The colossal and ever-expanding Forex market has its own unique terminology and jargon. In order to fully embrace the multidimensional world of currency trading, one should understand and internalize the basic vocabulary associated with the market. Here are some of the most common terms used in Forex trading.
The currency exchange rate between two currencies which are not the official currencies of the countries in question. For instance, if an exchange rate between the US dollar and the Japanese Yen was quoted in a European newspaper, this would be considered a cross rate in this context, because neither the dollar or the yen is the standard currency of any European country.
The value of one currency communicated compared to another. For example, if GBP/EUR is 1.1716, one pound is worth EUR1.1716.
The smallest incremental change a currency can make. It is also referred to as point or points. For instance, 1 pip for the GBP/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.
Leverage is the capability to finagle your trading account into a better position in relation to your total account margin. For example, if you have 1,000€ of margin in the account and you open a $100,000 position and then leverage the account by 100 times, or 100:1. If you decide to open a 200,000€ position with 1,000€ of margin in the account, the leverage is 200:1 thus amplifying the possibility of gains and losses.
Leverage benefits the trader to invest, but it comes with bigger risk. If an investor leverages an investment and the investment moves against the investor, the loss is considerably bigger than had the investment not been leveraged – leverage augments the chances of losing and winning. In the financial world, a company can utilize leverage to produce stockholder mammon, but if it fails, the interest overhead and credit risk of default abolishes stakeholder value.
The Spread is the variance concerning the sell and the buy or the bid and offer price. For instance, if EUR/USD quotes read 1.3215/18, the spread is 3 pips (1.315 – 1.3218 = 3). In order to break even, a position needs to move towards the trade by an sum identical to the spread.