What are the Basic Forex Terms Beginners Should Know
Master the basic forex terms. Forex is the short form for foreign exchange and it’s the market where currencies are traded against each other.
Forex trading involves buying and selling currencies based on their exchange rates, which fluctuate constantly because of various economic and political factors.
By learning basic terms in forex trading, you can read the forex charts, analyze market movements, and execute your trades confidently from a beginner’s perspective.
Basic Forex Terms for Beginners
To kick-start the learning process, below are some commonly used terms in forex trading:
- Base currency: It’s the first currency in a currency pair. For example, in EUR/USD, the base currency is EUR (euro).
- Quote currency: It’s the second currency in a currency pair. For example, in EUR/USD, the quote currency is USD (U.S. dollar).
- Bid price: The price at which a broker or a market maker is willing to buy a currency pair from you. This is the price you’ll receive when you sell a currency pair.
- Ask price: The price at which a broker or a market maker is willing to sell a currency pair to you. This is the price you’ll pay when you buy a currency pair.
- Spread: The difference between the bid and ask prices of a currency pair. This is the cost of trading you need to pay to your broker or market maker.
- Pip: The smallest unit of price movement in forex trading. A pip is usually the fourth decimal place of a currency pair, except for pairs involving the Japanese yen, where it is the second decimal place.
For example, if EUR/USD moves from 1.1850 to 1.1851, it has moved one pip.
- Lot: The standard unit of trading size in forex trading. One lot is equal to 100,000 units of the base currency.
For example, if you buy one lot of EUR/USD, you are buying 100,000 euros and selling an equivalent amount of U.S. dollars.
Leverage and Margin
Let’s move on to cover another important part, and that’s the forex 101 in leverage and margin.
Leverage:
The ratio of the amount of money you can trade with (the amount of money) you have in your account.
Leverage allows you to trade with more money than you have, which can amplify your profits or losses.
For example, if you have $1,000 in your account and use a leverage of 100:1, you can trade with $100,000
Margin:
The amount of money you need in your account to open and maintain a leveraged position. Margin is calculated as a percentage of the total value of your position.
For example, if you open one lot of EUR/USD with a leverage of 100:1, you need at least $1,000 (1% of $100,000) in your account as a margin.
Additional Forex Tips 101
Here are some slightly advanced forex terms for beginners to know before dabbling deeper in forex:
- Margin call:
A notification from your broker or market maker that your margin level has fallen below a certain threshold and that you need to deposit more money or close some positions to avoid liquidation.
An order that automatically closes your position at a predetermined price level when the market moves against you. A stop-loss order helps you limit your losses and protect your capital.
An order that automatically closes your position at a predetermined price level when the market moves in your favor. A take-profit order helps you lock in your profits and avoid missing out on potential gains.
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