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6 Basic Forex Terms and Definitions That Every Beginner Should Know

by James Musoba
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When it comes to trading, unfamiliar terms and a lack of knowledge may be the major obstacles to a trader’s success. With the expanding popularity of this market with millions of active FX traders around the world, the importance of certain forex definitions and common terminologies increases as well. As a novice trader, it might seem a bit overwhelming when you are introduced to certain advanced platforms and software. Continue reading for a list of common terms that every FX investor should be familiar with to improve their forex trading expertise.

Currency Pair

It denotes the exchange rate of one currency unit versus the other. The currency pair AUD/GBP, for instance, is made up of the Australian dollar and the British pound, where base currency will be the primary one, and the quote currency is the latter. In the FX market usually abbreviated versions for currencies are used such as USD, JPY, AUD and more.

Pip

A pip is a metric of fluctuations in exchange rates in the forex market that stands for “percentage in point.” The pip is a metric, which is a numerical number that is used to calculate gains and losses where 0.0001 is the value of a single pip. The fluctuations, gains, and losses of currency traders are frequently expressed in pips.

For example, if the GBP/USD currency pair goes from 1.3660 to 1.3662, it travels 2 pips. Similarly, if it moves from 1.3660 to 1.3664, it moves 4 pips, where the pip would be the last decimal point. All currency pairs have four decimal places, with the exception of the Japanese yen. JPY pairs contain just two decimal places (USD/JPY=85.41, for example).

Spread

The discrepancy in pip between the bid and ask price of the underlying security is known as a spread. Spreads are crucial for FX investors to understand since they are basically the price of initiating a trade. The subtracting result between the Bid/Sell price from the Ask/Buy price is what determines the spread.

For instance, The AUD/USD is now priced at 0.94590/0.94598 (Sell/Buy), where 0.94590 – 0.94598 = 0.00008 or 0.8 pips is the spread between the buy and sell prices.

Margin

The minimal quantity of funds, represented as a percentage that a trader needs to start and maintain a position is known as margin. In FX trading one does not require to buy all of the currency while executing a forex transaction, instead, they speculate on the currency rate. In other ways, traders agree on a contract-based arrangement with their respective brokerage for making or receiving a payment, based on whether the exchange rate shifted in favour or opposing the original speculation. For example, if you trade on a 1% margin, you’ll have to pay a deposit of EUR 1 for every EUR 100 you exchange or trade.

Leverage

Determined by the broker’s flexibility, leverage, in a technical sense is when an FX broker loans you funds so that you can trade larger lots. It is majorly dependent on the type of account you own, the leverage available for that specific type of account, and the amount of leverage you require. Suppose, with leverage of 1:100, a trader wants to trade a $100,000 position, but the available account balance is only $10,000. In such a scenario, the brokerage will offer a loan for the remaining $490,000.

Slippage

During a trade, there is often a little discrepancy that can be noticed between the anticipated value and the received price after the execution. Slippage is the term for what occurs when this situation takes place where market instability and execution speeds are the primary causes behind this.

For instance, suppose the USD/EUR exchange rate was 0.7040. After researching the trend, you conclude that it is on an upward movement and open a position at the current price of USD/EUR 0.7040, with the expectation of executing at the same price.

While the market continues to follow the pattern, it swiftly moves past your execution price and up to 0.7060. Since the projected price of 0.9050 is not currently available in the market, you will be provided with the next best available price, resulting in a positive slippage.

Conclusion

Trading forex can be a challenging thing to master, but the appropriate tools and information, it may give you an edge in this industry as a beginner.

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