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Forex Terms You need to Know

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Chapter 1

Forex Terms You need to Know

 

 

1.1 What is Forex                                       

Forex is made up of 2 words foreign & exchange, also called currency market/spot market.

 

The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world (Sourced from Wikipedia)

Why Forex is More Attractive

  • Minimal investment + Leverage
  • Liquidity
  • Transaction cost is low
  • Potential profits in Both long & short positions
  • 24 Hr Trading
  • Desktop Trading
  • Full control over investment
  • Quick rich/overnight millionaire (Myth)

           

1.2 Major Currencies                                            

Major Currencies traded are EUR (Euro), USD (US Dollar), GBP (British Pound), NZD (Kiwi Dollar), CHF (Swiss Franc), CAD (Canadian Dollar), AUD (Australian Dollar), JPY (Japanese Yen).

 

The currencies are traded in pairs EUR/USD, GBP/USD, USD/JPY etc. Initial currency is called base currency. The second currency is called quote/counter currency.

 

1.3 Pip (Percentage in Point)

The smallest change that a currency pair can make in forex. PIP is the lowest denomination for the currency pair value change. The term issued in the forex market. One PIP is generally equivalent to 0.0001, but always dependent upon base currency. Most of the brokers provide quote in 10th of pip.

 

1.4 Spread   

Its broker's profit taken from your every trade. Its difference in Bid & Offer.

You buy or sell a pair based on the price set by the broker (not the actual market price).

Broker does not charge you monthly fee but takes a piece out of your investment (Right, Investment! not later) on every trade put into action.

You Buy at Offer price & you Sell at Bid price.

in simple words, the difference between the 2 prices, charged by your broker, is called Spread.

(Sourced from www.Tradingview.com)

 

1.5 Market Price / Exchange Rate

 

Current price/rate at which the currency pair is being traded. This is the price offered to you by the broker and you buy the specific number of lots you want to trade with.

 

1.6 Lot / Lot Size                                        

 

Lot is a quantity of the units you buy or sell. Most of the brokers provision trading in 3 types of Lot Sizes.

  • Standard lot = 100,000 units = $ 10.00 / PIP (approx.)
  • Mini Lot = 10,000 units = $ 1.00 / PIP (approx.)
  • Micro Lot = 1,000 units = $ 0.10 / PIP (approx.)

Trading a pair of USD/CAD If you buy one standard lot or in other words 100,000 units of CAD at rate of $1.3200; now price go up and you sold these at $1.3300 that means you have made 100 pip profit.

Now lets check how much 100 PIP equates to.

100,000x 1.3300 = $133,000 (sale)

100,000x 1.3200 =$132,000 (purchase)

Profit = $133,000 – $132,000 = $1,000

That means 100 PIP = $1,000

  • 1PIP = $10 (for standard lot) as stated above.

 

 

 

 

                       

1.7 Leverage                                               

                                               

Leverage is called borrowing to invest. When you take a loan for investment to make potentially higher profits; its called leveraging.

In the Forex market you don't have to invest 100% of your sum as in stocks, etc. you can use the leverage provided by the broker.

From 1:10 to 1:500; means for every one dollar (or pound or euro) of your broker will invest 10 to 500 times of his money.

Higher leverage simply means higher, faster and quicker profit as well as higher, faster and quicker loss.

Leverage is further explained in Chapter 2

 

1.8 Margin & Margin Call                                     

 

Margin is an initial deposit you put for trade or in other words your broker holds this amount for collateral. So Margin is pledged as security for repayment of a leverage, to be forfeited in the event of a default/loss exceeding funds in the account under the trade.

So what you understand by margin--

Margin is the amount required to keep the account open.

Margin Call Execution is to close the trade by the broker in case of defaulting is called Margin Call.

 

 

 

 

 

 

1.9 Order                                          

Entering or exiting a trade is called placing an order with the broker. When you buy or sell manually or automatically that is called placing an order and depending on the market movement and brokers trading platform capability, your broker executes the order.

 

Long & Short

Long means when you are a buyer as a trader & Short means when you are a seller as a trader.

           

Order Types                                   

Various Order Types are placed/executed to manage your trade.

  1. A) Market Order
  2. B) Limit Order
  3. C) Stop Order
  4. D) OCO

 

Market Order                                               

Order placed/executed at market price for the currency pair is called market order.

 

 

 

 

 

 

 

Limit Order

A limit order is when you buy or sell an instrument at the decided price or better.

A buy limit order is set at & can be executed at the set /limit price or lower

A sell limit order is set at & can be executed at the set /limit price or higher

Market may not reach the limit price and a limit order is never guaranteed to get executed.

 

 

 

Stop Order                                      

                                               

It’s a predetermined exit price for the order already in place. A stop order is an order to buy or sell an instrument when its price will pass stop order price.

Stop order is either for stopping the loss for the order or for taking the profit and existing out of the order.

 

So you can set you stop order to your market order or even your limit order & the stop will be executed when price reaches that price point.

 

 

OCO (One Cancels Other)                                               

                                               

Its combination of limit order and stop order. When you want to set a future limit order (buy or sell) and set its stop order to exit out of the order. It gets executed with its parent order.

 

This means when intend to go long or short then you have created your limit order & at that time or later you have an option to set a combination stop order to exit out of this trade.

 

Always you should place 2 stop orders for one limit order or even for your market order, at any time (except some constraints by your broker). One stop order to get profit and another stop order to exit with a loss, if the market keeps going against you.

 

Now let’s say you have a limit order to buy or sell & when this gets executed then only its respective stop orders get active.

 

Once one of the stop order gets executed then the other orders (limit order & another stop order, if any) will get cancelled.

For example, if your “Take Profit” stop order gets executed then automatically the limit order to which this stop order belongs to, gets cancelled and at the same time any other stop order that was in place to stop losses will also get cancelled.

Watch this Surplus Forex video to understand forex terms you need to know.

OK. Now you have read and hopefully grasped the basics of forex.

Now move on to next steps to ensure you understood the forex trading relevant aspects of these forex terms

Seems easy, Right? Lets see how you fair…

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