November 28, 2021

Forex Terminologies Explained: What you need to know

Definition

Foreign Exchange can be defined as a marketplace of willing buyers and sellers who swap currencies at a decided rate. People, businesses, and central banks use forex markets to exchange currencies.

Forex Varieties

There are three types of forex markets, namely spot, forward, and futures. Forward markets are compared to farmers who plan to harvest in a short period but are unsure of market prices.

There is no uncertainty about the selling price or the date for future Forex markets, unlike forwarding contracts. Future contracts are therefore valid in a court of law since the price and dates are known.

Pairing Currencies

The Forex market has a distinctive aspect of paring currencies or quotes.

The flexibility of trading in a pair allows the trader or investor to express their position against the currency they believe is best paired with their preferred currency. For example, if a person’s preferred currency is the US dollar, the base currency is the US dollar when pairing. The first currency mentioned in the statement serves as the base currency for any pair.

In this illustration, the pairing quote is USD/GBP. There are two currencies in the quote, one of which the British pound is used to quantify the US dollar’s worth. It is the quote currency.

Assuming that the USD/GBP quote is 1.1000, that would equate to a value of £1.10 for every dollar. If the price rises to $£1.15, the dollar would have risen in strength, and the pound would have fallen in worth on a relative basis. The GBP ( Great British Pound)is the variable currency.

Shorting the dollar and purchasing it back at a cheaper price, known as “covering,” is an option for investors who are pessimistic about the dollar but optimistic about the pound. As a result, these investors predict that equities will rise.

An investor who is “bullish” believes that a stock or the market as a whole will rise in value. In contrast, “bearish” investors feel that a stock will fall in value.

Expounding Definitions

When a buyer (the bidder) makes an offer, their bid price is the maximum the bidder is willing to pay. When selling an FX pair, this price appears in red on the left side of the stated quote.

In contrast, the asking price is the lowest price at which a seller is willing to sell. You will see this blue-colored price when searching to buy a currency pair to the right.

Spread is what you get when you subtract the buying price and the selling price of a pair.

As an illustration, the USD/EURO rate varied from euro 1.15335 to 1.15345; the 4th decimal number is the pip.  Pairs with smaller denominations go against this rule. A good example is the Japanese Yen. For these, the change is observed in the number that comes in second in the decimals.

With leverage, traders can trade more outstanding capital while only putting up a percentage of the total value of the trade. Leverage gives traders the ability to take on more significant capital with less money without having to pay the entire value of your trade upfront.

Instead, they make a partial one percent down payment known as a “margin” to secure a loan. Profit or loss is calculated using the entire value of the position when you complete a leveraged trade. Therefore leverage heightens both gains and losses.

For instance, instead of cashing in $50,000, you invest $5000 for an FX pair transaction.

Before you Start Trading

Armed with this knowledge, an individual may start to trade. However, there are a few other critical pointers for choosing a broker and for trading.

One, the broker must be highly rated and have positive customer reviews on their platform. They must also have met all the legal requirements, such as a valid license of operation. Second, a trader must continually be updated on world events by keeping up with world news because the sociopolitical and economic environment significantly influences Forex. Lastly, a trader must be faithful to one trading software to gain experience in navigating when trading.

Conclusion

This article looked at the terminologies in foreign exchange in layman language and several things a newbie in Forex should follow when starting.