Fx Terms You Wouldn’t Want to Live Without (When Trading):
Forex
Forex stands for
Foreign Exchange. Forex is the simultaneous buying of one currency and selling of another. Since you purchase money with money, you both give and get money, i.e., two transactions (buying and selling) are happening at the same time.
Rate/Quote
Rate is the price of one currency in terms of another.
Base Currency
The
base currency is the first currency listed in any currency pair. Its value is determined against the
counter currency’s value.
(For example, if the following currency pair EUR/USD rate is 1.3525, then the EUR is the base currency and it is worth 1.3525 USD.)
Counter Currency
(Also known as
Quote Currency, or
Pip Currency)
The
counter currency is the second currency in any currency pair. Its value is determined against the
base currency’s value.
(For example, in the following currency pair EUR/USD, the counter currency is USD.)
Bid Price
(Also known as
Sell Price)
The
bid price (left quote display) is the price at which traders can sell the base currency.
If you think that the EUR value will
decrease then you can choose to sell it—you can sell EUR for USD at the price displayed in the bid quote.
Ask Price
(Also known as
Buy price or
Offer Price)
The
ask price (right quote display) is the price at which traders can buy the base currency.
If you think that the EUR value will
increase then you can choose to buy it—you can buy EUR for USD at the price displayed in the ask quote.
Spread
(Also known as
Bid/Ask Spread or
Market Spread)
The spread is the difference between the
bid price and the
ask price.
Pip
(Also known as
Points)
Pip is the smallest price increment in the last digit in the rate (i.e., in the decimal place).
Day Trading
Day Trading refers to transactions that are opened and closed on the same trading day.
Transaction Cost
Transaction cost is the cost you will have when you make a trade.
It is calculated in the following manner:
Transaction Cost = Ask Price - Bid Price.
Stop Loss
A trade type in which an open position is automatically closed at a specific price is referred to as a
stop loss order. You can put in a stop loss order to minimize losses in case the market moves in ways opposite of those you expected.
* The Forex market gives you the opportunity to trade with borrowed capital. So here are some Terms You Wouldn’t Want to Live Without (When Dealing with your Dealer, or Broker):
Margin & Leverage
The
leverage is the loan you get from your dealer, which enables you to transact quickly and cheaply with a small amount of initial capital.
Margin is the minimal cash deposit that you have to put up for the transaction. It covers possible future fx trading losses. (For example, leverage will allow you to buy or sell 10,000 USD with only 25 USD). While leverage enables you more buying power that can increase your potential profit, it can also increase your potential loss. It is highly recommended that you take the time to understand the risks involved while trading in leveraged products.
* eToro’s Approach*: if the above example were to be applied, with eToro you could not lose more than your initial minimal trading amount of 25 USD.
* Last but (certainly) not least
Trading currencies on
margin increases your
buying power.
If you have 25 USD cash in a
margin account whose
leverage is 400:1, you could purchase up to 10,000 USD worth of currency because you only have to post 0.25% of the purchase price as collateral. This means that while initially you had 25 USD cash, you now have 10,000 USD worth of buying power.
However, while more buying power can increase your profits, it can also increase your losses. It is highly recommended that you take the time to understand the risks. Make sure to read the margin agreement, to understand how your margin account works, and to ask questions whenever you come across things that are unclear to you.