What is currency pair? Do you know about spread and pip? Well, entering the forex trading world needs a good understanding of certain terminologies like them. Here you can learn about them.
Upon entering forex market, you've found so many unfamiliar terms flying around. They may made you confused, but worry not, we are here to discuss some of the most important terms everyone in forex trading should know.
Forex trading means we trade in one currency for another. Currency pairs are what we call those that we trade together. They could be any currency that is available in the market; US dollar, Euro, Yen, etc. However, there are eight major currencies that are among of the most traded in forex market. They are: US Dollars (USD), Euro (EUR), Japanese Yen (JPY), UK's Poundsterling (GBP), Australian Dollars (AUD), Canadian Dollars (CAD), New Zealand Dollars (NZD), and Switzerland Franc (CHF). Of course, there are many more currencies you could trade.
Lot refers to the quantity of each trade. In stock market, it is how many shares you buy in one transaction. In forex market, it is how many currencies you buy. Every broker stipulates their own limit as to how much a lot is worth and how many lot you could trade in one transaction.
Spread refers to the gap between bid/buying price and ask/selling price of a certain currency. For forex brokers, these are their profits. And so, the number of spreads differ between one broker and another. Generally, there are two kinds of spread:
- Fixed spread
Fixed spread, as it suggests, means that the broker put the same spread for every pairs you trade, and in any situation.
- Floating spread
Floating spread implies that the spreads is changing from time to time, and may differ from one pair to another. Before and after important news release, there could also be requotes because the system confused and failed to count the right spread. 'Quote' is what we call bid and ask price. So, 'requote' means that the system mentions a different price later on.
Pip is a common denominator used to count how many points currencies in forex market increases or decreases. There are pairs like USD/JPY who has two number after decimal points, and there are EUR/USD who has four number after the decimal. Let's say USD/JPY go from 103.95 to 104.00, then it gains 5 pips. Or in an example of EUR/USD, it weakens from 1.3527 to 1.3520, then it decreases 7 pips.
Long Positions and Short Positions
Long positions, means we expect a currency to gain against its counterpart, and put in a 'buy' position. Fore example, you trade in EUR/USD, and expect the Euro to go higher, then you do 'buy' transaction on the pair. It means you open a long position.
Short position, on the other hand, means that you expect a pair to go downward. In case of EUR/USD, it means you think USD will gain against Euro (or, in another word, the EUR/USD will go downward), and so you do 'sell' transaction on the pair.
Balance and Equity
Balance is the amount of money you have in your 'wallet' without counting the possibility of loss and profit of floating positions (positions that is still open, or as of yet on going). While equity is the total amount of balance plus floating positions.
Margin and Leverage
Margin is the money needed as guarantee for the funds you use to trade. While leverage refers to the funds you 'borrow' from your broker in an unspoken transaction. Let's say you have $20, and you want to trade with $2000. It is possible, but in order to do that, you have to trade at 1:100 leverage and seek broker who provides that. The 20 is your margin, and the 1:100 is what it could generate.
There are two concept of margins. The first, free margin is the remainder of your margin after you used your account to open transactions. The second, margin level is the percentage of your equity slash margin. Margin level is useful to calculate margin call. Margin call happen when one surpasses the limit of minimum margin required by his broker.
Entry and Exit Points
Technical analysis in forex market is not only used to determine the trend; often times, it is also used to calculate entry and exit, or when you open a certain position and when you close the aforementioned position. A mistake in calculating the two points will result in disastrous consequences; you could have received margin call, or else, you suffer great losses. That's why, apart from determining entry and exit points, you should also determine protection level in every transaction.
Protection level refers to how you protect yourself from losses. In order to do that, you could have used stop loss and trailing stop, or choose a certain money management. Read on to the related articles to know more about them.
Like its name suggests, target refers to the goal we wanted to attain in a trade. Calculating target is not an easy feat. Nevertheless, every trader has to have a certain target in each of their trade. Mapping protection level and target since the beginning will make your trade more efficient and effective. Target level is a continuation of your trading plan, therefore, this is too, is something you should calculate carefully.