Most Common Forex Trading Terminology
Forex trading comes with its very own set of terms. Understanding these terms is necessary before you jump into forex trade. In this article, we are going to discuss the most common forex terms that you will encounter on your trading
When you see a forex price quoted on your platform, you always see two prices because one is the buy price and one is the sell price. Bid is the price that a forex liquidity provider is willing to pay to a seller. Ask is the the price that a forex liquidity provider is willing to sell to a buyer. Ask price is typically higher than the Bid. From a trader’s point of view, they sell at the Bid and buy at the Ask. In example EURUSD above, Bid price is 1.05375. Ask price is 1.05394
Pip stands for Percentage in Points. Pips is the basic measure of price changes in forex market. Usually you count profit or loss in pips. Most of our currency pairs are quoted to 5 decimal places, except Japanese yen pairs. The change from the 4th decimal place (0.0001) in price commonly referred to as a ‘pip'. For example, if EURUSD rises from 1.05375 to 1.05394, EURUSD has risen 1.9 pips.
The difference between the Bid price and Ask price is the spread. The smaller the spread, the better for the trader. Spread is essentially an initial loss when taking on any trading position. In example EURUSD above, the spread is 1.9 pips
When you buy or sell forex pair, you esentially open a trade position. You need to close this position, to finalize the profit or loss.
Margin is the amount of money required to open a leveraged position. Margin can be thought of as a money required to maintain open positions. This money is simply a portion of your equity set aside and allocated as a margin.
When the trading losses exceed the defined margin requirements for a open positions, the broker issues a margin call. This means that the trader must reduce the size of position, or close of the position, or raise the available capital to cover the credit risk.
Equity is your current money amount added with profit or loss from trading position.
A lot is the smallest trade size available. In forex, you can open trade position from 0.01 lot (depends on your broker)