The process of Forex currency trading is very straight forward however the beginner will require some study to be able to trade successfully. We hope to give the novice a basic idea of how things work and how to navigate through the learning cycle with ease.Here are the basic concepts and terms you will encounter in your Forex travels. It may seem a little confusing at first but it's really quite simple. The more familiar you are with the ForEx basics the easier it is for you to get started well in ForEx currency trading. We might repeat what is listed elsewhere on this site which should serve to simply reinforce these concepts and terms.
Quotes
Every currency has a three letter abbreviation. The currency rates are always quoted in pairs and expressed as a five digit number. The first currency in the pair is the base currency and it is always equal to 1. For example, if EUR/USD = 1.4100 then every 1 Euro is worth US $1.41.
Pips
Currencies are traded on a price interest point (pip) system. The last digit in the currency pair represents one pip. For example if the GBP/USD rate moved from 1.6374 to 1.6375 this represents one pip movement. It also means that the GBP has appreciated by one point and the USD has depreciated by one point. Each currency has its own pip value. Similarly if the USD/JPY rate moved from 130.45 to 130.46 it has appreciated by one pip.
Pip Value
In any currency pair the base currency has a pip value of $1 per every 10,000 currency units. Therefore in a standard 100k account the base currency has a pip value of $10 for every 100,000 currency units.
Bid/Ask Price
The 'bid' price is shown at the left side of the quotation and is the price at which the trader can sell the base currency. The 'ask' price is shown at the right side of the quotation and is the price at which the trader can buy the base currency.
Bid/Ask Spread
The Bid/Ask spread is the difference between the bid and ask price for every currency pair. Forex traders are subject to spreads when opening or closing trades in the buying position. In other words, you are always subject to a spread when you buy, regardless of whether you are opening or closing the trade. The lower the spread the lower the broker's fees. The narrowest spreads are quoted on the most liquid currency pairs which are also known as “the majors”.
Margin
The beginner needs to understand that Forex currency trading is conducted on margin. This means that you only need to use a small cash deposit to trade a much larger amount of currency. The margin deposit is required as collateral to cover any losses that might be incurred. A broker might require only $1,000 in your trading account in order to trade from a $100,000 margin trading position. In effect the broker loans you $99,000 for $1,000 in security. You cannot lose more than your margin deposit amount.
Lot Sizes
Trading is done in lots, either standard lots or mini lots. A standard lot size is equivalent to 100,000 units of currency. With 100:1 leverage you will need $1,000 to trade one standard lot. A mini lot size is 10,000 units of currency, with 200:1 leverage you will need $50 to trade one lot.
Rollover
When a trader has an open position at 5.00 pm EST it will automatically be rolled over to the next day resulting in your trading account to either earn daily interest or pay daily interest. This is determined by the 'interest rate differential' which is the difference between the short-term interest rates of the two economies comprised in the currency pair.
For example, with GBP/USD, if Britain’s interest rates are 5.0% and U.S. interest rates are 2.0%, the interest rate differential is 3.0% (5% - 2%). Therefore if you were to buy GBP/USD you would receive interest at 3.0% per year. If you initially sell GBP/USD you would have to pay interest at 3.0% per year.
Carry Trade
The purpose is to earn extra income from the daily interest payments when you hold or retain a currency pair. Selection of the right currency pair is essential for this to work. You will need to buy the currency with the higher interest rate and sell the currency with the lower interest rate.
Cross Currencies
Currency pairs that do not involve the U.S. Dollar.
Long Position
Long Position occurs when a trader initially buys currency with the expectation that the currency will increase in price thereby selling it later at a higher price.
Short Position
Short Position occurs when a trader initially sells currency with the expectation that the currency will decrease in price thereby buying it back later at a cheaper price.
By the way, as reminder, you should probably know how to calculate profits well since you should be doing that often!
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