Beginner’s Guide to Online Forex Trading – Chapter 16: Terms used in Forex Trading – what do they mean?


Beginner’s Guide to Online Forex Trading – Chapter 16: Terms used in Forex Trading – what do they mean?

A number of terms are used in Forex trading and it would be advisable for you to understand them clearly.
Major and Minor Currencies:

The US Dollars (USD), Euro (EUR), Japanese Yen (JPY), British Pounds (GBP), Swiss Francs (CHF), Canadian Dollars (CAD), New Zealand Dollars (NZD) and Australian Dollars (AUD) are the eight most frequently traded currencies, which are called the Major Currencies. The rest of them are all Minor Currencies.

Base Currency:

Forex trading is always between a pair of currencies. The first currency in the pair is the base currency, and its value is indicated in relation to the second currency.

Quote Currency
:

The second currency is called the quote currency, also often known as the pip currency. Notional (unrealized) profit or loss is always indicated in the pip currency.

Pip:

Pip in the pip currency means the least value units of a currency. Almost all the currency pairs are expressed in five digits; the first digit is followed by decimal point and then four integers. For example, the EUR/USD pair is expressed as 1.2538.

Bid Price:

In a currency pair, the bid price is the price at which a buyer is willing to buy the first currency (base currency) in relation to the second (quote) currency.

For example, a quote for currency pair GBP/USD 1.8812/15 means that a trader can sell one GBP (base currency) for 1.8812 US Dollars.

Ask Price:

Ask price is the opposite of the bid price, which is also known as the offer price. Here the seller is willing to sell the first currency (base currency) at a particular price in relation to the second (quote) currency.

For example, a quote for currency pair EUR/USD 1.2812/15 means, a trader can buy 1 euro for 1.2815 US dollars.



Bid/Ask Spread:

The difference between the ‘bid’ and ‘ask’ price is the bid/ask spread. Another term in Forex trading is the big figure quote. The first three digits of a currency pair are treated as understood and only the last two digits are expressed. To illustrate, a quote of USD/JPY at 118.30/118.34 will be expressed only as .34 because the first three digits (118) are the big figure (and understood).

Quote Conversion:

In the Forex market, the accepted norm for expressing exchange rates is – Base Currency/Quote Currency Bid/Ask.

Cross Currency:

In the earlier stages, one of the currencies in a pair had to be the US Dollars. If someone wanted to trade sterling for Swiss francs, he had to first turn the sterling into dollars and then the dollars into francs. However, later it became essential to allow direct trades between currency pair without US Dollar being one of the two. A currency pair that does not include US Dollars is called a cross currency. It is noteworthy that cross currency pair manifests erratic price behavior because the trader has two sets of simultaneous trades going, e.g. a buy (long) trade of EUR/GBP means buying EUR/USD and selling GBP/USD simultaneously. Such a transaction obviously involves a higher transaction cost.

Forex Technical Analysis
:

Just as technical analysis prevalent in the shares market, for Forex trading also technical analysis is widely used. Forex technical analysis involve price movement predictions on future market trends based on past trading charts, which consider the currency price, trading volume and open interests, if applicable, in the instrument.

Forex Fundamental Analysis:

For Forex fundamental analysis which aims at forecasting future price movements of a currency is based on economic, political environmental and any other relevant factors which are bound to affect the supply and demand for an underlying financial instrument.

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