He has a monthly readership of , traders and has taught over 20, students. The Forex market comes with its very own set of terms and jargon. Cross rate — The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in.
This phrase is also sometimes used to refer to currency quotes which do not involve the U. For example, if an exchange rate between the British pound and the Japanese yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the pound or the yen is the standard currency of the U. However, if the exchange rate between the pound and the U. Exchange Rate — The value of one currency expressed in terms of another. Pip — The smallest increment of price movement a currency can make.
Also called point or points. Leverage — Leverage is the ability to gear your account into a position greater than your total account margin. Increasing your leverage magnifies both gains and losses. To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. Margin — The deposit required to open or maintain a position. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions.
This allows a trader to leverage his account by up to times or a leverage ratio of Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open.
Spread — The difference between the sell quote and the buy quote or the bid and offer price. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread. You will need to understand how to properly read a currency pair quote before you start trading them. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another.
In other words, in the example above, you have to pay 1. In other words, in the example above, you will receive 1. An easy way to think about it is like this: So, whether you buy or sell a currency pair, it is always based upon the first currency in the pair; the base currency.
The basic point of Forex trading is to buy a currency pair if you think its base currency will appreciate increase in value relative to the quote currency. If you think the base currency will depreciate lose value relative to the quote currency you would sell the pair. Bid Price — The bid is the price at which the market or your broker will buy a specific currency pair from you.
Thus, at the bid price, a trader can sell the base currency to their broker. Ask Price — The ask price is the price at which the market or your broker will sell a specific currency pair to you. Thus, at the ask price you can buy the base currency from your broker. Jump To Next Chapter — Part 3: Introduction — What Is Forex Trading? What is Professional Forex Trading? What is Fundamental Analysis? What is Price Action Trading Analysis? Introduction to Forex Charting. Common Forex trading mistakes and traps.
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Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets.
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Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results. Forex Trading Terminology Part 3: Introduction to Forex Charting Part 8: Common Forex trading mistakes and traps Part What is Technical Analysis Part The Psychology of Forex Trading Part Checkout Nial's Professional Forex Course here.
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