Basic Terms in Forex - Basics Concepts
Learning to trade the currency market is much easier for beginner traders when beginners start by learning the basic terms in forex. This way the other forex concepts become much easier to learn because the new forex trader will have already learnt about the basic terms in forex before proceeding to the other forex concepts.
The basic terms in forex that forex traders should learn first before starting Forex trading are:
What is FX? - Basic Terms in Forex Trading
FX is the simultaneous buying & selling of one currency for another. Traders buy & sell currencies for speculation purpose & for the purpose of trying to make a profit. Traders will buy a currency that they think will appreciate in value and sell the currency that they think will depreciate in value.
In Forex, forex traders buy currencies when the currencies become undervalued & sell currencies when currencies become overvalued. This is the basic concept of trading forex, as a beginner if you want to become successful when trading currencies you must learn to buy undervalued currencies and sell overvalued currencies. Many traders miss this concept & do the exact opposite buying overvalued currencies because that's when these currencies seem to be moving up and up & they sell undervalued currencies because these currencies seem as if they'll continue to move lower.
Just like in stocks market successful trader buy stocks when the stocks price is low & sell stocks when the stocks price is high. This is the same concept which traders should follow when trading currencies.
What is a Currency Pair? - Basic Terms in FX Trading
Forex trading is the simultaneous exchange of one currency for another, for this reason currencies are traded in pairs known as forex pairs. For example EURUSD is the currency pair which traders wanting to exchange EUROs for US Dollars trade. In this forex pair the EURO is being traded against the US Dollar.
What is a Currency Quote? - Basic Terms in FX Trading
Because forex currencies are traded in pairs, the price at which these currencies are exchange is determined by fx quote. For example if EURUSD forex quote is 1.2500 it represents how much one EURO is worth in terms of USA Dollars. 1.2500 currencies quote means that 1 Euro is equivalent to 1.2500 US dollars.
Currency quotes in FX are quoted in the format of four decimal places.
What is a Pip?
Currency quote are quoted in the format of four decimal points. The last decimal place represents a Pip which is the smallest movement used to calculate profit & loss in currency market moves.
Pip means Price Interest Point: it is a one point move in the fx quote. For example if EURUSD forex pair is quoted as 1.2500, then 1 pip move will mean that the exchange rate will move up by one point to 1.2501 or down by one point to 1.2499.
If the EURUSD fx quote moves from 1.2500 to 1.2600, this would be a 100 pip movement in the forex quote and this pip movement would be used to calculate the profit a trader would make if they had opened a trade at 1.2500 and closed it at 1.2600.
What is a Lot? - Basic Terms in FX Trading
In currencies are traded in units known as lots. The standard lot is made up of 100,000 units of currency. There is also the Mini lot which is made up of 10,000 units of currency & the Micro lot which is made up of 1,000 units of currency.
For 1standard lot the profit is $10 per pip, for mini lot the profit is $1 per pip & for micro lot the profit is $0.10 per pip. Therefore, in the above example where the forex pair moved upward by 50 pips if a trader was trading using one standard lot then their profit would be $10 multiplied by 50 pips which is $500.
What is Leverage? - Basic Terms in FX Trading
Because not many traders can afford to trade 100,000 units of currency or 10,000 units of currency, there leverage in Forex which means that traders can borrow money and use the borrowed money to make trade transactions with. For example leverage of 100:1 means that a trader with capital of $10,000 can borrow up to 100 times using the 100:1 leverage option and therefore after borrowing using this leverage the investor will control a total of $10,000 dollars multiplied by 100, which means the trader will have a total of $1,000,000 & can hence trade ten standard lots of $100,000 units of currency. This leverage is what makes Forex accessible to retail traders because retail traders can start with little capital of their own and use leverage to borrow the rest of the money required for fx trading. The money that the trader deposits is referred to as the trader's margin and a trader can continue borrowing money using this leverage option as long as they have the required margin in their trading account. This is why traders must have the required account balance in their trading account to open the trades they want to, for example a trader using leverage 100:1 must have more than $1,000 dollars in their trading account to be able to open and trade using standard lots.
What is Margin? - Basic Terms in Forex Trading
Forex Margin is the specific amount of money that a trader is required to put aside in order to continue holding an open leveraged trade. Margin also can be explained as the deposit a trader is required to keep so as to maintain his open positions. This margin is a percentage of account equity that has to be set aside and allocated as a margin deposit for the open positions that are held by a currency trader.
