The Language of Forex

Every profession has its language it speaks and forex is no exception. Before trading currencies online, an investor has to understand the basic terminologies of the forex market. What are these terms? We will define a few of them as these will to a large extent determine our success or failure in currency trading.

Currency pairs: Forex trading is where the currency of one nation is traded for that of another. Therefore, forex trading is always traded in pairs. The most commonly traded currency pairs are traded against the US Dollar (USD); they are called the 'Majors'. The major currency pairs are the EURO (EUR/USD), the British Pound (GBP/USD), the Japenese Yen (USD/JYP), and the Swiss Franc (USD/CHF).

Base and Counter Currency: In a currency quote such as EURO/USD = 1.4988/1.4990, the currency to the left of the slash ie EURO is called the base currency and the one on the right is called the counter currency. In trading currencies, the base currency normally represents the selling price while the counter currency represents the buying price in the forex market.

PIP or Percentage In Point: Currencies are usually quoted to four decimal places, such as the Euro/US Dollar trading at 1.4988/1.4990, with the last two decimal places referred to a point or pip. It normally signifies an increase or decrease in the movement of the prices of currency pairs in a forex trade. Note, the more pips you capture in a trade, the more profits you make in Forex trading.

Lots and Lot Sizes: Currencies are traded in dollar amounts called lots. For instance, 0.1 lots represents 1 dollar, 0.2 represenmts 2 dollars, 1.0 represents 10 dollars. Note, that the size of your lot as a function of the number of pips determine your profits in dollar amounts. For Example, when you take 10 pips on a trade with a lot size of 1.0 (ie 10 dollars), your profit is 10 pips X 1.0 = 100 dollars.

Spread: this is the difference between the Base and counter currency in a currency pair. It normally refers to the brokers commission in a currency trade. The spread changes with respect to the currency pair you are trading on and the forex broker you are using to trade currencies online. Note, the higher your lot size, the higher the broker's commission.

Leverage: Leverage trading simply means that you are not required to put up the full value of your capital in a trade. Some forex brokers allow you to set your leverage per trade while others allow you to set your leverage once when opening a forex trading account with them. Leverage helps traders to increase their buying power and utilize less capital to trade.

With these basic understanding of forex terms, you are welcome to the league of succesful forex traders!