The Beginner’s Guide to Forex Language
If you are interested in getting into the world of Forex trading, it’s inevitable that you will probably want to familiarise yourself with all of the terminology associated with it. Some of the terms that you will need to know if you are to devise the best Forex trading strategies will be self-explanatory, while others are difficult to explain unless you are already well-versed in this type of trading.
So, without any further ado, here is our comprehensive guide to Forex terminology here at Top 10 Best Forex Trading.
First of All... What’s a Currency Pair?
One of the first things that you will need to know if you are to be successful in your Forex trading is the definition of a currency pair.
When you come to trade Forex, you will be quoted one price, just like you would with anything else that you trade, such as gold or oil. However, Forex trading differs in that the price quoted is with regard to two different currencies, rather than one – hence the term ‘currency pair’.
On the foreign exchange market, currencies are valued in relation to each other, rather than in isolation, and a Forex transaction involves one currency being purchased while another is simultaneously sold. So if the Euro is 1.33 against the US dollar and after you buy the Euro against the dollar, the Euro strengthens relative to the dollar, the trade is a profitable one for you.
The first currency in a given currency pair is known as the base currency, and always has a value of 1. The second currency in a pair, meanwhile, is referred to as the quote currency, and is the amount that you will require to exchange into one unit of the base currency.
Exchange rates, of course, change continually and are influenced by all manner of external events. How far a given price has moved from an earlier point is measured in ‘pips’ – an acronym for ‘percentage in point’.
Let’s imagine, for instance, that the present exchange rate of the British pound against the US dollar is 1.52. You may only observe two units after the decimal point, but on the foreign exchange market, another two units follow the decimal point, which means the aforementioned price may be observed as 1.5200.
The final number – the last 0 – is what is known as the pip, so if the given currency pair’s value moves from 1.5200 to 1.5201, it can be said to have moved by a single pip.
The ‘Spread’ Dictates the Cost of Trading
‘Spread’ is another term that you will see frequently mentioned in our reviews of the best Forex trading brokers. This term is probably best thought of as a ‘fee’ that your broker charges you to trade, although it is more accurately defined as the difference between the price at which the broker is prepared to buy off you and sell to you.
The broker, naturally, needs to make money, so they will need to sell a currency pair to you at a slightly higher price than its actual value, and buy off you at a lower price than its actual value.
You may wish to buy a EUR/USD currency pair valued at 1:2500, for example, but you can expect the broker to charge you slightly more than that, such as 1:2501. If, meanwhile, you are interested in selling a currency pair of that value, the broker won’t pay 1:2500, but instead a slightly lower amount, such as 1:2499.
The difference between 1:2501 and 1:2499 in this example is two pips, which is the ‘spread’.
Boost Your Buying Power with Leverage
Another term that is central to the world of Forex trading is ‘leverage’. This refers to your ability as a trader to gear your account into a position greater than your total account margin.
Brokers offer leverage in order to maximise traders’ buying power. The greater the leverage that you have, the larger the volumes you will be able to trade, relative to your amount of funds. Leverage is expressed in the form of a ratio, so if your leverage is 1:200, your buying power will have been magnified 200 times.
Let Us be Your Guide to the Best Forex Trading Portals
Trading on the foreign exchange market is likely to expose you to an extremely wide range of terms that you will need to learn if you are to stand the strongest possible chance of success of making money.
Alas, we can’t provide a definition here for every single Forex-related term that you could conceivably come across, but what we can do is point you in the direction of the best Forex trading sites available today.
Discover informed and impartial reviews and ratings for a comprehensive range of Forex brokers here at Top 10 Best Forex Trading, and you will be in the best position to excel as a Forex trader, with the assistance and support of the right Forex broker for your specific needs and desires.