Previously in one of my articles, I introduced an earning opportunity known as forex trading.
As a reminder, this forex trading involves the buying and selling of foreign currencies.
Being a global business, and a flywheel of foreign currencies and exchange, a lot of people are curious to know more about the business.
It will be a great thing to inform you that forex is the largest global financial market in excess of $4 trillion dollars exchanged daily.
In view of this, traders and intending traders do not need much persuasion as there are millions of persons trooping into the business everyday.
As an intending, or a new trader who is already interested and willing to venture into the business– First of all, I have to say you are making the right choice, and as the manner is, there are some important things you need to know about your intended business. That thing is known as the forex terminologies.
It is imperative that you get familiar with the day to day language in the marketplace of forex.
No one wishes to go out there and look like a novice in the eyes of other traders or even brokers.
As important as this is, I have made it easier for you by highlighting the frequently used terms in forex and also stating what they really mean.
The truth is this, the first step in venturing into the business is for you to understand the languages of the business.
Below are languages you must hear as long as forex is involved;
A currency pair is a price quote of the exchange rate for two different currencies traded in FX markets. When there is a demand for a currency pair, the first currency on the list or base currency is bought while the second currency on the list in a currency pair or quote currency is sold.
From market research, the best currency pair for traders to trade on is the EUR/USD or USD/JPY. This is because we have discovered that it is the two pairs that make up much of the global daily volume.
Leverage is said to be when there is a use of a borrowed fund to increase one's trading position beyond what would be available from their cash balance alone.
Leverage benefits traders in the sense that traders profit from the slight change in price of currency pairs.
Leverage can as well be measured as the ratio of the assets value to cash needed to purchase it.
In a simpler sense, leverage is when one borrows funds in order to make profit that originally you wouldn't have made.
Most trading activities out there have a common character of leverage or leveraging.
Bid in a clearer tone means the selling price of a currency by the trader. Bid is the price a forex trader is willing to sell a currency pair.
Even though bid does not stand as the last price as the trader who wants to buy has a certain price that he is willing to buy, and that is known as the 'ask price'
Both the bid and the ask price are subject to change based on market factors. The difference between a bid and the ask price is the 'spread'.
A spread is simply the difference between the base currency ( sellers currency) and counter currency (buyers currency). The base currency is usually displayed at the left while the counter currency at the right.
For instance, if the base currency is 2.1035, and the counter currency which should be above it is 2.1039.
Therefore, spread= 2.1039–2.1035
Margin in a generalized term is the amount of money that a trader must deposit inorder to place a trade, and also maintain the position.
Margin should not be seen as transaction costs, but a security deposit that the broker holds while a forex trade is open.
Trading currencies on margin enables traders to increase their chances of profit which can unfortunately result in loss as well.
Margin is calculated by multiplying the size of the trade by the margin percentage. When you subtract the margin used for all trades from the remaining equity in your account yields the amount of margin that you have left.
Percentage in point abbreviated as PIP is the unit of change in value between two currencies . For example, if EUR/USD moves from 1.105 to 1.1052, that .0052 rise in dollar value Calle one PIP.
Currency pairs are usually quoted in four(4) decimal places.
Traders are said to be bullish when they believe in possible price rise .
Bearish is the direct opposite of bullish. This entails a perceived fall in price of a particular currency.
In forex trading, there is usually a specified amount that can be bought or sold– This is what we refer to as a lot. It is the amount of currency you can buy or sell.
For a standard lot size, it amounts to 100,000 units of currency.
Any company or financial institution that creates access for buying and selling of foreign currencies is referred to as forex broker.