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Did you know that there are an estimated 10 million foreign exchange traders worldwide?
This is one of the most popular and exciting markets, yet many people don’t fully understand the forex trading terms.
Whether forex trading is your thing or not, knowing about forex is always helpful. It can help you out when trying to communicate with others interested in the market.
Let’s discuss some basic forex trading definitions you’ll want to know.
An Introduction to Forex Trading Terms
Forex trading terms are essential for new traders to understand to manage their trading accounts effectively. Words associated with forex trading that a trader needs to know to include currency pairs, leverage, spread, quote, lots, and Pip or Point.
Currency pairs are an essential part of Forex terms. Each pair is composed of two currencies traded relative to each other. Examples are Euro and American dollar (EUR/USD) or Euro and the Swiss Franc (EUR/CHF).
Leverage, referred to as margin, is a tool traders use to increase their investment portfolio’s potential for profit. Forex brokers typically offer power in a ratio of 50:1, 100:1, or 200:1, where the first number indicates the position size for every $1 of account equity.
Leverage allows traders to utilize their capital more effectively, yielding a more significant return than a traditional investment.
The term “spread” is commonly used in Forex trading. It is the difference between the bid and the asking price of a currency pair. This is also called the “bid-ask spread” or simply the “spread” of a currency pair.
The spread on a currency pair can be variable or fixed. Variable spreads fluctuate based on market conditions and are usually tighter during low liquidity or volatility periods. The broker generally sets fixed spreads and can sometimes be seen with specific currency pairs.
A Forex quote describes the exchange rate between two currencies in a currency pair. In Forex trading, the selection reflects how much of the quote currency (the second currency) a trader can buy with one unit of the base currency (the first).
A “lot” is a standard unit of measure used in Forex trading to refer to the smallest available trade size that can be placed when trading currency pairs. One lot represents 100,000 currency units of the base currency and therefore has a much higher value than a standard trading size.
Pip or Point
A pip, or point, is a unit of measurement when trading currencies in the foreign exchange market. A pip, or point, calculates profits and losses when a trade is closed and sets limits on transactions and trailing stops.
This Guide Will Help You Get Started
Forex trading terms can be daunting, but with the proper knowledge, it doesn’t have to be. The above times are just a few of the key concepts to understand.
As you grow in your experience, you’ll become confident in your understanding and execution of the Forex market. Get started now to learn the basics – it’s never too late!
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