Knowing how the Forex market works is one thing, understanding the terms is another. In fact, understanding the jargons and terms used in Forex trading is crucial before even considering investing into this market.

The Basics

For starters, you must know the basic terms of currencies, buying and selling. This of course are the most fundamental knowledge anyone should have in order to get into the market. If you are not sure how such terms works and what they mean, then this investment is not your cup of tea. Apart from that, there are other terms as below:

Cross Rate

This refers to the currency exchange rate between 2 different currencies which are not the official currencies of the nation where the quote is given. For instance, if the exchange rate between the US Dollar and the British Pound is quoted in a Japanese newspaper, it is considered a cross rate because the 2 currencies are not the official ones in Japan.

Exchange Rate

This refers to the currency as expressed in relation to another currency. For example, the exchange rate for EUR/USD is 1.2300. This means that it is USD1.2300 for every 1 Euro Dollar.

Pip

Used mainly in Forex trading, it is the smallest increment of any price movement that the currency makes. At times, it is referred to as a point or points for plural.

Leverage

This refers to the ability to position your account to a situation where it is superior in relation to the total margin of the account. For example, if you have USD2000 of margin in your account and you open up a USD200000 position, this means that you have a 100:1 or you leverages your account by 100 times.

Margin

Margin can fall under either free or used and it refers to the deposit that you need to either open or maintain a position during your trade. A used margin is the amount that you use to maintain the open position while the amount available to open new positions is a free margin.

Spread

Often related to a pip, it is the difference found between the sell and buy quotes. This could also be the bid and offer price.

Forex Pairs

In Forex trading, the exchange rate of 2 currencies is always quoted in pairs. This usually comes in the form of USD/JPY or EUR/USD and so on. That is the fundamental method by which Forex is traded. To understand more about the process, read here.

Bid and Ask

  1. Bid Price – The price where the market wants to buy a certain currency pair from you or which could come from your broker
  2. Ask Price – The price where the market wants to sell the certain currency pair to you which could come from your broker as well.
  3. Bid/ Ask Spread – The difference between the prices of bid and ask.