Bring your knowledge up to date with Forex
Learn the basic terms you need to understand in Forex, this shall be your language as you trade, and become an outstanding member of the Forex community.
What is Forex Trading?
Forex Exchange market is a global decentralized market place for the trading of currencies. If you have ever purchased a currency other than your countries native currency, chances are you have participated in the Forex Exchange market passively.
However, Forex Trading is the act of buying and selling currencies (CFD’s) electronically, in the hopes of gaining when its value rises or falls.
In Forex all the trading instruments are paired. That makes sense, you need one currency in order to buy another.
The currency that comes first is called the base currency. Thus if you have AUD USD, standing for Australian dollar United States dollar, the Australian dollar becomes your base pair, while the second currency is called the quote currency.
The Bid Price | The Ask Price
The Bid price is the price at which your broker executes your buy trades, and as you might have guessed, the Ask price is the price at which your Sell trades would execute.
The difference between the Bid and Ask Price is the Spread. The bigger the spread the more expensive your trading fees. The most commonly trading pairs often have lower spreads, and as a beginner, it might be wise to stick to currencies with lower spreads.
A pip is an acronym for Point in Percentage, is the name used to indicate the fourth decimal place in a currency pair, or the second decimal place when JPY is in the pair.
Value of a Pip
The value of a pip differs from currency to currency pair. 50 pips of USD CAD, isn’t the same as 50 pips of GBP USD.
For each pair where the USD is listed second, purchasing a 1000 unit gives you a pip value of $0.10. Thus if you made 50 pips, that means you made 50 X 0.10 = $5
If you bought 10,000 units, the pip value would be $1 per pip, your 50 pips profits would be equal to $50 profits.
In essence, the value of a pip depends on two things, the currency you are buying, and the quantity you are buying.
The quantity you are buying is called the lot size.
Lot size refers to the quantity of a currency purchased. The standard Lot size is equivalent to 100,000 units of the base currency.
If you purchased 1 lot size of GBPUSD, you are actually buying 100,000 worth of GBP.
When a trader take’s a long position in the Forex market, he has in reality bought the base currency, in the hopes that it would rise against the quote currency for him to profit.
When a trader is said to have shorted a currency pair, he is actually selling the base pair, in the hopes that the base pair would drop in value against the quoted-pair.
Long and Short are opposite positions in the Forex market.
Broker’s give you leverage and you select this option while creating your account, it can also be changed later on.
When you deposit $1000 in your brokerage account, this means you can essentially only buy $1000 or 0.1 lot size of a currency pair in which USD is the base currency.
To solve this problem, your broker offers you a temporal loan called leverage, thus if you choose leverage of 1:10 for example, your $1000 deposit would now give you the purchasing power of $10,000, 10x more!
Leverage gives you the power to do more, but with power comes responsibilities, leverage is a double-edged sword that can go terribly against the new trader, use it with caution.