As in any new skill that you learn, you need to learn the lingo… especially if you wish to win your love’s heart.
You, the newbie, must know certain terms like the back of your hand before making your first trade.
Some of these terms you’ve already learned, but it never hurts to do a little review.
Major and Minor Currencies
Major currencies are the most traded currencies in the world, typically from countries with large, stable economies. They are highly liquid and widely accepted in the forex market
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the major currencies or the “majors.” These are the most liquid and the most sexy.
Minor currencies are those from smaller or emerging market economies. These currencies are still traded in significant volumes but are less liquid compared to the major currencies. They often come from countries with developing economies or smaller financial markets.
Exotic currencies are from smaller, less developed, or emerging market economies. They are less liquid and more volatile compared to major and minor currencies. Trading exotic currencies often involves higher spreads and can be riskier.
Base Currency
The base currency is the first currency in any currency pair. The currency quote shows how much the base currency is worth as measured against the second currency.
For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350.
In the forex market, the U.S. dollar is normally considered the “base” currency for quotes, meaning that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair.The primary exceptions to this rule are the British pound, the euro, and the Australian and New Zealand dollar.
Quote Currency
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.
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 this instance, a single 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 equals 1/100 of a cent.
Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01.
Pipette
In forex trading, a “pipette” is a term used to describe a fractional pip.
A pip (percentage in point) is the standard unit of measurement for price movements in the forex market, typically representing the smallest change in the value of a currency pair.
One-tenth of a pip. Some brokers quote fractional pips, or pipettes, for added precision in quoting rates.
Some forex brokers and trading platforms quote currency prices to five decimal places instead of the standard four, incorporating pipettes.
For example, instead of quoting the EUR/USD exchange rate as 1.2345, they might quote it as 1.23456, where the “6” represents 6 pipettes.
Consider the EUR/USD currency pair:
- Standard Pip: If the EUR/USD moves from 1.2345 to 1.2346, it has moved 1 pip.
- Pipette: If the EUR/USD moves from 1.23456 to 1.23457, it has moved 1 pipette.
Pippetes allow for more precise entry and exit points in trading, which can be important for high-frequency trading strategies.
Bid Price
The bid is the price at which the market is prepared to buy a specific currency pair in the forex market.
At this price, the trader can sell the base currency. It is shown on the left side of the quotation.
For example, in the quote GBP/USD 1.8812/15, the bid price is 1.8812. This means you sell one British pound for 1.8812 U.S. dollars.
Ask/Offer Price
The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market.
At this 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 means you can buy one euro for 1.2815 U.S. dollars.
The ask price is also known as the offer price.
Bid-Ask Spread
The spread is the difference between the bid and ask price.
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.”
In this example, USD/JPY has a 4-pip spread.
Quote Convention
The quote convention refers to the standard way in which exchange rates are expressed.
Exchange rates in the forex market are expressed using the following format:
Base currency / Quote currency = Bid / Ask
Consider the currency pair EUR/USD quoted as 1.2345/1.2347:
- Base Currency: EUR (euro)
- Quote Currency: USD (US dollar)
- Bid Price: 1.2345 (You can sell 1 EUR for 1.2345 USD)
- Ask Price: 1.2347 (You can buy 1 EUR for 1.2347 USD)
- Spread: 0.0002 (or 2 pips)
Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade.
Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair.
For example, 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 (spread) = Ask Price - Bid Price
Cross Currency
A cross-currency is any currency 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 selling GBP/USD.
Cross-currency pairs frequently carry a higher transaction cost.
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 broker to broker and can be as low as $100 to as high as $100,000.Each time you execute a new trade, a certain percentage of the account balance in your margin account will be set aside as the initial margin requirement for the new trade.
The amount is based on the underlying currency pair, its current price and the number of units (or lots) traded. The lot size always refers to the base currency.
For example, let’s say you open a mini account that provides a 200:1 leverage or 0.5% margin. Mini accounts trade mini lots. Let’s say one mini lot equals $10,000.
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 0.5% = $50).
Leverage
Leverage is the ratio of the amount of capital used in a transaction to the required security deposit ( the “margin“).
It is the ability to control large dollar amounts of a financial instrument with a relatively small amount of capital.
Leverage varies dramatically with different brokers, ranging from 2:1 to 500:1.
Now that you’ve impressed your dates with your forex lingo, how about showing them the different types of trade orders?