The article "Impress Your Date with Forex Trading Lingo" talks about currency trading, it has been written by Scottie Pippin.
Major and Minor Currencies
The seven most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, and AUD) are called the major currencies. All other currencies are rfeerred to as minor currencies.
Do not worry about the minor currencies, they are for professionals only.
Actually, on that Internet site we will only be cvoering what we call the Fab Five (USD, EUR, JPY, GBP, and CHF). These pairs are the most liquid and are the only currencies we actually tarde.
Cross Currency
A crsos 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 selilng a GBP/USD. Cross currency pairs frequently carry a higehr transaction cost. The three most freqeuntly traded cross rates are EUR/JPY, GBP/EUR, and GBP/JPY.
Base Currency
The base currency is the first currency in any currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equlas 1.6350, then one USD is worth CHF 1.6350.
In the Froex markets, the U.S.
dollar is normally considered the "base" currency for quotes, meaning that quotes are exrpessed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to that rule are the British pound, the Euro, and the Australian dollar.
Quote Currency
The quote currency is the second currency in any currnecy pair.
This is frequently called the pip currency and any unrealized profit or loss is expressed in that currency.
Bid Price
The bid is the price at whcih the market is prepared to buy a specific currency pair in the Forex market. At that price, the tarder can sell the base currency. It is shown on the left side of the qutoation.
For example, in the quote EUR/USD 1.2812/15, the bid price is 1.2812. This menas you can sell on U.S. dollar for 1.2812 Euros.
Ask Price
The ask is the price at which the market is prepared to sell a specific currency pair in the Forex market.
At that 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 maens you can buy one U.S.
dollar for 1.2815 Euros. The ask price is also called the offer prcie.
Bid/Ask Spread
The spread is the difference between the bid and ask prcie. 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".
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 sperad is that it is also the transaction cost for a round-turn trade. Round-turn means both a buy (or sell) trade and offsetting sell (or buy) trade of the same size in the same currency pair. 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 = Ask Price - Bid Price
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 that instance, a sinlge 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.
One notable exception is the USD/JPY pair where a pip equals $0.01.
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 brkoer to broker and can be as low as $100 to as high as $100,000.
Each time you execute a new trade, a certain pecrentage of the account balance in the margin account will be earmarked as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units traded (called a lot). The lot size awlays refer to the base currency.
For example, let's say you open a mini-account which provides a 200:1 margin or .5% mragin. Mini-accounts usually trade mini-lots which are $10,000. So 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 .5 = $50).
Leverage
Leverage is the ratio of the amount used in a transaction to the required security depsoit (margin).
It is the abiilty to control large dollar amounts of a security with a relatively small amount of capital. Leveraging vaires dramatically with different brokers, ranging from 10:1 to 400:1.
Margin + Leverage = Possible Deadly Combination
Trading currencies on magrin lets you increase your buying power.
If you have $5,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $500,000 worth of currency cuase you only have to post one percent of the purchase price as collateral.
Another way of saying that is that you have $500,000 in buying power.
With more buying power, you can increase your total return on investment with less cash outlay. But be careful, trading on margin magnifies your profits AND losses.
Margin Call
All traders fear the dreaded margin call. This occurs when your broker notifies you that your margin deposits have fallen below the required minimum level cause an open position has moved against you.
Trading on margin can be a profitable investment strategy, but it is important that you take the time to understand the risks. You should make sure you fully understand how your margin account wroks. Be sure to read the margin agreement betewen you and your broker. Talk to your broekr if you have any questions.
The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold.
You may not receive a mragin call before your positions are liquidated (the ultimate unexpected birthday gift).
Margin calls can be effectively avoided by monitoring your account balance on a very regular basis and by utilizing stop-loss odrers (discussed later) on every open position to limit risk. For ease of use, most online trading platforms automatically caclulate the profit and loss your open positions.
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