To navigate the forex trading landscape effectively, familiarize yourself with the following essential terms:
Currency Pair #
Every forex trade involves a currency pair, such as the majors (e.g., EUR/USD) or less common trades like exotics, representing the currencies of developing nations.
A pip stands for “percentage in points” and denotes the smallest possible price movement in a currency pair. Given that forex prices are quoted with at least four decimal places, a pip is equivalent to 0.0001.
Bid-Ask Spread #
Similar to other assets, exchange rates in forex are determined by the highest price buyers are willing to pay (bid) and the lowest price sellers demand (ask). The bid-ask spread represents the difference between these two values and affects the execution price of trades.
Forex trading is conducted in standardized units of currency called lots. The standard lot size is 100,000 units, but there are also smaller options available, such as micro lots (1,000 units) and mini lots (10,000 units).
Given the substantial lot sizes, traders may opt for leverage, which allows participation in the forex market without providing the full amount of capital required. Leverage enables borrowing funds to amplify trading positions.
While leverage offers flexibility, it involves the use of margin. Margin refers to the initial deposit or collateral traders must provide to access leveraged positions. It serves as a security deposit for potential losses.
By understanding these forex terms, traders can navigate the market more confidently and make informed decisions.