It’s fair to say the world of Forex trading consists of some fairly strange phrases. If you’re a total novice in the world of trading this could be the guide you’re looking for. Read on for an explanation of the most commonly used terms you’ll need to know.
Forex and FX are simply shortened monikers for the foreign exchange market where banks, companies, brokers and investors buy, sell and speculate on currency pairs, as the value of individual currencies fluctuate. The FX market is open 24 hours a day, 5 days a week.
National currencies are in an almost constant state of movement whether it’s the euro, the pound or the dollar. In Forex trading you’ll be paying attention to currency pairs, which demonstrate the difference in value between two different currencies. The first currency listed is the ‘base currency’, while the second is the ‘quote currency’. In an AUD/USD currency pair, for example, the trading figure shows how much USD is equivalent to 1 AUD.
A pip is a standard measurement to mark minute fluctuations in currency values – and will therefore indicate your gains or losses. For most currencies other than the Japanese yen, the pip will be the fourth number to the right of the decimal place, so one hundredth of a cent. For the yen, the pip is two places to the right of the decimal.
The spread is the difference between a bid (sell) and ask (buy) price for a currency pair, usually indicated in pips. Ideally you want the currency you hold to have a greater number than the currency you are trading for. The spread will typically represent a fee for many Forex providers.
Leverage essentially amplifies the exposure potential of your trade, providing up to 400 times more exposure on your deposit in the case of ForexCT. Keep in mind that while that means you can amplify your profits using leverage, it also increases the possibility of your potential losses.
In order to minimise the fallout of an unfavourable change in currency values, traders use stop losses to protect their returns. A regular stop loss needs to be manually adjusted, while a trailing stop loss will adjust automatically based on pre-defined percentages or amounts. ForexCT provides guaranteed stop losses on all FX trades.
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