It is a must that we get familiarize with terms that are often used in the Forex trading. Without knowing what they mean, we actually get lost in this major money making method. So here are few important key forex terms which I think every forex trader must be aware of.
PIP
The increment in the currency value is called a PIP. If EUR/USD move from 1.8889 to 1.8890 it is one pip. The Pip is how you measure your profit or loss. It is calculated in different way for a currency pair with USD as its base currency and for a pair in which USD is not the base currency.Do not worry, we need not calculate this pip value, the brokers will do it for us automatically.
LOT
An important term. The standard lot size is $100,000 and the size of a mini lot is $10,000. We always buy and sell in lots. For example if you buy 1 lot of USD/CHF at 1.5000, it means,USD/CHF at an exchange rate of 1.4555The broker will calculate this for us.
(.0001 / 1.5000) x $100,000 = $6.6 per pip
here, 0.0001 is the minimum change in currency value i.e. the PIP
1.5000 is t he exchange rate and
100,000 is the lot we buy or sell.
LEVERAGE
It is possible to trade large money in forex with very little amount. This is made possible by what is called leverage. For example, you start an account with a broker for $1000 and the broker is offering a 100:1 leverage meaning you can trade 100 times your money i.e. with $1000 you can trade 1 lot of $100,000 of Forex money.As luring as it might seem. It has high risks involved too. The more the leverage the more the profit but do not forget that it is also more the loss.
BID PRICE
Bid price is the price at which the market is ready to buy the currency pair. This is the price for which you can sell your base currency. For example,if GBP/USD 1.7500/05, the bid price is 1.7500. This means you sell one British pound for 1.7500 U.S. dollars.ASK PRICE
Ask price is the price at which the market is ready to sell the currency pair. This is the price for which you can buy your base currency. For example,if GBP/USD 1.7500/05, the ask price is 1.7505. This means you buy one British pound for 1.7505 U.S. dollars.SPREAD
Spread is the difference between Bid and Ask price. This is mostly where the broker gets his money. For example if EUR/USD is 1.5800/05, then the spread is 5 pips.CROSS CURRENCY
The currency pairs in which neither the base nor the quote currency is USD. For example, EUR/GBP. Buying EUR/GBP riggers two trades involving USD. i.e. it is equivalent to buying EUR/USD and selling a GBP/USD. These involve high transaction cost and has higher risks involved.MARGIN CALL
Margin call is given by your brokers. The broker notifies you that your margin deposits have fallen below the required minimum level. This is when we will not have opportunity to trade further unless we deposit further.This is all I can think right now. If you want to know more about any listed term or anyother term please let me know.
