Impress Your Date with Forex Lingo
As in any new skill that you learn, you need to learn the lingo…
especially if you wish to win your love’s heart. You, the newbie, must know
certain terms like the back of your hand before making your first trade. Some
of these terms you’ve already learned, but it never hurts to do a little
review.
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 and the most sexy. All other currencies are referred to as
minor currencies.
Base Currency
The base currency is the first currency in any currency pair.
The currency quote shows how much the base currency is worth as measured
against the second currency. For example, if the USD/CHF rate equals 1.6350,
then one USD is worth CHF 1.6350.
In the forex market, the U.S. dollar is normally considered the
“base” currency for quotes, meaning that quotes are expressed as a unit of 1
USD per the other currency quoted in the pair. The primary exceptions to this
rule are the British pound, the euro, and the Australian and New Zealand
dollar.
Quote Currency
The quote currency is the second currency in any currency pair.
This is frequently called the pip currency and any unrealized profit or loss is
expressed in this currency.
Pip
A pip is the smallest unit of price for any currency. Nearly all
currency pairs consist of five significant digits and most pairs have the
decimal point immediately after the first digit, that is, EUR/USD equals
1.2538. In this instance, a single pip equals the smallest change in the fourth
decimal place – that is, 0.0001. Therefore, if the quote currency in any pair
is USD, then one pip always equal 1/100 of a cent.
Notable exceptions are pairs that include the Japanese yen where
a pip equals 0.01.
Pipette
One-tenth of a pip. Some brokers quote fractional pips, or
pipettes, for added precision in quoting rates. For example, if EUR/USD moved
from 1.32156 to 1.32158, it moved 2 pipettes.
Bid Price
The bid is the price at which the market is prepared to buy a specific
currency pair in the forex market. At this price, the trader can sell the base
currency. It is shown on the left side of the quotation.
For example, in the quote GBP/USD 1.8812/15, the bid price is
1.8812. This means you sell one British pound for 1.8812 U.S. dollars.
Ask/Offer Price
The ask/offer is the price at which the market is prepared to
sell a specific currency pair in the forex market. At this price, you can buy
the base currency. It is shown on the right side of the quotation.
For example, in the quote EUR/USD 1.2812/15, the ask price is
1.2815. This means you can buy one euro for 1.2815 U.S. dollars. The ask price
is also called the offer price.
Bid/Ask Spread
The spread is the difference between the bid and ask
price. The “big figure quote” is the dealer expression referring to the first
few digits of an exchange rate. These digits are often omitted in dealer
quotes. For example, the USD/JPY rate might be 118.30/118.34, but would be
quoted verbally without the first three digits as “30/34.” In this example,
USD/JPY has a 4-pip spread.
Quote Convention
Exchange rates in the forex market are expressed using the
following format:
Base currency / Quote currency = Bid / Ask
Transaction Cost
The critical characteristic of the bid/ask spread is that it is
also the transaction cost for a round-turn trade. Round-turn means a buy (or
sell) trade and an offsetting sell (or buy) trade of the same size in the same
currency pair. For example, in the case of the EUR/USD rate of 1.2812/15, the
transaction cost is three pips.
The formula for calculating the transaction cost is:
Transaction cost (spread) = Ask Price – Bid Price
Cross Currency
A cross
currency is any pair in which neither currency is the U.S.
dollar. These pairs exhibit erratic price behavior since the trader has, in
effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP
is equivalent to buying a EUR/USD currency pair and selling GBP/USD. Cross
currency pairs frequently carry a higher transaction cost.
Margin
When you open a new margin account with a forex broker, you must
deposit a minimum amount with that broker. This minimum varies from broker to
broker and can be as low as $100 to as high as $100,000.
Each time you execute a new trade, a certain percentage of the
account balance in the margin account will be set aside as the initial margin
requirement for the new trade based upon the underlying currency pair, its
current price, and the number of units (or lots) traded. The lot size always
refers to the base currency.
For example, let’s say you open a mini account which provides a
200:1 leverage or 0.5% margin. Mini accounts trade mini lots. Let’s say one
mini lot equals $10,000. If you were to open one mini-lot, instead of having to
provide the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).
Leverage
Leverage is the ratio of the amount capital used in a
transaction to the required security deposit (margin). It is the ability to control
large dollar amounts of a security with a relatively small amount of capital.
Leveraging varies dramatically with different brokers, ranging from 2:1 to
500:1.
Now that you’ve impressed your dates with your forex lingo, how
about showing her the different types of trade orders?
#Trading #Forex
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