some terminology that will be used in any course or software on this
subject. The following set of terms were put together with the idea of
providing the novice forex trader with the fundamental concepts of the
forex trading business. While they sound technical, most are easy to
understand and apply.
Let us begin with the instruments that are traded in the forex
markets. Currencies are traded in pairs so the instrument will always
be in this double denomination. The reason for this is simple; the
basis of forex currency trading is to exchange one currency for
another. So if the pair is the Euro and the US Dollar, and the forex
trader is taking a long position or buying the Euro in hopes that it
will appreciate, effectively the trader is also selling US Dollars to
buy the Euros. The most widely traded pairs are the Great Britain
Pound and the US Dollar (indicated as GBP/USD), the Euro and the US
Dollar (the EUR/USD pair), the Aussie Dollar and the US Dollar (AUD/
USD pair), the USD and the Japanese Yen (USD/JPY pair), and the
Canadian Dollar and the USD (USD/CAD pair). These pairs account for
well over 80% of the total volume of the trading in the forex market.
The advantage to trading in these currency pairs is that they are
highly liquid and allow the investor to convert their portfolio to
cash very quickly to realize a profit.
In every pair, the first currency is called the base currency, over
which the second one is countered to imply the price of the pair. The
second is therefore called the quote currency and the pair price is
recorded in terms of the units of the quote currency required to buy
one unit of the base currency. Thus, assuming the price of the GBP/USD
pair is 1.5, this implies that 1.5 USD will buy 1 GBP.
Every pair is quoted in terms of a bid ask spread. The bid price means
that this is the rate at which your forex broker bids to buy the
currency at, while the ask price is the rate which the forex broker is
asking to sell the currency to the forex trader. The bid price will
always be lower than the ask price and the forex trader will buy at
the ask price and sell at the bid price. The bid ask price will be
quoted as: GBP/USD 1.532/5, meaning the bid price is 1.532 and the ask
price is 1.535.
A price interest point or a pip, as it is commonly called, is the
smallest incremental change a currency pair will experience, for
instance, a change in the GBP/USD price from 1.532 to 1.542 is a
change of 10 pips. A trading margin is a deposit which is a minimum
amount or a small percentage of your traded amount that you have to
put up. The remaining amount is supplied by your broker. This amount
can vary from 1% to 0.25%, also referred to as 100:1 and 400:1. Most
often, forex brokers will offer 100:1 or 200:1 to most clients. This
is risky but enables the trader to leverage a large amount that he or
she would not otherwise have access to.
Finally, a margin call can happen when the forex trader allows the
balance in the trading account to go below the margin deposit
percentage agreed upon with the forex broker. The broker will
automatically sell your long positions or buy your short positions and
clear the entire trading account, returning the margin amount to the
trader to protect the trader from losing more money than they have.
Professional Forex Trader, Mentor and Coach, Guide You To Forex
Success - http://lmtmentor.key.to/
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