Basic Forex Trading Terminology That You Need to Know!
The forex market comes with its own set of terms and jargon. So, before you deep dive into trading in forex and speculating, you’ll need to understand what some of the basic terminology means. Since you’ll be using them everyday or as often as you trade in forex, it’s imperative that you take the time to read and learn about them.
Here are a few basic forex terms to start you off…
The Eight Majors
The Eight Majors are nothing, but the major currencies that trade often in the forex trading market. They are mentioned below.
- New Zealand (NZD)
- Australia (AUD)
- Canada (CAD)
- Switzerland (CHF)
- Great Britain (GBP)
- Japan (JPY)
- United States (USD)
- Eurozone (EUR): The major players in the forex market are Spain, Italy, France and Germany
This refers to the value of a particular currency in terms of another. For instance, if you read that EUR/USD is 1.4200, this means that 1 Euro is worth US$ 1.4200.
This refers to the currency exchange rate between two currencies that are not a part of the official currency of the country it has been quoted in. Sometimes this term is also used to refer to currency quotes that don’t involve the U.S. Dollar, irrespective of which country the quote has been provided in.
For instance, if the exchange rate between the Japanese Yen and the British Pound was quoted in an American newspaper, then this is considered as cross rate. Neither the Yen or the Pound is standard American currency. On the other hand, if the exchange rate between the American Dollar and the British Pound had been quoted, then it’s not considered as cross rate as the American Dollar is their official currency.
In the forex market, all the currencies are paired together. So, you’ll often see EURUSD. This refers to the pair of the Euro and the US Dollar. All the pairs will have a standard layout. Out of the two, base currency is the first one and terms currency is the second one. So, in EURUSD, EUR is the base currency while USD is the terms currency.
The base currency is the benchmark for the price or value of the currency pair. So, taking EURUSD as an example again, if EURUSD = 1.400, then this refers to a single Euro being valued at US$ 1.400.
Terms currency is also known as quote currency or counter currency. So, in EURUSD, USD is the terms currency.
Bid and Ask
Bid refers to the buying price of the dealer. Ask refers to the selling price of the seller. If the dealer wants to make money, then the dealer needs to make sure that the bid price is lower than the ask price.
The difference between the Bid price and Ask price is Spread. The value of spread is always calculated by subtracting the Ask price from the Bid price. So, the formula to calculate Spread is Bid price – Ask price = Spread.
If you hear the term going long, it means taking the long position or buying the base currency hoping that the value of that currency will rise in value against the terms currency. So, in EURUSD, if you want to go long, you’ll need to buy EUR with your USD, hoping that the value of EUR will appreciate.
Going short is exactly the opposite of going long. You sell the terms currency hoping that this currency will strengthen against the base currency. This means that the value of the currency pair needs to decrease. This indicates that the value of the terms currency increases.