Online Currency Trade

Know Your Forex Terminologies

You do not want to be clueless when it comes to Forex terminologies. Forex words are important and they are exclusively used in Forex trading alone. Before you venture into the world of Forex trading make sure that you fully understand these terms for they will guide you in your trading purposes.

1. Bid/Ask Spread

The difference between the buy and sell price or the bid and ask price is called the "spread". Referring to the first few digits of an exchange rate however, is called the "big figure quote".

Example: USD/JPY = 118.30/118.34 - In words you will hear say the first three digits from this rate, which is the "30/34".

2. Quote Convention

Forex market make use of a specific format, exchange rate are expressed through the following:

Base Currency/Quote Currency Bid/Ask

3. Transaction Cost

The bid/ask spread has an important characteristic which is also known as the "transaction cost", this is for a round-turn kind of trade.

A "round-turn" trade means both the buy or the sell trade and the offsetting selling or buying with the same size and in the same currency pair.

Example: EUR/USD = 1.2812/15 - In this example the transaction cost is the three pips. - Formula to get the transaction cost is: Ask Price - Bid Price -------------------- Transaction Cost

4. Cross Currency

Any pair that does not include the USD is called the cross currency. This now shows an erratic price behavior after the trader, one way or the other, initiated two USD trades.

Example: EUR/GBP = long buy is also equivalent to EUR/USD buying as well as GBP/USD selling.

This kind of transaction, which is called the cross currency often times carries a higher amount of transaction fees than others.

5. Margin

This has something to do with a new account with a Forex broker. The new account is called "margin" account; a deposit is required to make with the minimum amount.

Broker have different amount of minimum deposits, it can as low as $100 or it can be as high as $100,000.

Every time that a trader makes a new trading transaction, a percentage of that deposit from the margin account balance will be reserved as the "initial margin requirement".

6. Leverage

The ratio of the capital amounted in a transaction made to the required security deposit or the margin is called the "leverage".

This is the process of controlling a huge dollar amount from a security that is comparatively small amount of capital.

Different brokers have different leveraging that ranges from 2:1 to 400:1.

7. Leverage + Margin = Possible Fatal Combination

You can increase your buying power at the trading currencies on a margin. The more buying power you have the more you can increase your return of investment with having less cash outlay only.

Nonetheless, you should be careful since the trading margin can exaggerate your profits as well as your losses.

8. Margin Call

Margin call happens when your broker informs you that your deposits made from the margin have fallen below the minimum level that is required, this means that an open position is moving against you.

However, you can avoid a margin call by constantly monitoring your account on a regular basis. Also, you can avoid this situation by utilizing stop-loss orders.