The forex market can be a complex and intimidating place for beginners. However, taking the time to understand some key terms and what they mean can help you navigate the market. Here are some common forex terminology for beginners, with explanations to guide you through your forex journey.
Pip
A pip stands for ‘percentage in point’. It is the smallest unit of price movement for a currency pair. Typically, it is the fourth decimal place for most major currency pairs, but for other currencies, such as the Japanese yen, it is the second decimal place. It is crucial to note that the value of a pip can vary depending on the size of the trade or position.
Leverage
Leverage is a large amount of money in the market with a small amount of capital. This allows traders to control large positions with less money. It can both have a positive and negative influence, as it can amplify gains but also increase losses. Leverage can increase the potential for both profits and losses, so it is essential to use it wisely and be aware of the risks. Leverage can typically be obtained from a broker and often ranges from 1:1 to 1:500 or more.
Currency pair
A currency pair is two currencies traded within the forex market. The first currency in the pair is called the “base currency,” and the second currency is called the “quote currency.” For example, the EUR/USD currency pair is made up of the Euro as the base currency and the US dollar as the quoted currency. Currency pairs are grouped into three categories: major, minor and exotic. Major currency pairs are the most traded and include:
- EUR/USD
- USD/JPY
- GBP/USD
- Minor currency pairs include less frequently traded currencies such as AUD/JPY and NZD/CAD
- Exotic currency pairs include an exotic currency and a major currency such as EUR/TRY
Long and short
When trading forex, you can consider taking a ‘’long’’ position, believing that the currency pair will increase in value, or a ‘’short’’ position, if you believe the currency pair will decrease in value. A long position is taken when traders buy a currency pair with the expectation that the value of the base currency will increase relative to the quoted currency. A short position is taken when traders sell a currency pair with the expectation that the value of the base currency will decrease relative to the quoted currency.
Bid and ask
Bid and ask are two prices that are quoted for a currency pair in the forex market. The bid is the price at which a trader can sell a currency, while the ask is the price a trader can buy a currency. The difference between the bid and ask is called the “spread.” The spread is the difference between the asking price and the bid price, and it is the cost of trading in the forex market. The smaller the spread, the less it costs to trade.
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