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Understanding Forex Jargons
One
of the major frustrations of Forex traders is the awful lots of
jargons.
Googling those terms does not seem to help either because the
explanations are
more often than not, contain other jargons. This article explains five
common
technical terms used in Forex trading in layman language.
Quote:
Forex trading is always done in
pairs and thus a currency is always quoted relative to another
currency, e.g.
USD/JPY, EUR/USD, AUD/GBP. A quote would look like this: USD/JPY =
100.00. The
currency on the left
(in this case, US dollar) is known as the “base currency”
and always equal to 1 unit, whereas the currency on the right (in
this case,
Japanese Yen) is called the quote
or counter currency. A quote is how much
worth one unit of the base currency, hence this particular quote means
that USD
1 can purchase 100.00 Japanses Yen.
Pip:
stands for “percentage in point”
which is the smallest increment of trade in Forex. Prices in Forex
market are
always quoted to the
fourth decimal place, except Japanese Yen;
e.g. when
EUR/USD rises from 1.5200 to 1.5201, it rises by 1 pip. For Japanese
Yen, 1 pip
is equivalent to 0.01 (two decimal places). Most currency pairs trade
between
100 – 150 pips daily.
Bid / Ask:
In Forex, to bid
means “to buy”
whereas
“to ask”
means “to sell”.
The quote on the left is the bid (buy) price while
the quote on the right is the ask (sell) price, and bidding price is
always
lower than the asking price. The base currency would be the one in
which the
transaction would be conducted.
Let’s
look at the example, EUR/USD 1.2600/02.
To sell this currency pair means to sell the base currency, i.e. the
EURO. The
market would buy your 1 EURO base currency with 1.2600 USD. On the
contrary, to
buy 1 EURO, you need 1.2602
Spread:
is the difference between the ask
price and the bid price. Using the same example as above, the spread
was 2
pips, which you automatically pay to your broker at every trade.
Margin:
The minimum amount of money
required to place a trade with a broker. You can trade as long as your
account
has this minimum amount, otherwise your accounts would be closed down.
Understanding
the terminologies would definitely boost your confidence in trading and
discuss
your trade with other traders without sounding like a total novice!
Understanding Forex Jargons
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