Like learning a new skill, there's nothing wrong with learning forex vocabulary if you want to steal the attention of others or partners. As a beginner, understand certain terms before continuing your trading steps.
Major currencies and minor currencies
The eight most frequently traded currencies are USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD which are referred to as the major or “majors” currencies. 8 These currencies have higher liquidity.
Currencies other than those mentioned above are called minor currencies.
Base currency
The base currency is the first currency in any currency pair. A currency quote/quotation shows how much the base currency is measured against the second currency.
For example, if the USD/CHF rate is equal to 1.6350, then 1 USD is worth 1.6350 CHF.
In the forex market, the US dollar is usually considered the "base" currency for quotes, meaning quotes are expressed as units of 1 USD per other quoted currency in the pair.
The exceptions to this rule are the British pound, Euro, Australian and New Zealand dollars.
Quote Currency
Or so-called comparison currency is the second currency with any currency pair. Often called pip currency with unrealized gains or losses in this currency.
pip
A pip is the smallest unit of value for any currency.
Almost all currency pairs consist of five significant digits and most pairs have a decimal point after the first digit, i.e. EUR/USD is equal to 1.2538.
In this example, one pip equals the smallest change in the fourth decimal position - that is, 0.0001. Therefore, if any currency quote is paired with USD, then 1 pip always equals 1/100th of a cent.
The exception is the pair with the Japanese Yen where the pip is equal to 0.01.
pipette
That means one-tenth of a pip. Some brokers quote fractional pips or pipettes for added quote rate precision.
For example, if EUR/USD moves from 1.32156 to 1.32158, it will move 2 pipettes.
Bid Price
The bid price is the price at which the market is prepared to buy a certain currency pair in the forex market. At this price, the trader can sell the base currency shown to the left of the currency quote.
For example, in the GBP/USD rate of 1.8812/15, the bid price is 1.8812. This means you sell 1 British pound for 1.8812 US dollars.
Ask/Offer Price
Ask/offer is the price at which the market is prepared to sell a particular currency pair in the forex market. At this price, the Trader can buy the base currency shown to the right of the quote.
For example, in the EUR/USD rate of 1.2812/15, the ask price is 1.2815. This means you can buy one euro for 1.2815 US dollars.
Bid-Ask Spread
The spread is the difference in value between the bid and ask prices.
“Big figure quote” is a dealer expression that refers to the first few digits of the exchange rate. This digit is often omitted in dealer offers.
For example, the USD/JPY rate is 118.30/118.34, but will be quoted verbally without the first three digits as “30/34.”
In this example, USD/JPY has a 4-pip spread.
Quotation convention
Exchange rates expressed using the following format:
Base currency / Quote currency (comparison) = bid / ask
Transaction fee
The characteristic of the bid/ask spread is also the transaction fee for each round-turn.
Round-turn means a buy (or sell) and a sell (or buy) transaction that is offset by the same size in the same currency pair.
For example, in the case of the EUR/USD rate of 1.2812/15, the transaction fee is three pips.
The formula for calculating transaction costs is:
Transaction fee (spread) = Ask price - Bid price
Cross Currency
A cross currency or cross currency pair is any pair excluding the US dollar. The pair is showing erratic price behavior as the trader has started two trades with the USD.
For example, buying EUR/GBP is equivalent to buying the EUR/USD currency pair and selling GBP/USD. Cross currency pairs often charge higher transaction fees.
Margin
When opening a new account, the trader must deposit a minimum amount of collateral with the broker.
The minimum amount depends on the terms of each broker with possible values as low as $100 or as high as $100,000.
Every time you make a transaction, a certain percentage of the margin account balance will be set aside as the initial margin/guarantee requirement.
The amount is based on the price of the currency pair that is the reference for the current price and the number of lots traded. The lot size always refers to the base currency.
For example, let's say you open a mini account with 200:1 leverage or 0.5% margin. Mini accounts are traded with mini lots. Let's say one mini lot equals $10,000. If you open a mini lot instead you have to pay the full $10,000, otherwise you only need $50 ($10,000 x 0.5% = $50).
Leverage
Leverage or leverage is the ratio of the amount of capital used in the transaction to the required security deposit (margin).
It is the ability to control a large amount of funds with a relatively small amount of capital.
The size of the leverage varies from broker to broker, from 2:1 to 500:1.
If the term forex has become your attraction, it's time to show the people around you the types of traders.
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