Forex Market: Some Important Terms You Should Know

If you are a newbie to the Forex world, chances are you wouldn’t be quite well versed with the different terms used. Every market has its terminologies which are not widely used in our day-to-day conversations.

Unawareness can lead to various troubles. Listed below are few important terms that can help you understand the market in a much better way.

Currency Pair:

Many multi-national companies deal with varied clients who pay money in different currencies. This calls for currency pair; which comes into picture when two currencies are traded for one another. This way, one can trade about any kind of currency against nearly any other kind of currency provided in the Forex market. As there are various currencies available in the Forex market, one has the liberty to pair different currency as one trade.

Spread:

This is basically the difference between the bid or buying price for a currency and the ask or selling price for it. Every individual trading currency has to pass through broker. Every broker adds a spread to the trading currency, and this is how they are able to make profits. While trading currency, you observe numbers in your currency pairs. If your currency number is higher than you will make profit, and in reverse case, you will have to take loss.

Pip:

This is considered as the smallest unit on the Forex market. In some of the cases you will notice that two currencies have four digits to the right of the decimal points. The furthest one is called as pip. In others, most importantly in Japanese yen, the pip is the second number from decimal point. The difference of one pip between two currencies may represent only a tiny amount of money going into your retirement fund, but that is fine.

Leverage:

In Forex market, leverage means using credit or margins to trade between two currencies. With the usage of leverage one can make one dollar; which will have equal power like fifty dollars. One should use this leverage carefully as it can lead you to heavy losses if ignored.

Margin:

Margins are the credits many brokers will extend to traders allowing them to trade larger amounts of money without investing nearly as much. However, there is a risk involvement in this. At times, the Forex market gets as scared a place as any other market. This initiates a margin call; that is everyone who are trading on margins has to return all of the money they borrowed.

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