FOREX TERMS AND THEIR MEANINGS
Forex is a very intriguing market where traders from all over the world converge to make transactions involving the currencies of different countries. The factors affecting the market is quite unique and different from other markets; thus making it special.
A lot of traders are involved in this market as it is a worldwide market which accommodates different types of traders such as banks, private businesses, private individuals, retail traders, central banks and governments.
The effect of the foreign exchange market is felt worldwide by consumers as the price of an imported product can easily be affected when there is a change in forex rate. Vacationing in another country can also be deemed cheaper or more expensive depending on hotforex rate.
Terms used in forex trading
- Currency pair. Every forex trade involves a currency pair. These pairs are made up of two currencies and generally depicted with their three letter codes. The currency in the left is the base pair while that on the right is the quote pair.
- Lot. Foreign exchange is traded by standardized unit or currency or what is also known as lot. The usual lot size is about 100 000 units of currency. There is also the micro lot which is about 1000 units and the mini lot which is about 10000 units.
- Pip. This stands for percentage in points. It is the littlest possible price difference within a currency pair. A pip is usually equivalent to 0.0001 since forex values are quoted to a minimum of four decimal places.
- Margin. Leverage trading is not free; hence traders are expected to make a deposit.
- Leverage. Due to the large amount or number of lot sizes, it is quite possible for some traders to be unable to put in that much to start a trade. Hence, leverage allows them to borrow money that allows them to participate in the foreign exchange market when they are short of the required amount.
- Bid ask spread. Just like other stocks, exchange rates for forex are estimated by the maximum amount traders are eager to pay for a bid and the minimum amount traders are willing to sell. The difference between the two values and the value at which the bid is later completed is the bid ask spread.
The market is susceptible to risks as most markets; hence while trading on the market, caution has to be applied so as not to make careless mistakes that might result in a huge loss.
It is advisable to start with a demo account while trading on the forex market in order to get used to the dos and don’ts of the market before starting real time trading. Real time trading should only be started when the trader is well acquainted with the trading process of the market.
It is important to note that ending a deal at a higher rate than thebuying rate results in a profit while ending a deal at lesser rate results in a loss.