10 Terms Forex Traders Need To Know To Make Money

Forex Key Words To Know

Before starting your investment adventure, there are a few fundamental phrases in the world of finance and forex that you must comprehend. Having a head start on novice traders who want to trade the markets by becoming familiar with these terminology can be beneficial. Although you may already be familiar with some of them, it's always a good idea to review them.

1. Major and Minor Currencies

The list of major currencies that are most liquid and often traded on the forex market is provided below.

1. USD
2. EUR
3. JPY
4. GBP
5. CHF
6. CAD
7. NZD
8. AUD

Although the currencies not on this list are minor, that does not imply they are not significant. After careful examination, you can still earn from tiny currencies.

2. Cross Currency

Cross-currency pairs consist of two different currencies, none of which is the US dollar (USD). Because the trader actually started two USD trades without trading a USD pair, the behaviour on these pairings is a little bit different.

For instance, if you wanted to buy EUR/GBP, what would actually happen is that you would be selling GBP/USD and buying EUR/USD. Your transaction fees will likely go up as a result.

3. Transaction Cost

Depending on the broker you employ, the spread and/or commission make up the majority of a trade's transaction costs. 

The spread calculation formula is as follows:

Spread is the difference between the ask and the bid prices.

Every broker has a different commission rate, so be careful to inquire about what they charge.

4. Margin

You must deposit an initial sum of money before you can begin trading; the amount varies between brokers. The broker will issue a margin call and request additional funds from you if the balance of your margin falls below the minimum maintenance level. If you reside in the EU, new ESMA legislation mandate that brokers provide negative balance protection, limiting your potential losses to the amount you initially deposited. 

5. Leverage

The ratio of the capital employed in a transaction to the required security deposit (margin) is what determines how much leverage is there. This enables you to own more shares of a security with a smaller initial investment. Although the level of leverage varies from broker to broker, new regulations are also capping the amount of leverage that retail traders in CFDs and options can use. Leverage is now limited to 50:1 for normal clients under ESMA law. 

6. Pips

When you first begin your Forex journey, pips may appear frequently. Perhaps due to the phoney tactics and frauds you encounter online. For instance, "100 pips a day!" 

The smallest unit of value for any currency is the pip. A short tip is that, barring Japanese yen pairs, a pip is often the fourth decimal place digit. For example, if the exchange rate changed from 1.5001 to 1.5002, it would be a change of 1 pip. 

Because the pips are in the second decimal place, JPY pairs are slightly different. Therefore, a movement of 1 pip from the exchange rate of 1.01 to 1.02 would be considered.

7. Pipette

Pipettes are one-tenth of a pip, and brokers typically use them to add precision to quote prices. When you count the number of pips a pair has moved, the cTrader platforms will first display the pip and then the pipette in the first decimal place.

8. Base Currency

The first currency in a currency pair is called the base currency.

For example: EUR/USD

Base currency = EUR

9. Quote Currency

The second currency in a currency pair is called the quote currency.

For example: EUR/JPY

Base currency = JPY

10. Quote convention

When dealing with quotes from the forex market, the exchange rates often adhere to a set structure.

This is:

Base currency/ quote currency = Bid/Ask