As you enter the Forex trading world you might be introduced to a number of different terms. You may not know what they mean, and you might need further explanation.
Understanding Forex trading jargon is vital to your success as a trader. Therefore, some of the most commonly used terms are defined below:
Bid-This is what the buyer of a currency would be willing to pay for a foreign currency. This amount is usually based on current market trends. This is the price that the seller is usually expecting to pay in order to purchase currency they later can sell for a profit.
Ask-This amount is what the seller is expecting to make when selling a particular foreign currency. Just like the bid it is based on current market price. It may not be exactly what a seller will get but it is the goal of the seller to make a profit and sell for at least the current market price.
Spread-The simplest way to define this term is this: It is the difference between ask and the bid price. This is the key to profit (or unfortunately sometimes to loss).
PIP-The smallest price of a currency is referred to as this. Calculations based on this unit is what helps figure out exchange rates more accurately.
Base currency-The currency that you start with is called by this term. It would be compared to another (base currency to determine exchange rate, as well as profit or loss.
Secondary currency-This term is used to describe the current that is exchanged with the base currency. For instance, if you originally traded in the British pound and want to switch to the American dollar the American dollar would become the secondary currency.
Margin-When referring to working with a broker this term is usually used. It is the amount that you would be expected to deposit in a new financial account opened. It is also the commission that would be paid to a broker every time a trade is made.
Leverage-This term describes the weight of a margin. Forex trading deposit accounts are usually set up in this way so that large amounts of security deposits are managed with as little capital as possible.
Margin call-This is a phrase that is used to describe a time when a trader’s deposit does not even cover the transaction made. It is in some ways like having taken out a business loan and not making a profit. Worse yet, it could be a significant loss.
Currency pair-This is simply the two different mediums of financial media being exchanged. It is made up of the base currency and the secondary or “quote” currency. A trading duo such as this can also be thought of as a single unit being bought/sold.
Volatility-This is the measure of the amount of risk involved in making a specific Forex trading transaction. This is an evaluation tool that helps determine whether making a certain type of investment is potentially profitable or not.
Clearing price-The value of a currency pair is described by using this phrase. It is the specific monetary value assigned to a security or asset and it is determined by current bid and ask price.