Forex for dummies
October 26th, 2009
Whilst the concept of the forex market is straightforward, i.e. selling and buying different currencies, the forex market is not an easy market to understand. Newbies have to familiarize themselves first of all with the terminology within the market.
In the next paragraphs we explain some terminology used in the forex market.
Forex market
Forex market is the abbreviation for foreign exchange market. Sometimes it is also referred to as fx market.
Currency exchange market
Another term used for the forex market is currency exchange market.
PIP
PIP stands for “point of percentage”. Every currency exchange rate consists of a number of decimals. The last decimal represents the pip value.
Fractional PIP
The fractional PIP is 1/10 of the normal PIP. The fractional PIP has been created to enabling brokers to offer sharper spreads.
Long position
Whenever a trader thinks that a currency rate will increase, e.g. USD versus EUR, the trader will have to buy USD first and then sell the USD at higher rate which will result in a profit. This is called a long position.
Short position
Whenever a trader thinks that a currency rate will decrease, e.g. USD versus EUR, the trader will have to sell USD first and then buy USD at a lower rate which will result in a profit. This is called a short position.
Pivot point
A pivot point is the level at which the marker direction changes for the day.
Forex trading chart
A forex trading chart is a chart in which all pivot points are plotted.
Volatility
Volatility is the relative rate at which the price of the currencies move up and down. The pace of the price changes in the forex market is very fast and therefore the forex market is called a high volatility market.
Bid price
The bid price is the selling price of a currency contract. The bid price is always lower than the ask price.
Ask price
The ask price is the purchase price of a currency contract.
Spread
The spread is the difference between the bid and ask price. The spread is the fee for the broker, since there are no commissions in the forex market.
Currency pair
Each currency is always traded against another currency, for example, USD versus JPY. This is called a currency pair.
Leverage
It is possible to trade with a multiple of the invested amount. In that case the trader is not required to put up the full value of the position. This is called leverage. Leverages of 50:1, 100:1 and even more are not exceptional in the fore market.
Margin
When the invested amount is leveraged the trader has to keep the invested amount in a so-called margin account. The margin account may not have a debit balance. In case this happens due to a loss, the debit balance of the margin account needs to be settled by the trader.
Rollover
A “rollover” or “Tom-next” (Tomorrow Next Day) stands for rolling a position to the following day.
Posted in Forex Terminology