Forex market trading is such a crazy place, you will encounter countless terms in it that most people never heard in their entire life.
While our previous experience on stock trading is somewhat helpful for us in becoming a trader on Forex, we have few terms that you should know and we believe that these might become misleading for those who are new to it.
The items that we are going to list below are the short list among many items, we considered these lists as extremely basic that every Forex trader must know and should not ignore it.
Foreign exchange or known as Forex market is composed of people or traders conducting not just millions but even trillion dollars worth trades a day, every six days.
When the FX or Forex market is officially in session, individual traders, government traders and even major banks around the globe trade its currency pairs with others simultaneously. In just second, it can create a huge difference between gaining or losing traders money, and those seconds is equivalent to difference both small and large scale changes in trader’s wealth.
1. The Currency Pair
The currency pair, this happens when two different currency are being traded from one another. Basically, a trader can trade any currency against any kind, provided that someone in the foreign exchange market has the said currency that you want to trade.
For instance, a trader trade a Japanese yen Versus US dollars, or Great British pounds Versus Euros. Since there’s no one-sided standard on the worth of the currency to be traded, the market has stable flux as the currencies are moving downward and upward towards it other.
Normally, seven major currencies in the world are being traded. Among them are the currencies that we just mentioned above, then Canadian Dollars, Mexican pesos and Australian dollars. But since there are dozens of currencies available in Foreign Exchange market, dozens of opposite currency can also be traded.
2. The Spread
This is the difference between buying or bid price for currency and selling or ask price on it. Broker is used for individual currency trading, and each broker has its spread attaches to currencies that they trade, in which this will make them profit after the trading.
When a trader trades currencies, the numbers in the currency pair should be watched carefully. In the situation wherein the currency you are holding has higher in number compared to the currency that is to be trade and you get profit. In reciprocal, will give you a loss, but the main interest here is profit.
3. The Pip
This is the smallest unit in Forex Exchange market. In most cases, the two Forex currencies has four digits after the decimal, the pip here is the farthest right after the decimal.
Notably for Japanese currencies, the second value to the decimal point is the pip. The difference between currencies is one pip and this represents a tiny amount that will go on retirement fund
4. The Leverage
If you’re watching the movie “The Wizard Leverage”, it refers to margins or credit that is used in the trade currencies on foreign exchange market. With the leverage, individual has the chance of making dollar up to fifty dollars. Always remember to make use of the leverage carefully. Misuse can cause heavy losses that will be discussed on the next portion. Margin
5. The Margin
Margins does not limit to the paper edges. In foreign exchange, margin is described as credit by brokers that can be extended to trader. This will allow them to have trading in large amount without much investing.
For instance, a trader can use $20,000 for $1,000,000 by just using margins. But take note. There is risk with this kind of trading power.
There are cases that foreign market becomes a risky place compared to any market. If you can remember the 2008 panic in stock market, the trading comes to near standstill and number of large trading player lose its confidence.
The initiation of margin call, this is when those who are trading based on margin returned the money borrowed. For sure, this situation is problematic, especially when one currency has changed its value that is against their advantage.
During marginal call, the trader solely relies to all the funds borrowed. This can also be subject to losses to trader compared to the money that was originally invested. So the importance of stop loss is extremely important in which we are going to discuss next.
6. The Stop Loss
This term is your very best friend. As provided a trader will set a property stop loss, or set on stop loss on trading, the chances of losing small amount of the money invested, this is regardless to whichever the foreign exchange market it may be.
A customary stop loss remains at particular assessment flanked by currencies lastingly, while trailing stop loss continue with position no matter what result it may go. So once you have decent profit in the trading, the trailing stop loss then protects your gained profit.
7. The Long VS Short
Holding long currency position means keeping that on certain period, this usually happens at least seven days or a week. In the world of foreign exchange, seven days is already long. But occasionally Forex traders even keep the positions for months. They will ride on the position trend.
Nevertheless, short selling or shorting a certain currency is a clear indication against going downward. Meaning when a certain Forex trader is in short of currency, they will have to buy currency trading that is against it.
8. The Closing UP
The market in foreign exchange is a great place for you to remember those good commands and basic greatly helps a lot and it plays a significant role for achieving success. Opinions widely vary on how you constitute a strategy for a successful trading, but without the terms mentioned above, the only things we need to know are tax deductions and loss.