10 Essential Currency Trading Terms
You don't need a Master in Fiance to trade currencies or even to understand currency trade-speak. Although some of the more advanced trading terms may require a bit more experience to understand, for the most part, you can trade after adding just a few basic terms to your vocabulary.
Here are 10 essential trading terms you need to know.
ForEx is short for Foreign Exchange, which is basically another way of saying currency trading.
Some of you might be rolling your eyes thinking, "that is WAY too obvious". Well, if you walk down the street and ask people if they know what ForEx is, most people will shrug their shoulders. So it really is worth mentioning here.
2. Currency Pairs
Two currencies that are traded together in the foreign exchange markets. The value of a currency is determined by its comparison to another currency. So for example EUR/USD represents the relationship, in terms of price, of buying Euros using US Dollars.
Currency pairs are read as follows: the first currency listed is the base currency. The second currency listed is the quote currency. This mean that to buy 1 unit of the base currency, you have to spend X units of the quote currency. This takes us to the next definition, the Exchange Rate.
3. Exchange Rate
The price of a currency in terms of another currency. In other words, this is the value of a currency pair. So if the exchange rate of the EUR/USD currency pair is 1.10, this means that the value of 1 Euro in US Dollars is $1.10.
Check out this article to read up on detail about exchange rates
A pip is 1/100 cents. Fluctuations in exchange rates are so tiny that they are actually measured in pips. On the foreign exchange market, the EUR/USD currency pair will generally have an exchange rate of four decimal places. The fourth decimal place is the pip. Some markets will also show a fifth decimal place (1/1000th of a cent), called the pipette.
For example in the EUR/USD currency pair can have an exchange rate of 1.1009. The 9 is the pip, or 1/100th of a cent. If a fifth decimal is added, i.e. 1.10096, the 6 is the pipette.
Read up on pips and pipettes in this article.
5. Bid-Ask Prices
The Bid price is the maximum amount that a buyer of a particular currency is willing to pay. The Ask price is the minimum amount that a buyer is willing to sell a particular currency. A transaction occurs when when a buyer and seller agree on a price.
Lets say that a buyer of Euros is willing to pay $1.12 cents per Euro. $1.12 is the maximum amount the buyer is willing to pay for 1 Euro, i.e. the Bid price. On the other hand, a seller of Euros may be willing to sell 1 Euro for $1.09. This would be the ask price. The difference between the bid price and the ask price is known as the Spread.
To keep things simple, the Cashout app currently does not differentiate between bid/ask prices.
6. Long vs Short Positions
Going long, or a long position is when a trader buys a currency, with the expectation that the exchange rate will rise, and that the future value of that currency will be greater than the present value. On the Cashout app, this is the "RISE" button.
On the other hand, going short, or a short position occurs when a trader sells a currency (that he either owns or that he borrows) and sells it with the expectation that its value is going to fall. On the Cashout app, this is the "FALL" button.
The Spread is the difference between the Bid price and the Ask price of any given currency pair. The spread is generally expressed in therms of pips, or the number of pips in between the bid and ask prices. So, if the bid price for the EUR/USD pair is 1.1210, and the ask price is 1.1215, than the spread is 5.
You can learn more about spreads in this lesson.
Leverage, also called a leverage multiplier, or a Booster on the Cashout app, is quite literally the use of borrowed capital to make an investment. By adding leverage to a trade, traders can vastly increase the potential profit of a trade, while taking on greater risk.
In currency trading, the volatility of a market is generally defined as the standard deviation on an exchange rate over a given period of time. Concretely, volatility is a measure of fluctuation of an exchange rate. The higher the volatility the more movement there is in a currency pair.
A trader's greatest tool, the Stop-Loss allows traders to define a maximum loss amount on a trade, so that the trade closes at the specified loss amount, rather than risk losing more.