Forex Key Words To Know
In the world of finance and Forex there are some key terms you need to understand before you venture off in your investment journey. Knowing these terms at the start can give you an edge over new traders looking to trade the markets. Some of them you may already know but it's always good to refresh your memory.
1. Major and Minor Currencies
Below is the list of major currencies which are the most liquid and traded the most in the Forex market.
Currencies that are not included in this list are minor currencies, but that does not mean they are non-influential. You can still profit from minor currencies following thorough analysis.
2. Cross Currency
Cross currencies are pairs which neither currency is the U.S. dollar (USD). The behaviour on these pairs are slightly different because what has actually happened is the trader has initiated two USD trades without trading a USD pair.
For example, if you wanted to buy EUR/GBP, what happens is you are buying EUR/USD and selling GBP/USD. This generally means your transactions costs will be higher.
3. Transaction Cost
The transaction costs of a trade normally consist of the spread and or commission depending on the broker you use.
The formula for calculating spread is:
Spread = Ask price - bid price
The cost of commission varies from broker to broker so make sure to look into how much they charge.
When you start trading you must deposit an initial amount of cash this amount depends from broker to broker. If the balance of your margin falls below the minimum maintenance amount the broker will make a margin call and ask you to deposit more funds. If you are within the EU new ESMA laws now require brokers to offer negative balance protection, so you can only lose however much you deposit.
The leverage comes from the ratio of the amount of capital used in a transaction to the required security deposit (margin). This lets you control larger amounts of a security with a relatively small amount of cash. Leveraging does vary from broker to broker but new regulations are also limiting the amount retail traders can leverage in CFDs and Options. ESMA law now only allows 50:1 leverage for regular clients.
You may come across pips a lot when you're starting your Forex journey. Maybe notoriously from the false strategies and scams you come across online. E.g. "100 pips a day!".
The pip is the smallest unit of price for any currency. A quick tip is that generally a pip is the 4th decimal place digit excluding the Japanese yen pairs, e.g. if the exchange rate moved from 1.5001 to 1.5002 it would be a 1 pip move.
JPY pairs are slightly different because the pips are the 2nd decimal place. So a move from the exchange rate of 1.01 to 1.02 would be a 1 pip move.
A pipette is one-tenth of a pip, generally brokers will use this as a decimal of a pip to ad precision to quoting rates. On cTrader platforms when you measure how many pips a pair has moved it will first show the pip then the pipette in the first decimal place.
8. Base Currency
The base currency is the first currency in a currency pair.
For example: EUR/USD
Base currency = EUR
9. Quote Currency
The quote currency is the 2nd currency in a currency pair.
For example: EUR/JPY
Base currency = JPY
10. Quote convention
When dealing with Forex market quotes the exchange rates generally follow a standard format.
Base currency/ quote currency = Bid/Ask
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