Impress Your Date with Forex Lingo

Impress Your Date with Forex Lingo: Lesson No 11

Let’s enter into the exciting world of Forex, where we’ll learn the ropes like experts. Consider it your first day of class, and you’re eager to impress your crush – but this time, it’s the Forex market!

First and foremost, we must master the terms, just like we would with any other new ability.So, for those of you beginners out there, knowing certain words like the back of your hand is essential before making your first trade.

Now, let’s talk about the Forex language.

Major and Minor Currencies: 

The “majors” include USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD. These are like A-list celebrities, the most traded and, dare I say it, the most attractive!

The “minors” are all the other currencies that serve a supporting role.

Base currency:

Consider the base currency as the main character in a movie. It is the first currency in any pair, and the currency quote indicates its value in relation to the second currency.

For example, if the USD/CHF exchange rate is 1.6350, one USD equals 1.6350 CHF.

In our Forex world, the US dollar is considered the “base” currency, with a little help of the British pound, euro, and Australian and New Zealand dollars, which each have their own spotlight.

Quote currency:

The quote currency functions similarly to a co-star in a movie. It’s the second currency in any pair, also known as the pip currency. Profits and losses are expressed in this currency.

Pip: 

Pay attention! A pip is essentially the lowest unit of price in any currency. Most pairings have five digits, with a pip representing the smallest change in the fourth decimal place. For example, if the EUR/USD is at 1.2538, one pip is equal to 0.0001. If the quoted currency is USD, one pip is equal to one hundredth of a penny.

Examples include pairs with the Japanese yen, where a pip equals 0.01.

Pipettes

Pipettes are little yet powerful tools. A pipette is one-tenth of a pip and is ideal for those who value perfection. Pipettes can be utilised by traders to increase the accuracy of their rate estimates.

Bid price

Finally, there’s the bid price. The market is willing to buy a specific currency pair at this price. If you see GBP/USD 1.8812/15, the bid price is 1.8812, which means you can sell one British pound for 1.8812 U.S. dollars.

Ask/Offer Price:

 This is the price at which the market is willing to sell a specific pair of currencies in Forex. It’s similar to the price tag on something you want to buy.

Consider this: when you read a quote for EUR/USD 1.2812/15, the ask price is 1.2815. This means that you may buy one euro for 1.2815 US dollars. Simple, right? Sometimes, people refer to the ask price as the “offer price.”

Bid-Ask Spread:

 The spread represents the difference between the bid and ask prices. Consider the difference between the purchase and sale prices.

And here’s some trader language for you, the “big figure quote.” It’s a quick approach to discuss the exchange rate.

 For example, if the USD/JPY rate is 118.30/118.34, traders may simply say “30/34.” The spread in this example is four pips.

Quote Convention:

In Forex, exchange rates are calculated as follows,

Base currency / Quote currency = bid / ask. 

It’s similar to a formula that calculates how much one unit of the base currency can be bought or sold for.

To summarise, the Ask/Offer Price is the amount you pay when buying, the Bid-Ask Spread is the difference in prices, and the Quote Convention is how rates are expressed. 

Let’s talk about some more important points in Forex. This time, we’re going to discuss Transaction Cost, Cross Currency, and Margin. Don’t worry, we’ll keep it easy.

Transaction costs:

The bid/ask spread is more than just a price difference, it also represents your transaction costs. When we talk about a “round-turn trade,” we indicate a buy and sell transaction of equal amount in the same currency. For example, the transaction fee for EUR/USD at 1.2812/15 is three pips. To calculate it, simply subtract the bid price from the ask price.

The formula for calculating transaction cost (spread) is as follows:

Transaction cost (spread) = Ask Price – Bid Price

Cross Currency

Cross Currency refers to currency pairs that do not include the US dollar. They can be challenging because you simply execute two USD trades. For example, going long (buying) EUR/GBP is the same as purchasing EUR/USD and selling GBP/USD. Keep in mind that certain pairs may have higher transaction costs.

Margin:

When you open a margin account with a trader, you must deposit a minimum amount. This is different, certain traders may ask for as little as $100 or as much as $100,000. When you place a deal, a portion of your account balance is set aside as the first margin requirement. This is dependent on the currency pair, its price, and the amount of units transacted. The lot size always connects to the base currency.

For Example:

You start a micro account with 200:1 leverage and 0.5% margin. micro accounts trade micro lots, which are $10,000 each. If you open one mini-lot, you will only require $50 ($10,000 x 0.5% = $50).

Alright, let’s talk about something extremely important in Forex: LEVERAGE Consider leverage to be a trading superpower, allowing you to handle a large sum of money with only a tiny amount of your own.

Leverage

Leverage is the ratio of capital used in a trade to the required security deposit, sometimes known as the “margin.” It’s the key to managing big sums of money with very little of your own.

Variety of Leverage:

Here’s the interesting part, not all traders offer the same leverage. The ratio can range from 2:1 to 500:1. That means that for every $1 you invest, you could earn two to five hundred dollars. It’s like getting a lot of value for your money!

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Imagine this:

You’ve amazed everyone with your Forex language, and now you’re about to impress even more by going into the various forms of trading orders. Are you ready to progress to the next level? Let’s go!