Let Us Familiarize Ourselves with the Basic Terms Used in Forex

April 8, 2021 | AtoZ Markets Today, we will learn about the most basic terms that a novice trader can encounter in the trading world. Knowing all the essential words in forex trading may not create a massive impact for a newbie trader, but it is an excellent practice to start by familiarizing with the most basic terms.

The major currencies and the minor currencies

Let us start with the stars of forex trading: the currencies. The most-traded and used ones are USD, EUR, GBP, JPY, CHF, CAD, AUD, and NZD. These eight currencies are referred to as the major currencies, while those not mentioned are part of the minor currencies.

The base and quote currency

Let us use EUR/USD = 1.11 as an example. Here, the first currency in the pair, which is EUR, is the base currency. If we interpret this, it means that one Euro is equal to 1.1 US Dollars. Even if our example is EUR/ USD, currency pairs usually have USD as their base currency except for EUR, GBP, AUD, and NZD.
We call the second currency the quote currency. In our example, our quote currency is the USD. All unrealized gains or losses are expressed in quote currency, which is also known as the pip currency.

Thus, exchange rates are expressed as:
Base currency/ Quote currency= Bid/ Ask

The pips and pipettes

A pip is the slightest possible unit of currencies. Most currency pairs have five significant numbers because usually, the decimal point succeeds the first digit. For example, in EUR/USD = 1.1123, 1.1124 is one change of a pip. It means that the most minimal change in the fourth decimal place or 0.0001 is one pip. If the currency pair’s quote currency is USD, one pip amounts to 1/100 of a cent. Everything is the same except for a Japanese Yen pip equal to 0.01 or the slightest change in the second decimal place.

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If you think a pip is a small unit, you must know that a pipette is equal to one-tenth of a pip. If an exchange rate is 1.12345, then one change of a pipette is 1.12346.

The bid and ask price, and the bid-ask spread

The bid price is the price of a base currency that a broker is willing to buy for a quote, while the ask price is the price that a broker is ready to sell the base currency for a quote currency.

The bid-ask spread is the result of the difference between the bid price and the ask price. Bid-ask spread is also known as a round-turn trade’s transaction cost. A round-turn trader is a buy or sell trade, and at the same time, an offset buy or sell trade identical to the currency pair’s size.

A cross-currency

A cross-currency does not contain any USD currency in the pair. For example, the EUR/ GBP currency pair is the same as buying two USD trades because this currency pair means a buy EUR/ USD and a sell GBP/ USD.

Margins and leverages

Opening a margin account with a broker requires a minimum amount deposit anywhere from $100 to $10,000. Some percentage goes to the margin account that becomes the initial margin requirement when making a new trade. This amount depends on the involved currency pair, current price, and lots in the trade.

Leverage refers to the transaction amount capital ratio to the security deposit requirement or margin. Leverage can control massive dollar amounts of a financial instrument with tight capital. Leverage differs from one broker to another.

As a summary

There we have it. These are the most basic terms in forex trading that may offer a little help and insight especially for new traders.

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