Forex trading for beginners: Some Forex trading terminology

Forex trading for beginners:  There are some specific terms and jargon in the Forex market that are commonly used. It is important to have those terms clear to have a better understanding of Forex.

Basic Forex terms: 

-Cross rate: The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in. 

-Exchange rate: Is the price or value of one currency expressed in terms of another. For example, if EUR/USD (Euro/US dollar) is 1.3500, 1 Euro is worth US$1.3500.

-Pip: This is one of the most used terms; Forex trading for beginners usually includes this term because it is basic to understand how to trade. Pip is the smallest increment of price movement that a currency can make. It is also known as point or points. For example: 1 pipi for the EUR/USD=0.0001 and 1 pip for the USD/JPY (US dollar/Japanese Yen)=0.01.

-Leverage: Is like a loan that provides your account with a greater position than your total account margin. For example, if a trader has $2,000 of margin in his account and he opens a $200,000 position, he leverages his account by 100 times, or 100:1. If he opens a $400,000 position with $2,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.

-Bid Price: The bid is the price that the market will offer you (or pay you) to buy a specific currency pair from you. 

-Ask price: It is the ask price at which the market will sell a specific currency pair to you.

-Bid/Ask spread:  Is the difference between the bid and the ask price. 

An important concept in Forex trading for beginners is the pair quotes. You will need to understand how to properly read a currency pair quote before you start trading them.

The exchange rate of two currencies is quoted in a pair, such as the EUR/USD or the USD/JPY. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another.

The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash mark is called the counter or quote currency. For instance: EUR/USD = 1.25647

If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example above, you have to pay 1.25647U.S. dollars to buy 1 euro.

There is a lot of material related to Forex trading for beginners and it is highly recommended to learn as much as possible before starting to trade.

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