Before making your first trade it is absolutely necessary for any serious new trader
to know the list of terms bellow:
When quoting currency pairs, the first currency is referred to as the Base currency while
the second referred to as the Counter or Quote currency. The currency pair is used to
represent how much Quote currency is required to exchange for the base currency.
Example: if the EUR/USD is at 1.3500 it means that 1 Euro is traded for
1.35 USD. As such, the Base currency is always equal to 1 monetary unit
of exchange. The dominant base currencies are, in order of frequency, the
EUR, BP, and USD.
The Quote currency is the second currency quoted in a currency pair in Forex. In a direct
quote, the quote currency is the foreign currency.
Major and Minor Currencies
Forex major currencies are the seven most commonly and frequently traded currencies
generating the majority of the global currency trading volume. In addition, the Majors offer
the most liquidity.
The list of currencies bellow consists of the seven Majors
USD (US dollars)
EUR (European Euros)
GBP (United Kingdom pounds)
JPY (Japanese yen)
CHF (Swiss francs)
CAD (Canadian dollars)
AUD (Australian dollars)
Any other currency is referred to as minor currency
AUD (Australian dollars)
Any other currency is referred to as minor currency.
In general Exotic currencies are currencies that are not commonly traded in the Forex
market. Exotic currencies are usually origin from developing countries from Asia, the
Pacific, the Middle East and Africa. Trading Exotic currencies is not simple, since the
market does not offer the same level of liquidity and activity for exotic currencies as it
does for main currencies.
The pip is the smallest unit of change a currency pair can move. In the Forex world,
currencies are traded in fractions of a Cent, or Euro, and so on. Nearly all currency pairs
consist of five significant digits and most pairs have the decimal point immediately after
the first digit, with four decimal points to follow. For example, EUR/USD is equals to
1.3377. In this example, 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 equal 1/100 of a cent. The only notable exception to this rule is the USD/JPY pair
where a pip equals $0.01.
You buy the EUR/USD, which is quoted with five
digits in all out of which 4 decimals, at 1.3530 and sell it later at 1.3542.
The difference would be +12 pips, or. 0012.
However, in the case of the UsD/JPY currency pair, one has to make a
note that it is quoted with only 2 decimals. And so if you bought the UsD/
JPY at 110.51 and it then went down to 110.31 where you have sold it,
the difference would be -20 pips, or. 20 pips loss. the pip difference would
determine your calculation of profit/loss on the trade.
Forex quotes are shown in ‘bid’ and ‘ask’ prices. The Bid is the price at which the market
maker is ready to buy a given currency pair and so at this price the trader (seller) can sell
the base currency to the market maker, The Bid is shown on the left side of the quotation.
For example, in the quote EUR/USD 1.3811/14, the Bid price is 1.3811. This means you
(the trader) can sell one Euro for 1.3811 U.S. dollars.
Forex quotes are shown in ‘bid’ and ‘ask’ prices. The Ask is the price at which the market
maker is ready to sell a given currency pair and so at this price the trader (buyer) can
buy the base currency from the market maker, The Ask is shown on the right side of the
quotation. For example, in the quote EUR/USD 1.3811/14, the Ask price is 1.3814. This
means you (the trader) can buy one Euro for 1.3814 U.S. dollars. The Ask price is also
called the Offer price.
Spread = transaction cost
The dealing spread is the difference between the bid price and the ask price over a
currency pair. Two prices are given for each currency pair. The spread represents the
difference between what a market maker is willing to buy from a trader, and what the
market maker takes to sell to a trader. The spread is where the market maker makes his
money. In general, smaller spreads are better for Forex traders. The critical characteristic
of the bid/ask spread is that it is also the Transaction cost for a round-turn trade. Roundturn
means both a buy or sell trade and an offsetting sell (or buy) trade of the same size
in the same currency pair.
Most Forex brokers do not charge commissions, but rather make money from the dealing
spread. The dealing spread is the difference between the bid and ask quote. At present,
under normal market conditions the dealing spread over the Major currency pairs should
be no more than 3 pips.
Example: In the case of the EUR/USD rate of 1.3812/15, the transaction
cost is three pips.
New Electronic Communication Networks (ECNs) systems are now offered by Forex
brokers. As a rule of thumb, they offer a much improved spread, but at the same time the
brokers charge a commission per lot for using the ECN as your executing system. Find
out with your broker for costs associated with executing through an ECN based execution platform, as they should offer an improved overall cost (Spread plus commissions).
A Cross Currency is a pair of currencies traded that does not include the USD as one of
its currencies, where by one foreign currency is traded for another without having to first
exchange the currencies into a USD. Traditionally, in order to exchange a sum of money
into a different currency, the trader would be first required to convert that money into
USD, and only then convert it into the desired currency. Cross currencies help traders to
bypass this extra step. The EUR/CHF cross, for example, was invented to help individuals
who wanted to convert their money directly without having to first convert it into USD
A Cross Quote is the currency exchange rate between two currencies, both of which are
not the official currencies of the country in which the exchange rate quote is given in. For
example, if an exchange rate between the GBP and the JPY was quoted in an American
newspaper, this would be considered a cross rate because neither the Pound nor the Yen
is the standard currency of the United States. Yet, if the exchange rate between the pound
and the U.S. dollar were quoted in that same newspaper, it would not be considered a
cross rate because the quote involves the official U.S. currency.
GBP/USD = 1.5464
USD/JPY = 102.29
Thus the cross quote is: GBP/JPY = 1.5464 x 102.29 = 158.18
There for one British pound is worth 158.18 Japanese yen.
Manny cross rates exist, but they often have low liquidity and so might carry a large
spread leading to a higher transaction cost.
The margin is the amount of money needed to open or maintain a position. Banks and/or
brokers need collateral to ensure that the trader can pay in case of a loss.