Forex Terminology

When you are new to Forex you are likely to be confronted with a lot of new bewildering Forex terminology.Some you may be familiar with if you have traded other forms of investments such as Stocks or options. Other terms are unique to the Forex currency market.
So in order for you to be able to ‘converse’ with your Broker, we have provided detailed explanations of some of the key Forex terms below. Take time to understand these terms and how they are used in relation to your brokerage account (especially Leverage!).

Bid Price

The Bid Price is the price that the market is prepared to buy a specific currency pair for on the Forex markets. For the Forex trader this is the ‘sell’ price of the base currency.
Example: In the quote EUR/USD 1.4510/13 the bid price is 1.4510. This means you can sell one Euro for 1.4510 dollars.

Ask Price

The Ask Price is the price that the market is currently prepared to sell a currency pair for in the Forex market. For the Forex trader this is the ‘buy’ price of the base currency.
Example: In the quote EUR/USD 1.4615/18 the ask price is 1.4618. This means you can buy one Euro for 1.4618 dollars.

Margin and Leverage in Forex

Margin and Leverage are very important concepts to understand in Forex trading. Both refer to a similar concept from a slightly different angle. When a trader opens a position, they are required to deposit a fraction of the open position with the broker. This is known as the “Margin Requirement”.  This is often also referred to as a “good faith deposit.” This is because the trader will receive the amount back when they close the position out.

Margin

When you open your Forex account, the broker will request that you deposit a small sum into the account. This is, known as the 'margin'. Think of this as insurance for the broker against any losses that you may incur on your account. With this deposit you are able to control a proportionally much larger amount of currency i the market. This enables you to achieve both greater gains and equally greater losses than you would be able to achieve with your deposit alone.
This margin deposit is used in conjunction with leverage to allow the trader to control a proportionally much larger amount of currency than could be achieved by the deposit alone. This enables both greater gains and equally greater losses to be achieved.
Most trading platforms will generally display both the current margin in use for open positions and the amount of margin remaining available to open new positions.
You level of margin will fluctuate with underlying price of the market and therefore should be watched closely. When an account runs out of tradable margin the trader will receive the dreaded ‘margin call.’ Essentially this means that there is insufficient equity in the account to meet the minimum margin requirement for open positions in the account.
When this happens the Forex Broker will immediately liquidate all open positions at current market rates.
Whilst most brokers will guarantee that you cannot lose more than you have deposited in your account this is only of some consolation, as a margin call effectively means that you have blown your account!

Forex Quotes and Pips

Currencies cannot be traded in isolation. Instead they are traded against each other in pairs. Therefore when you get a Forex quote from your Forex broker there will always be two currencies quoted against each other.The first currency is known as the ‘Base’ currency. The second is the ‘Quote’ currency. This is also sometimes referred to as the 'counter currency.' When we refer to currencies on the Forex markets we refer to the trading pair, EUR/USD for example.

The Format of a Forex Quote

Each pair of currencies in a Forex quote is given in the following format of XXX/YYY; where XXX and YYY denote the ISO 4217 international three-letter code of each of the currencies.
The first of the two letters of the Forex quote identifies the name of the currency’s’ country of issue. The third letter identifies the international name attributed to the currency. For example:

For example: USD = US (United States) D (Dollar)

In a Forex quote you will also be given the current rate of exchange. This number is known as the exchange rate quote. This tells us how many units of the base currency (the first currency) it takes in order to purchase one unit of the quote currency (the second currency).

You will notice when looking at a Forex quote that in actual fact, two numbers are given after the currency pair. The first number is the 'bid' price. This is the rate that you buy from the broker. The second number is the 'ask' price. This is the rate that you sell back to the broker.
The first is the Bid Price. This is the price that the market is prepared to buy a specific currency pair for on the Forex markets. For the Forex trader this is the ‘sell’ price of the quote currency. In the example above the the bid price is 1.23829. This means you can sell one Euro for 1.23829 dollars.
The second price quoted is the Ask Price. This is the price that the market is currently prepared to sell a currency pair for in the Forex market. In the above example this is 1.23849. This means you can buy one Euro for 1.23849.
The difference between the two prices in a Forex quote is known as the bid/ask spread or if you like, the buying and selling price.
The spread on a particular currency pair will vary from broker to broker although typically will tend to be less than 0.1%. You will often see brokers quoting minimum spread sizes. Expect the spread to be anywhere between 1-3 pips although expect the broker to raise these during illiquid markets unless they guarantee 'fixed spreads.'
A broker providing a Fixed spread will guarantee that the price you buy and sell from the Broker will not change, whatever the market conditions.
The spread is also sometimes referred to as the transaction cost as it is this spread that the Forex broker keeps as commission for executing the deal.

Understanding The Forex Markets

The Foreign Exchange Market is the worlds leading global financial market. Commonly referred to as the Forex markets, or FX markets, it facilitates the exchange of several trillion dollars worth of currencies per day.Recent estimates show the daily traded volume to be close to $4 trillion dollars per day. To put this into perspective, this equates to more than three times the combined value traded on all the words stock markets.

What Is Traded On The Forex market?

The simple answer is money, or more specifically different currencies.
Forex trading is the simultaneous buying of one currency and the selling of another with a view to profiting rom the difference.
In simple terms, if the currency bought appreciates against the currency sold when the deal is closed, the forex trader makes money. Conversely if the currency has depreciated during this time then the trader will lose money.
Foreign Currencies are bought and sold through a broker or dealer much like Stocks and Shares. However this form of trading differs in that you don't actually purchase a physical asset such as a share or coupon. Instead you are simply speculating on the differential in value of the two currencies quoted.
When trading foreign currencies you will notice that they are quoted against each other. The first currency is the base currency. This is in effect the currency that you buying. The second currency is the currency you are in effect selling. For example, you can exchange the British Pound for the US Dollar (GBP/USD) or the Euro for the US Dollar (EUR/USD).

Why are Currencies traded?

The exchange of currencies has long been practiced throughout history. Traditionally currencies have been exchanged between regions to facilitate trade, investment and regional movement.

Increasingly however, currencies are being used purely for speculation and investment purposes. The ability to trade on online has seen a huge growth in the number of retail investors who are drawn to this way of trading. You may for example, be reading this article as one of the many traditional equity investors who are now turning to Forex trading as part of their portfolio.

Retail Forex traders now make up an increasingly large portion of the market. Traders will speculate on currency movements in much the same way that a stock trader would speculate on future share price movements. Different trading strategies are employed with both very short term (Intraday) and long term (Strategic) movements speculated on in an attempt to profit.

Forex Basics

So you've decided to dip your toe into the Forex currency markets and open yourself to the potential returns offered by Forex Trading? Congratulations! Trading foreign currencies is both an exciting and potentially highly profitable form of Financial Trading.
As a beginner to Forex Trading, there are plenty of places that you can go for great information. In fact there is so much information available on the internet these days that when starting out it can often seem overwhelming!
In this lesson we address some of the Forex basics that you will need to understand to start profiting from the Forex Markets.
Let's start by answering some common questions.

What do I need to start trading Forex?

Generally all you need to start Trading Forex is a computer with a high-speed Internet connection and a Forex brokerage account. Most people these days will have access to the former while online Forex Broker accounts can be opened quickly and easily in a matter of minutes.
However before you go heading off to the nearest Broker site we recommend that at the very minimumyou read the information on this website and ideally gain a good grasp of the general principles of Forex Trading.
At Forex Technical Chartist we cannot emphasize enough how important it is to not jump the gun! Remember the Forex Markets will be around for a long time, much longer than your Trading Capital if you do not approach them with both an idea of what you are trying to achieve and an understanding of the tools with which you intend to achieve this!

What does it cost to trade Forex?

Forex Trading can cost you as much or as little as you want it to. Forex Account opening deposits start very low with many brokers only requiring a $50 deposit to open a Micro account and sum offering account opening from just $1!
'Mini' account opening limits (their bigger brother) tend to start from around $500. This ‘higher’ level account may give you access to more platform features, better spreads or both. However increasingly, the distinction between account types is becoming more blurred as brokers become more competitive.
Both Mini and Micro accounts are good ways to dip your toe into the Forex markets for the first time with a limited exposure. Both account types will allow you to trade fully on the markets as you begin to pick up the ropes. Bear in mind though that just because you can open an account with a deposit of $50 in reality this is far too small an amount to allow you to follow a proper balanced Forex trading strategy.