To be able to trade in Forex, you need to know the Forex lingo.
- Major and Minor Currencies
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the major currencies or the “majors.” These are the most liquid. Other currencies that are not mention above are simply called the minor currencies.
- Base Currency
We call the first currency in a currency pair as the base currency. The base currency will determine how much it is worth as amounted against the second currency.
- Quote Currency
The second currency at the currency pair is called the “quote currency”. However, this is also called as the pip currency. As the trader, you will realize your loss and profit in this currency.
- Pip
A small unit of price in a currency is called the pip. Almost all the currency pairs have five remarkable digits and almost all pairs have decimal point right after the first digit.
- Pipette
One-tenth of a pip.Some brokers quote fractional pips, or pipettes, for added precision in quoting rates.
- Bid Price
The bid price is the buying price of one currency in the pair currency in the market. The trader can sell the price of the base currency at this amount.
- Ask Price
This is now the selling price, which is called the “ask price”. Sometimes ask price can also be called as the “offer price”.
The spread is the difference between the bid and ask price.
- Quote Convention
Exchange rates in the forex market are expressed using the following format:
Base currency / Quote currency = Bid / Ask
- Transaction Cost
Costs incurred when buying or selling securities. These include brokers’ commissions and spreads (the difference between the price the dealer paid for a security and the price at which it can be sold).
Formula for calculating the transaction cost is:
Transaction cost (spread) = Ask Price – Bid Price
- Cross Currency
Any pair in which neither currency is the U.S. dollar
- Margin
How much is needed for a trader to own whenever he opens a position or to be able to maintain one.
- Leverage
The extent in which a trader uses borrowed money in order to gain from trading.