Common Forex Terms Every Beginner Must Know
Planning to start forex trading and eventually work your way up to becoming a successful trader? You might feel like a fish out of water if you are not aware with the standard trading protocols. Forex is a dedicated field with its own personal set of codes and terms that are not generally used in everyday conversation. Some of them you might have heard before but some might sound totally mysterious to you. But what’s the harm in not being familiar with a few words? Well, the answer is simple, if you do not know the meaning of a particular term, there are chances you might get misled and eventually lose your hard earned money in this in this highly volatile marketplace. Listed below are a few common terms and their meanings which might be of help to the beginners in forex trading.
1. Currency Pair
This basically refers to the pricing structure and the way in which the prices of the currencies are quoted. In the forex market almost any type of currency is bought and sold provided that there is a seller present in the market selling a particular currency. If you trade Euros for dollars they are basically known as currency pair. When someone purchases a particular currency he buys the base currency and in exchange he sells the quote currency which he was in possession with. If you purchase a currency pair like US Dollar/Euro that is quoted as 1.5 in value, you will get 1 dollar for every 1.5 Euros you sell.
The smallest unit of measurement in forex trade, pip is generally used in trades involving the currencies where the value of the currency is 4 digits, right to the decimal point. The last digit is considered the pip. In currencies like the Japanese Yen the pip is considered to be the 2nd digit after the decimal point. Pip is basically the smallest unit of the currency value in the forex market and the difference of a single pip between 2 currencies can make a huge difference in the amount of money you earn.
Margin in the forex trade refers to the level of credit the brokers will extend to the traders. Marginal trading allows the traders to make trade which are worth much more than the money they invest. One can use a fairly small amount of money to make trades which cost millions without actually investing the million. Nevertheless, this extra power comes with a great responsibility and during volatile situations in the market the marginal traders are always at the risk of being asked to return the money they have borrowed. For more details on marginal trading, you can also visit forex related websites such as forexstars and others.
4. Stop Loss Order
Forex offers several risk management tools which come in handy when the market moves against you. Placing a stop loss order with the broker will allow you to automatically sell a particular position if the value goes down below a certain point. Forex market is full of sudden movements in the prices of the various currencies which in turn are fueled by the demand for a particular currency. A stop loss order is particularly helpful if you’re dealing with a position that you have held for a long time but it is also used sometimes in short position, when they’re directly sold if they go above a certain price. This is also known separately as the ‘take profit order’ and is a great tool to increase your chances of success when you do short term trading.
There is a difference between the buying and selling price of a particular currency and for this you must employ the help of a forex broker. The broker attaches a spread to each traded currency according to which the selling and the buying or bid price is regulated in the market. If the currency you’re selling is higher in value than the currency you’re buying, then you will earn a profit.
Forex is a world full of learning and complexities and provides several opportunities to generate profits. Nevertheless, you have to be smart enough and practice trading with utmost patience in order to become good at generating profits in the market. The above terms might be of help when you make your first forex trade.