FOREX TERMS

To start with forex you need to know about certain terms. Well there are lots of terms to know but I would be putting down a few important ones over here. Certain terms are self explanatory which shouldnt be difficult to understand.

Trader- Thats you.
Market maker, dealer, broker are the ones you gonna deal with.

Spread is the difference between the buy and sell price i.e. ask and bid. The bid represents the price at which the forex market maker is willing to buy the base currency in exchange for the counter currency . Conversely, the ask price is the price at which the forex market maker is willing to sell the base currency in exchange for the counter currency. This is the difference between the market makers selling price and the price the market maker is ready to pay to buy the same currency. This means that if you buy a currency and then sell the currency before the price has changed you will lose money because of the spread. Bid price is always lower than the ask price, thus the situation. Forex prices are always quoted using five numbers; so, for this example, let's say we had a USD/CAD bid price of 120.00 and an ask of 120.05. Thus, the spread would be equal to 0.05, or $0.0005.


Pip- I EUR/USD bid/ask is 1.3121/1.3125 then by selling the security before the price has changed, you will lose 5 pips. If you understand the example you would notice that the currency rates do not change a lot so the changes are quoted in pips. The smallest upward or downward price movements quoted in forex. A movement of 0.0001 is one pip (for example, from 140.005 to 140.004 euro). But for Japanese YEN, a movement of 0.01 is one pip (for example, from 116.32 to 116.31 yen).

Quote- Price of a currency is called quote. There are two types of quotes Direct Quotes and Indirect Quotes. Direct quote is the price for 1 US dollar in terms of the other currency. Indirect quote is the price of 1 unit of a currency in terms of US Dollars. Quote is provided by the market maker(the dealer) to the investor.

Cross Rate- When quote is not put against US dollar but against another currency, say GBP/USD- 1.7315

Margin- deposit required to open or maintain a position. Basically a security in case you incur losses. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade. Your margin will always be the agreed percentage of the value of the transaction that you make.

Leverage - The ratio of margin to the maximum position size. With a deposit of $5000 and a leverage of 50, you are able to operate a face value of $250,000. Leveraging allows you to profit quickly, but lose money just as fast. Leverage gives a trader the ability to increase the potential return on an investment. Leverage works both ways however; and it also increases potential risk. Therefore leveraging magnifies both gains and losses. Leveraging a position involves putting down margin, to take on a position that is larger in value. I'l need to put down a whole new post explaining how leverage works.