Useful Terminology Or Technical Terms Of Forex Trading

                                                         

technical-terms-of-forex-trading

• What is a Lot : This is the smallest size of trade available for traders and normally the standard size of a lot is 1000 units of a currency. However, traders can place orders with brokers in multiples of smallest size of trade e.g. 1000/2000/3000 etc.

• What is a PIP : PIP is the unit of measurement to express the change in value between two currencies. Most currency pairs except JPY(Japanese Yen) are always quoted to four decimal places. This fourth place after the decimal point is taken into consideration to count 'pips'. For instance, if rate of  EUR/USD rises to 1.2355 from 1.2350 it means EUR/USD rate has risen by 5 pips.

• What is an Exchange Rate : The exchange rate also called 'currency exchange rate' and 'foreign exchange rate' is the value at which one currency is converted into another. The forex market place is a decentralized one in nature and is conducted by several market participants spreading over several locations of the world. The exchange rate depends on several geopolitical and economical factors including interest rate, inflation and financial strength/weakness of various countries. Thus, it is common that two currencies will differ in value to one another and the exchange rate continues to change every bit of a second. 

• What is a Spread : Ask rate is the lowest price at which a financial is offered for sale and BID is the price at which a buyer is prepared to purchase, the price offered for a currency. The spread is the difference between the BID and the ASK price in market quotes. 

• What is a Leverage : In general terms, leverage means borrowed funds. Leverage enables traders to control a large amount of money in forex markets. Nowadays, trading in forex have reached all corners of the globe. This has been possible due to availability of numerous trading platforms and access to credit. Based on the availability of funds in a trader's account, a leverage or an enhanced limit is allowed to the trader to trade in various foreign currencies. Suppose, your broker allows you a maximum permissible limit in major currency pairs of 50:1. This means, for every dollar you have in your trading account, you are allowed to trade with a maximum of 50 dollars in a major currency. The more dollars you have in trading account the more is the available limit. Leverage enables a trader to make reasonable profit with minimum investment. At the same the risk rises considerably as leverage may result in increased profit or loss both. So, utmost caution should be exercised when using the facility of leverage or borrowed funds. 

• What is Pegging : Pegging may be described as the idea of fixing the exchange rate of a specific currency by matching its value to the value of another currency(s) or to another measure of value such as gold/silver. 

• What is Hedging : Hedging means opening of a new position in the opposite direction of an existing position on the same instrument. A trader cannot open a new position with insufficient margin in account.  

• What is a Position : Total amount of commitments in a given currency at a specific point of time. A position may be long or short and flat or square. Long position refers to more bought than sold, on the other hand short position indicates more sold than bought. A flat or square position means no exposure. 

• What is a Margin : Margin is the amount required to be deposited as collateral in your account to open a trade. This is done to cover losses resulted from adverse movement of prices. Margin depends on the present market quote of the base currency of the trader's account vs base currency of the trader's account, leverage level of the trader's account and the volume requested.

• What is a Margin Call : A margin call is an instruction from broker to deposit additional funds in account as collateral in order to guarantee current open positions, in case the market moves against a trader's position(s).

• What is  Rollover/Swaps : Trading in forex generates interest income and capital gains also. Forex is always traded in pairs, it not only involves two different currencies but two different interest rates as well. When the interest rate of the currency a trader bought is higher than the interest rate of the currency a trader sold the trader will gain interest or rollover called positive roll. If the situation is vice versa then the trader will pay rollover called negative roll. Rollover is when the settlement of a deal is rolled over or forwarded to a different date due to a variation in interest rate. A swap is the temporary holding of a security that is then exchanged after a fixed period of time. One needs to calculate the interest rate differential between two currencies to calculate the swap. Rollovers/Swaps add a considerable cost or profit in a trader's account.

• What is a Deficit : A negative balance of trade or payment. 

 

• What is a depreciation : A fall in the value of a currency due to economic factors and market forces.

• What is a One-Click-Trading : Lets a trader open a new position with just a click of the mouse.

• What is a Derivative : Derivative is a contract between two or more parties that establishes the value of underlying assets. Examples of such derivative instruments are: Forward Rate Agreements, Floors & Swap Options, Interest Rate Swaps, Options, Caps.

• What is a Devaluation : Spontaneous downward adjustment of a currency by the government of that country in relation to another currency.

• What is a Euro : This is the currency of the European Monetary Union(EMU) which replaced the European Currency Unit(ECU).

• What is European Central Bank : This is the Central Bank of the European Monetary Union.

• What is Forex : The global currency exchange market.

• What is Inflation : An economic situation when demand is more than supply and the prices of commodities are rapidly rising in the market. This situation affects the poor harder than the rich. 

• What is a Option : Option is an agreement that allows the holders to buy/sell a specified security of a specified quantity at a specified price within a set time period. There are two types of options - Call or Put. A 'Call' is the right to buy while a 'Put' is the right to sell.