The easiest way to learn something is to start with the essential topics. When you try to learn a foreign language, you first need to know its letters and alphabet. Before making a sentence, you have to understand the meaning of some words and the grammar rules they follow. Similarly, before going deep into advanced Forex topics, you must learn about the related technical jargon. Foreign exchange trading is full of technical words and phrases. The commercial trading activities operate and function on their commercial trading terms. An individual must be aware of the terminologies well in advance. Otherwise, understanding other problematic aspects of the business will be more challenging for you.
Forex terminologies are words, each of which refers to a single concept. If you don’t know which term is used to indicate which forex factory action or idea, you cannot understand Forex trading correctly. In the discussion of advanced topics, these terms are used without explanation. So, you will end up reversing your learning process to leaning them to move on. It will help a trader in making profits through a better understanding of the market and its policies.
This post discusses the essential Forex terminologies you will encounter in your trading life.
1. Currency Pair
You might already know that Forex is a marketplace where people trade currencies. The unique feature of trading currencies is that you cannot trade a single currency. You have to include a minimum of two currencies. You trade or exchange one currency with another. These two currencies are called a currency pair. For instance, EUR/USD is a currency pair that traders in Hong Kong and other countries trade the Euro with the US dollar.
The Base Currency – This is the main currency of a pair. The Euro is the base currency of the EUR/USD pair.
Counter Currency or Quote – This is the secondary currency: the one that follows the backslash mark.
If you buy a Base Currency by selling a Counter or Quote Currency, you execute a Buy order. In the Sell orders, you sell Base to buy Quotes. If you intend to invest in futures, make sure you know everything about the bid and ask price in the Forex rates. Good knowledge of this sector can help you improve your trade execution process and enable you to earn more money.
2. Exchange Rate
It is the amount of the Quote Currency you need to sell to buy a single unit of the Base Currency. Suppose the exchange rate of the EUR/USD pair is 1.3115. That means you can buy 1 Euro selling at 1.3115 dollars. The calculation of the foreign exchange rate is simple. It is calculated on a day to day basis and therefore varies accordingly.
In Forex trading, you buy a Base Currency with a Quote Currency when the exchange rate is lower. Then you wait for the market to change its trend. For specific movements, the exchange rate of your currency pair goes higher. At this point, you can sell at the Base price. The majority of the exchange rates you will experience are the flexible exchange rates. That means the rate of exchange is positively affected by economic changes. In contrast, some nations control the exchange rates of their currencies against outside monetary units.
3. Ask Price
It is also known as the offer price. This price appears on the right side of the counter currency. You can purchase the base currency at this Ask price. For instance, if the Counter Currency is 1.12345/67, it tells you that you can buy a single unit of the base currency for 1.12345 units of the counter currency.
This Forex rates term is commonly used in inter-market, intra-market, and calendar spread. It refers to the price that an investor is ready to sell its securities. There are some common elements that a trader should focus on while quoting the Ask price. The market should be highly liquid, and demand-supply should have some friction.
4. Bid Price
You sell your currency pair at this price. For instance, if your currency pair addresses 1.4568/1.4570, the former one is your Bid Price. You can sell the pair at 1.4568 units. The Bid Price is the best potential price that buyers and sellers in the market are willing to transact at.
It is to be noted that an Ask Price is always higher than a Bid Price. A seller who thinks a currency will decline might sell at the bid price to take advantage of the fall. It should be noted that the Bid Price is the highest price that an investor is willing to pay for the security.
The difference between the Bid-and Ask Price is called a spread. The spread shows the brokerage service cost. You will encounter two types of spread. One is the fixed spread, and the second is the variable spread.
As the name suggests, the fixed spread always maintains a constant gap between the Bid and Ask price. Market changes cannot affect a fixed spread. The variable spreads vary by the market’s liquidity. An investor needs to monitor the broker’s spread to cover the expenses and fees of the spread. A forex spread depends on many factors, such as time of day, events, volatility, and risk factors.
There are hundreds of such Forex terms that you have to learn before making your way into more advanced topics. Once you know them, you should sign up for a demo account. It will help you understand them more fully. Make a list of terms, acronyms, jargons, and common phrases used in Forex trading.
Dealing in the market directly without knowing the basic terminology can be challenging. There may be times that you will not be able to understand the purpose, motive, and conclusion made in the client meetings or the conditions mentioned while doing the paperwork. Most of the new businesses and traders hire agents and experts that consult them throughout their trading journey. Then also, you must be aware of the basic terms and phrases associated with the Forex to understand the decisions proposed by your agents and expert consultants.