The 5 Most Important Forex Terms To Know

by Trading 101     Jul 16, 2019

Forex trading can be fairly intimidating at the beginning to get into. Many of the trading 101 courses out there assume its takers have a basic education in trading already – many of which don’t have that basic education or understand some concepts but not the terms.

There are plenty of things that one needs to understand about trading in general and then the forex markets specifically before even thinking about buying into them. One of them is terminology – many news outlets, articles and websites online will use the same terms so having a base understanding of what each of them means is important.

Today we’ll cover 5 important terms that any budding forex trader needs to know and be able to use in their trading career. These are important inside and outside of forex, so consider them preparation for any other formal trading 101 class that one may take.

  • 1) Margin Trading

The term “margin” refers to the practice of margin trading. Margin trading is in its most basic form, a type of lending. Margin trading means a forex trader is using their broker’s money to trade currency pairs for, hopefully, profit.

Brokers lend the money without the trader necessarily needing to deposit the amount being loaned to them into their brokerage account. This is a very common practice but should be treated as the double edged sword that it is: margin trading can raise potential gains considerably but also expose the trader to significant amounts of losses.

  • 2) Leverage

Leverage is connected to margin trading. Each broker has a different leverage ratio – a ratio that basically determines how much money a broker is going to boost your trading position with. For instance, a broker as a leverage ratio of 50:1. In this case, if the trader enters a trade worth 5 USD, then the broker will leverage that amount to be 250 USD instead.

Leverage is great for traders that don’t have large amounts of capital. In the same vein as margin trading, using leverage well can really augment profits but equally expose the trader to significant losses as well.

  • 3) Pair

In forex trading, everything is traded in pairs. It’s impossible to trade only a single currency as that would, well, not make any sense.

There are 8 major currencies in the market that are considered the standard currencies. These are: US Dollar (USD), Japanese Yen (JPY), Great British Pounds (GBP), European Euro (EUR), Australian Dollar (AUD), Canadian Dollar (CAD), Swiss Franc (CHF) and New Zealand Dollar (NZD). These are traded by almost any forex broker and come in pairs, so if you own Euros and want to trade into US Dollars, the pair to trade would be EUR/USD.

Of course, there are dozens of other currencies in the world and hundreds of potential pair combinations. Picking the right ones to trade are important.

  • 4) Base & Quote Currency

The base currency is the first one listed in a pair. In the case of JPY/AUD, the Japanese Yen would be the base currency.

The quote currency, the second one in a pair, is the one being traded against. It’s also referred to as the pip currency in some cases.

  • 5) Pips

Pips are units of measurement. In the forex context, a pip is the smallest possible unit of currency. The size of a pip is determined by the type of currency.

For example, in EUR/USD, a pip would be 0.0001 of either currency. Japanese Yen however, which has higher denominations than EUR/USD, would have a pip sized 0.01 instead.

Pips are important as they’re often the size of price fluctuations you can see in the market, so pip-sized movements can be profitable despite being so small, especially when using margins or leverage.

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