Forex Trading Vocabulary

It is crucial for you to understand the terms and jargons that are common in the forex industry. Before I go any deeper into explaining how to trade the Forex market, I will show you the most important terminology that is used every day by traders – you need to familiarized them in order to fully understand the articles that I wrote in this “mini-course”

  • bull and bearBulls & Bears – I bet that you’ve heard these two worlds “bulls” and “bears” in the context of financial markets, “bulls drive price higher” or “bears control the market”. These are metaphoric terms that illustrate who are in control of the market.

Bulls are those players who believe that market is going higher in the future. We use a bull to describe the rising of prices because when a bull attack its opponent, the bulls its horns to flick them up in the air.

Bears are those players who believe that market is going lower in the future. Again the same goes here, when bears are about to attack they use their powerful arms to know down their opponents.

  • Exchange Rate – This is basically the value of one currency expressed in terms by another. Forex, if GBP/USD is 1.6000, then 1 British Pound is worth US $1.6000.
  • Pip – The smallest change of price movement a currency can make, you can see some time to be called like point or points. For example, 1 pip for the GBP/USD = 0.0001 and 1 pip for the GBP/JPY = 0.01.
  • Pip Worth – Pip worth or value will vary based on currency pair, not only the pair but market price fluctuation will change the pip value. So how to calculate the pip value? It is pretty straight forward but I will explain it using a simple example with USD/CAD. Let’s assume that the currency pair is trading at 1.0800. In order to find the value of a single pip we first need to take the value change in the counter currency (CAD) and multiple it by the exchange rate ratio.

Value change in counter currency (.0001 CAD) x the exchange rate ratio (1 USD / 1.0800 CAD) Or simply [(.0001 CAD / (1.0800 CAD)] x 1 USD = 0.00009259 USD per unit tradedleverage myforexuniverse

  • Leverage – Leverage is the ability to open a trade that has greater volume than your total account. For example, if a trader has $10,000 of margin in his account and he opens a $1000,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. You have to have in mind that leverage can boost you profits and can also bankrupt your account.

You can calculate leverage with an ease, just divide total value of your position by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000).

  • Margin – In order to open a trade you need to deposit certain amount, this deposit is called margin. The deposit required to open or maintain a position. Margin can be either “free” or “used”. With a $2,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $200,000. Yes you get it the margin is the opposite site of leverage.

If a trader’s account starts to decrease and falls below certain level and he/she still have an open position broker will send a “margin call”. Margin call is the requirement for the trader and he/she need to add more money into his or her trading account or to close open positions. Brokers have the right to close all position if account balance fall under certain level(if trader doesn’t add money when he/she receives margin call), by doing so broker is protecting the trader – the trader doesn’t want to have negative balance and to pay it. Every broker has different margin call requirements you can lose half of your trading account in open positions and still not receiving a margin call.

  • Spread – Before you close a trade you see a difference between buy and sell price, difference between the sell quote and the buy quote or the bid and offer price. For example, if GBP/USD quotes read 1.6000/02, the spread is the difference between 1.6000 and 1.6002, or 2 pips. To hit the breakeven of your trade, price needs to move 2 pips in your direction just to compensate the spread.

You need to understand how quotes occur in the market how to properly read them. So, let’s get started with this:

The exchange rate of two currencies is quoted in a pair, such as the GBP/USD or the GBP/JPY. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another. If you were to buy the GBPUSD you will make profit if British pound strengthened against the dollar, you would then be in a profitable trade.

Here’s an example of a Forex quote for the euro vs. the U.S. dollar:

base quote pair

The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash market is called the counter or quote currency.

If you want to buy a EURUSD or whatever currency pair, the exchange rate shows you the terms of quote in order to buy one unit of base currency. The first pair is left to the currency slash mark and it is called base currency and the second currency next to it is called counter pair. In other words, if you want to buy GBP/USD on rate of 1.6000 you have to pay 1.6000 U.S. dollars to buy 1 British Pound. If you sell the EUR/USD (or any other currency pair), the exchange rate tells you how much of the quote currency you receive for selling one unit of the base currency. In other words, in the example above, you will receive 1.32105 U.S. dollars if you sell 1 euro.

The game plan is easy – if you consider that the base currency is going to appreciate relative to the counter currency in future you will buy it. If you think the base currency will depreciate relative to the quote currency you would sell the pair.

What is the bid ask price?

bid ask spreadBid to Ask price is pretty much the same as the spread but looked from different point of view.

Bid price – The bid is the price of currency pair at which the market or your broker is willing to buy from you. In order to sell the base currency your broker or market has to buy it from you.

Ask price – It is the opposite of the bid price, the ask price is the price of currency pair at which your market is willing to sell to you. In order to buy the base currency your broker or market has to buy it from you.

You need to have in mind that every broker will has its own Bid to Ask Spread and the spread will varies between brokers.

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