Forex Trading Terminology You Should Know About
January 1st, 2012
In forex, the currencies are traded worldwide. It is the most dynamic financial market. Currencies are traded with large volumes and hence the Forex is very liquid. Trading in forex is very complex. It requires careful analysis of news, events, currencies, and even political awareness.
To understand how the forex market works it is important that we know the meaning of the following terms:
1 – Cross rate:
Currencies are always traded in a pair. Here’s an example of a currency pair: EUR/USD. EUR stands for euro and USD is the American dollar. When we say 1.2582 EUR/USD, we mean that 1 USD is equal to 1.2582 EUR. The Euro is the base currency and the USD is the counter currency. We are determining the rate of Euro which is a cross rate.
2 – Bid-Ask spread:
Bid refers to the cost price whereas ask refers to the selling price of the trader. Every currency pair has its own spread.
3 – Pip:
Percentage in Point is referred to as PIP. The PIP measures the amount of profits generated. For the currency pair EUR/USD, 1 PIP is equal to.001. This means that if the EUR/USD moves up 1%, it rose 100 pips.
The participants in the forex are:
1 – Banks and Large financial institutions:
Trading is carried out in big volumes by the banks. Interbank trading also takes place hence making the banks one of the major players in forex.
2 – Commercial Companies:
Big firms buy sell and good or services in exchange of currencies. They have an impact on trade balances.
3 – Government:
The monetary policies decide the exchange rates, rates of interests, etc.
4 – Retail Traders:
Even an individual can trade the forex market. People can start trading with less than $100.
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