fbpx
  • Use Forex Lingo to Impress your Date

    As it is with learning every other type of new skill, so it is with forex—it is mandatory that you learn the lingo, most especially if you would like to win the love of your heart.

    As a newbie, there are certain terms that you must know before embarking on your first trade.

    Yea, you may have learned some of these terms already, but you know, it’s never a waste of time doing a little review.

    Minor and Major Currencies

    Out of all currencies, eight of them are the most traded, and these are: USD, EUR, GBP, JPY, CAD, CHF, NZD and AUD.  These are the “Major” currencies and all other currencies are seen as “Minor” currencies.

    Remember Base Currency?

    Base currency refers to the first currency in any type of currency pair. The base currency worth is shown by the currency quote when measured against the second currency.

    For example, if the rate of USD/AUD equals 1.6350, then it means one USD is worth 1.6350 AUD.

    As much as the forex market is concerned, the US Dollar is typically regarded as the “base” currency when it comes to quotes. This means that all quotes are denoted as a unit of a single US dollar for each of the other currency that’s been quoted in the pair.

    There are some exemptions to this rule, and these are the euro, British Pound, the New Zealand and Australian dollars.

    What Is The Quote Currency?

    The second currency in any currency pair is known as the “quote currency”. In most cases, it is referred to as the pip currency, and any loss or unrealized profit is registered in this currency.

    What is Pip?

    A pip means the smallest price unit for any type of currency.

    Almost all pairs of currency comprise of five important digits, and majority of pairs contains the decimal point as soon as their first unit is shown. Example, EUR/USD equals 1.2638.

    In this scenario, one pip equals the smallest change in 0.0001 (which is the fourth decimal place). Thus, assuming USD is the quote currency in any pair, it automatically means that 1 pip is always equal to 1/100 of a cent.

    Again, there are notable exemptions, and a typical example is a Yen where a pip equals 0.01.

    What about Pipette?

    Pipette is defined as the one-tenth of a pip. To add more precision while quoting rates, some brokers usually quote pipettes or pips.

    For example, if there is a move from 1.32156 to 1.32158 in EUR/USD, it means it moved two pairs.

    Let’s Talk about the Bid Price

    In the forex market, the price at which the market is ready to purchase a specific currency pair is called the bid price. The trader can sell the base currency at this price (bid price), and it’s shown usually on the left side of the quotation.

    Consider a situation where the quote is GBP/USD 1.8812/15, the figure of 1.8812 is the bid price. By this, it means you are selling one British pound for 1.8812 United State dollars.

    What about the Ask/Offer Price?

    The price at which the market is ready to sell a defined currency pair is known as the Ask/Offer price. This is the price at which you can purchase the base currency. It is usually displayed on the left side of the quotation.

    Consider a situation where the quote is EUR/USD 1.5812/15, the asking price is 1.5812. By this, you can purchase one euro for 1.5812 USD. Another name for the asking price is the offer price.

    Tell Me Something About The Bid-Ask Spread

    The difference between the bid and the asking price is known as the “spread”.

    The dealer expression that talks about the first few digits of an exchange rate is the “big figure quote”. Such digits are in most cases omitted in dealer quotes.

    For instance, the USD/CHF rate appears to be 118.40/118.44, but would be verbally quoted without the first three digits as”40/44”.

    Given this example, USD/CHF has a 4-pip spread.

    What is Quote Convention?

    In the forex market, the exchange rates are usually denoted using the preceding format:

    Base currency/ Quote currency = Bid/Ask

    Transaction Cost (TC)

    The essential features of the bid/ask spread also dubs it as the cost of transaction or TC for a round-turn trade.

    A Round-turn trade means an offsetting sell (or buy) trade and a buy (or sell) trade of the exact size in the same pair of currency.

    The formula used in the calculation of the TC is:

    TC (spread) Ask Price – Bid Price

    Cross Currency (CC)

    When any currency pair does not stand as the USD, that is your cross currency. These types of pairs demonstrate unstable price behavior, considering that the trader has virtually initiated two trades in USD.

    For example, we initiate a long (buy) EUR/GBP which is equal to purchasing EUR/USD currency pair and then selling GBP/USD CC pairs which carries a much higher transaction cost frequently.         

    Margin

    The minimum amount you will deposit with a broker whenever you open a new account with that broker is called margin.

    There is no fixed rate of minimum, as it varies from one broker to the other. It can appear as low as $100 as offered by some brokers while it can also go as high as $100,000.  

    Anytime you initiate a new trade, a particular percentage that forms part of the balance in the margin account is to be put aside to represent the initial margin as required by the new trade.  

    The said amount is predicated on the current currency pair, the recent price, as well as the number of lots (or units) traded. It is the lots size that refers to the base currency as always.

    Let’s take this example, assuming you open a new account that renders a 0.5% margin or 20:1 leverage. Now, mini lots are traded by mini accounts. We can assume that 1 mini lot=$10,000.

    Now, assuming you want to open 1 mini lot, instead of making available the full $10,000, you only need to make a payment of $50—which is $10,000x.05%=$50.

    Leverage

    Leverage refers to the ratio of the sum capital utilized in any transaction to meet the required security deposit (the margin).

    Leverage entails that ability to be in control of a considerable volume of dollars as security with just a tiny fraction of capital.

    Leveraging differs from broker to brokers. It ranges from 2:1 and all the way to 500:1.

    Now that you have demonstrated your skills in forex lingo to your spouse, how about starting on a new topic titled types of trade orders?

    Fasten your seat belts and let’s ride.

  • arrow