Currency Exchange Terms Every Forex Trader Should KnowF

Before jumping into the forex market, you need to arm yourself with some
terminology that will be used in any course or software on this subject. The
following set of terms were put together with the idea of providing the novice
forex trader with the fundamental concepts of the forex trading business. While
they sound technical, most are easy to understand and apply.

Let us begin with the instruments that are traded in the forex markets.
Currencies are traded in pairs so the instrument will always be in this double
denomination. The reason for this is simple; the basis of forex currency trading
is to exchange one currency for another. So if the pair is the Euro and the US
Dollar, and the forex trader is taking a long position or buying the Euro in
hopes that it will appreciate, effectively the trader is also selling US Dollars
to buy the Euros. The most widely traded pairs are the Great Britain Pound and
the US Dollar (indicated as GBP/USD), the Euro and the US Dollar (the EUR/USD
pair), the Aussie Dollar and the US Dollar (AUD/USD pair), the USD and the
Japanese Yen (USD/JPY pair), and the Canadian Dollar and the USD (USD/CAD pair).
These pairs account for well over 80% of the total volume of the trading in the
forex market. The advantage to trading in these currency pairs is that they are
highly liquid and allow the investor to convert their portfolio to cash very
quickly to realize a profit.

In every pair, the first currency is called the base currency, over which the
second one is countered to imply the price of the pair, or commonly referred to
as the "cross currency". The second is therefore called the quote currency and
the pair price is recorded in terms of the units of the quote currency required
to buy one unit of the base currency. Thus, assuming the price of the GBP/USD
pair is 1.5, this implies that 1.5 USD will buy 1 GBP.

Every pair is quoted in terms of a bid ask spread. The bid price is the rate at
which your forex broker bids to buy the currency at, while the ask price is the
rate the forex broker is asking to sell the currency to the forex trader. The
bid price will always be less than the ask price and the forex trader will buy
at the ask price and sell at the bid price. The bid ask price will be quoted as:
GBP/USD 1.532/5, meaning the bid price is 1.532 and the ask price is 1.535.

A pip price interest point), as it is commonly called, is the smallest
incremental change a currency pair will experience, for instance, a change in
the GBP/USD price from 1.532 to 1.542 is a change of 10 pips. A trading margin
is a deposit which is a minimum amount or a small percentage of your traded
amount that you have to put up. The remaining amount is supplied by your broker.
This amount can vary from 1% to 0.25%, also referred to as 100:1 and 400:1. Most
often, forex brokers will offer 100:1 or 200:1 to most clients. This is risky
but enables the trader to leverage a large amount that he or she would not
otherwise have access to.

Finally, a margin call can happen when the forex trader allows the balance in
the trading account to go below the margin deposit percentage agreed upon with
the forex broker. The broker will automatically sell your long positions or buy
your short positions and clear the entire trading account, returning the margin
amount to the trader to protect the trader from losing more money than they
have.