Understanding The Lingo In Currency Trading

Forex is a multi-national world encompassing many cultures and languages. Every trader should know the basic lingo in currency trading so as to trade with complete ease. It will be difficult for traders to earn money in forex unless they are well equipped with the currency trading language.

Let’s find out some of the terms used in the language in forex trading:

Major and minor currencies in forex trading

The eight major currencies that are the most frequently traded in forex market are EUR, USD, JPY, CHF, GBP, NZD, AUD and CAD. Other currencies which are mention here are simply called the minor currencies. EUR, USD, GBP, CHF and JPY are known as the ‘Fab Five’ and these currencies are the most liquid of all.

Base currency

The first currency in any currency pair is referred as base currency. This base currency will determine how much it is worth as amounted against the second currency.

Quote currency

The second currency in any currency pair is called quote currency. It is also known as the pip currency and any unrealized profit or loss is expressed in this currency.

Pip

The smallest unit of price for any currency is referred as pip in forex trading. It is also sometimes referred to as a 'point'. Almost all the currency pairs consists five significant digits and almost all pairs have decimal point right after the first digit.

Bid price

The bid price is the buying price of one currency in the pair currency in the market. At this price you can sell the base currency and it is shown on the left side of the quotation.

Ask price

The selling price is called as the ask price and it is also sometimes referred to as offer price. At this price, the trader can buy the base currency and it is shown on the right side of the quotation.

Spread

The difference between the bid and ask price is referred as spread in currency trading. The spread is also how banks and brokers earn money. Wider spreads mean a higher ask price and a lower bid price.

Margin

Margin is the minimum amount of money needed to put up to place a trade with a broker. The minimum amount varies from broker to broker and can be as low as $100 to as high as $100,000.

Margin Call

It is the condition set by the broker to make more funds available in a bid to maintain an open position. This occurs when insufficient funds are detected in the account.

Leverage

The ratio of the amount capital used in a transaction to the required security deposit i.e. margin is termed as leverage in forex trading. It has the ability to control large amounts of a security with a relatively small amount of capital and it varies accordingly with different brokers, ranging from 2:1 to 400:1. Understanding the currency trading language is very necessary for every trader to make their desire profit from their forex investments. Going through the above terms and lingo in forex trading will help you to get more familiar with forex.