The Forex market comes with its very own set of terms and jargon. So, before you go any deeper into learning how to trade the Fx market, it’s important you understand some of the basic Forex terminology that you will encounter on your trading journey…
• Basic Forex terms:
Cross rate -
The currency exchange rate between two
currencies, both of which are not the official currencies of the country
in which the exchange rate quote is given in. This phrase is also
sometimes used to refer to currency quotes which do not involve the U.S.
dollar, regardless of which country the quote is provided in.
For example, if an exchange rate between the British pound and the
Japanese yen was quoted in an American newspaper, this would be
considered a cross rate in this context, because neither the pound or
the yen is the standard currency of the U.S. However, if the exchange
rate between the pound and the U.S. dollar were quoted in that same
newspaper, it would not be considered a cross rate because the quote
involves the U.S. official currency.
Exchange Rate -
The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
The smallest increment of price movement a
currency can make. Also called point or points. For example, 1 pip for
the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.
Leverage is the ability to gear your
account into a position greater than your total account margin. For
instance, if a trader has $1,000 of margin in his account and he opens a
$100,000 position, he leverages his account
by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of
margin in his account, his leverage is 200 times, or 200:1. Increasing
your leverage magnifies both gains and losses.
To calculate the leverage used, divide the total value of your open
positions by the total margin balance in your account. For example, if
you have $10,000 of margin in your account and you open one standard lot
of USD/JPY (100,000 units of the base currency) for $100,000, your
leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard
lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage
ratio is 15:1 ($150,000 / $10,000).
The deposit required to open or maintain a
position. Margin can be either “free” or “used”. Used margin is that
amount which is being used to maintain an open position, whereas free
margin is the amount available to open new positions. With a $1,000
margin balance in your account and a 1% margin requirement to open a
position, you can buy or sell a position worth up to a notional
$100,000. This allows a trader to leverage his account by up to 100
times or a leverage ratio of 100:1.
If a trader’s account falls below the minimum amount required to
maintain an open position, he will receive a “margin call” requiring him
to either add more money into his or her account or to close the open
position. Most brokers will automatically close a trade when the margin
balance falls below the amount required to keep it open. The amount
required to maintain an open position is dependent on the broker and
could be 50% of the original margin required to open the trade.
The difference between the sell quote and
the buy quote or the bid and offer price. For example, if EUR/USD quotes
read 1.3200/03, the spread is the difference between 1.3200 and 1.3203,
or 3 pips. In order to break even on a trade, a position must move in
the direction of the trade by an amount equal to the spread.