Getting Accustomed to the "Foreign" in Forex Trading

Below are some of the basic terms used in Forex trading that you will come across in your journey towards being a live trader.

Lets start with what you will encounter and need to know from the beginning of your journey and make more sense out of the terminologies instead of doing it alphabetically.

Currency symbols
USD - US Dollar
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
CHF - Swiss Franc
JPY - Japanese Yen
* Note - These are all Major Currencies, all other currencies not listed above are considered minor.

Currency Pair
Since in Forex Trading you are essentially buying one currency and selling another simultaneously any and every transaction involves 2 currencies.
And a Currency Pair refers to the two currencies that make up a foreign exchange price rate. For example USD/JPY, GBP/JPY, EUR/USD etc

Major Currency Pair
A pair involving major currencies that include the U.S. dollar eg. EUR/USD, USD/CHF, GBP/USD, USD/JPY etc.

Cross Currency Pair
A pair involving major currencies that does not include the U.S. dollar eg. EUR/JPY, GBP/CHF, GBP/JPY etc.

Base Currency
This refers to the first listed currency in a Currency Pair. The Base Currency is always quoted as 1 unit against the second currency.

Counter Currency
This refers to the second listed Currency in a Currency Pair. The Counter Currency is quoted at the price Rate in terms of 1 unit of the first listed currency or the Base Currency.

Rate
This shows the price of one currency in exchange for another. For instance, EUR/USD at 1.3535 shows that 1 Euro is now worth 1.3535 in terms of US Dollar and that is the Rate at which a transaction for this Currency Pair can be effected in Forex Trading.

Ask (Offer) Price
The Ask Price is the price at which the market is willing to sell a specific currency in exchange for another during a particular time fraction in a Forex transaction. Hence, you as a trader can BUY the Base Currency in exchange for the Counter Currency to enter trade at the price quoted.

Bid Price
The Bid Price is the price at which the market is willing to buy a specific currency in exchange for another during a particular time fraction in a Forex transaction. Hence, you as a trader can SELL the Base Currency in exchange for the Counter Currency to enter trade at the price quoted.

Spread
This refers to the difference between the bid and ask prices. Also refered to as the Bid/Ask Spread, this is essentially what Forex dealers make from each and every transaction. As a trader this is also your cost of trading as you enter into each transaction and a lower Spread will mean a potential profit that is that much higher.

Pip
A Pip or a Percentage In Point is the smallest unit of price movement for any currency pair. Price movements are calculated from the fourth decimal place onwards i.e. 0.0001 to determine the profits/gains or loss made. Hence all profits/gains and losses are made in number of Pips.

BUY or Long position
A position where gains will be made when market prices increase and losses suffered when market prices fall. The position is said to be Long when you BUY the Base Currency in the pair to enter trade.

SELL or Short Position
A position where gains will be made when market prices fall and losses suffered when market prices rise. the position is said to be Short when you SELL the Base Currency in the pair to enter trade.

Open Position
An active trade (either BUY or SELL to enter trade) which remains open where it has not been offset by a corresponding opposite deal (SELL and BUY to exit trade).

Closed Position
A trade position (either BUY or SELL to enter trade) that is closed where it has been offset by a corresponding and opposite deal (SELL and BUY to exit trade) that is equal in volume.

Lot
A unit to measure the amount of the deal. A Standard Lot typically means you're transacting 100,000 units of a Currency Pair. A Mini Lot means 10,000 units while a Micro Lot equals 1,000 units.

Leverage
The ratio of the amount used in a transaction to the required security deposit. If the ratio is 400:1 it means you only need $1000 to enter a trade of worth up to $400,000 in value. The higher the ratio, the higher your leverage but also the risk!

Profit or Gain
Profits or Gains made through trading activities (BUY or SELL) which positions have been Closed following favourable Long or Short positions.

Loss
Losses suffered through trading activities (BUY or SELL) which positions have been Closed following unfavourable Long or Short positions.

Get friendly, even intimate, with above terms and you will surely find them handy in beginning your life as a Forex Trader! Good Luck!

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