Basic Terms In Foreign Exchange
If you like to trade in the foreign exchange market, first of all you need to get familiar with the basic terms in foreign exchange. When you understand foreign exchange terminology you can increase your success in the market as well as your personal understanding of how foreign exchange market operates.
Here are some of the important basic terms in online foreign exchange that every trader should get familiar:
Major and minor currenciesThere are eight major currencies which are frequently traded in the foreign exchange market. These major currencies are US Dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), New Zealand Dollar (NZD) and Australian Dollar (AUD). All other currencies are referred to as minor currencies. These currencies are used more by professionals and advanced forex traders.
Base currencyThe other basic term in foreign exchange that you need to know is the base currency. Base currency in foreign exchange referred to as the first currency in any currency pair. It shows how much the base currency is worth as measured against the second currency.
Quote currencyOne of the other terms in foreign exchange online is the quote currency. The second currency in any currency pair is referred to as quote currency in foreign exchange market. This is the value of a medium of exchange as compared to the base currency.
PipAnother basic foreign exchange term includes pip. Pip in foreign exchange market refers to the smallest unit price of any currency. It helps provide as accurate of an exchange rate as possible.
Bid priceBid price in foreign exchange market refers to the price at which the market is prepared to buy a specific currency pair. This is the price at which the trader can sell, and is what the buyer is usually prepared to pay.
Ask PriceAsk price in foreign exchange market refers to the price at which at which a seller plans to or expects to sell a specific number of monetary units. In simple words, it is the price at which the trader can purchase the base currency.
SpreadThe difference between the bid and ask price in the foreign exchange market is termed as spread. Yet this is one of the other basic terms in foreign exchange online that you need to understand.
MarginMargin basically refers to the initial amount you need to deposit when you open a new account with a broker. However, the initial deposit differs from broker to broker. It can as low as $100 to as high as $100,000.
LeverageLeverage is one of the other basic terms in online foreign exchange that that you need to know. Basically leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). The purpose is to control large security deposits with little capital. Leverage varies from broker to broker; it can range from 2:1 to 400:1.
Margin callWhen 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.
Margin CallMargin call in foreign exchange market usually occurs when your broker alert you that your margin deposits went down below the required minimum level because an open position has moved against you. When trading on margin can be a profitable investment strategy, it is important that you take the time to understand the risks.
Make sure you know the above basic terms in foreign exchange market before you start trading.