globe. Also known as Foreign Exchange, the forex market essentially describes trading of currencies that are used worldwide. It is a versatile and extensive financial market, and is open for trading twenty-four hours a day, five days a week.

This allows traders globally to participate in the purchase and sale of currency pairs. The forex markets are closed during weekends. One of the main points about forex trading that appeal to investors is that trading can be done online, which increases accessibility for them.

When trading in forex, it can prove to be useful to know the various terms that are used regularly. The knowledge of such terminologies, specific to forex can help traders understand the basic concepts easily. Some of the essential terms related to forex are discussed below.

• Currency Pair

The currency pairs, as the name suggests, includes two types of currencies that are quoted in a pair, and each currency pair can be considered as a single unit, for convenience of trading. The use of pairs of currency enables traders to purchase one currency and sell the other, corresponding to the pair chosen. In EUR/USD currency pair, there are two currencies indicated. The first currency, which is before the slash mark is termed as base currency, and the second currency is called quote currency or counter currency.

The currency pair enables traders to purchase base currency and sell the counter currency. In forex trading, traders also need to stay informed about exchange rate, as it provides information about the amount a trader needs to pay in counter currency terms, to purchase a single base currency unit.

• Pip

It is a term that is used to indicate the minimum increment in movement of price made by a currency.

• Spread

This term refers to the difference calculated between the buying price of a currency, also known as bid, and the selling quote, also known as ask. The spread, which is associated with currency traded, can also indicate the profit to be made. If a trader reads EUR/USD with 1.3300/ 02, the difference between 1.3300 and 1.3302, which is equal to two pips, is the spread calculated.

• Margin

They are used to describe credits offered to traders by brokers, thus facilitating them to trade with significant amounts of money, when the investment does not reflect as much. Available as used margin and free margin, the former refers to amount that is already employed for the position, and the latter is used to indicate amount that can be used for new positions.

• Leverage

This term in forex trading is used in reference to the margins or credits by the investors while trading on currencies. It enables traders to equip their position with a significantly greater sum, in comparison with the actual account margin. The use of leverage must be done with care and planning, as it can impact both profits and losses.

The knowledge and use of the field specific terms in forex can be quite useful for those investors, who are new to forex. This can help them understand various forex discussions and market updates, and thus, they can make informed trading decisions.

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