Basic Forex Terms you Need to Know

Forex is short for “foreign exchange.” This is how you identify currency trading, which is done in a similar fashion as other types of stocks or futures trading.

As you embark on your forex adventure, you should know a few basic terms:

Base currency-This is the form of money that you start with that would be compared to another, which would be called the secondary currency.

Secondary currency (a.k.a. quote currency)-This is the value of a medium of exchange as compared to the base currency. For instance, perhaps you own USD and want to trade for the Yen (Japanese dollar). The base value would be the USD and the secondary value would be the Yen, for which you want to know the value as compared to the USD.

PIP-This is the smallest unit price of any currency. It helps provide as accurate of an exchange rate as possible.

Bid-This is what a market is willing to or expected to pay as they exchange one country’s unit of money for another. This is the price at which the trader can sell, and is what the buyer is usually prepared to pay.

Ask Price-This is the price at which a seller plans to or expects to sell a specific number of monetary units. Again, this is what the buyer usually is willing or expecting to pay upon investment.

Spread-This is the difference between the bid and ask price. This determines profit or loss.

Cross Currency-In this instance neither monetary unit being traded is the USD. For instance, the EUR/GBP (euro and British Pound) would be a cross currency pair.

Margin-This is the amount you are expected to deposit when you open a new account with a broker. This amount will vary and will be allocated to the broker by a % of commission every time you trade.

Leverage-This is the weight of the margin value-wise. It is the security deposit (margin) ratio to amount of capital. The purpose is to control large security deposits with little capital.

Margin Call-When this happens, it is regarded as a trader’s worst nightmare. This an instance when your margin deposit does not even cover the transaction you have made. It could be likened to a business loss in some ways.

If you do not understand these terms right now, do not worry. Eventually you will be a pro at forex trading. This is your time to learn all you can about this type of trading. In the mean time, you can also practice before making real time investments.