Basic Forex Terms

Exchange Rate

This refers to the ratio of one currency value to another currency or quantity of one currency unit which can be exchanged to another currency unit. This rate is fluctuating according to various factors. The supply and demand of currencies, geopolitical and world economy are main factors that affect exchange rate. However the government of a country can peg currency value.

Pip

It is the unit which is used to measure currency pair movements. The pip value is measured in four decimal places. This is very important to realize as this will determine your total Forex trading profit or loss.

For example, imagine the currency pair value of EUR/USD has varied from 1.2015 to 1.2017; the pip would be the difference between those two values (0.0002). Usually the one pip is equal to 10 dollars for a standard lot.

Pip is the difference between close value and open value.

Open value is the value exists when you open the account and the close value is the value exists when you close the account.

BID and ASK Price

These two terms are very important in Forex trading. The buying price of a currency is known as ASK and selling price of currency is called the BID. When you sell currencies, you will get bid price and when you want to buy currencies, you will consider ASK price.

The Spread

The difference between ask and bid price is called the spread. Usually Ask price is higher than Bid price.

Example:

 A company needs to buy 100 EURO for 10 dollars from B Company and this is called bid price. C company is willing to sell his stock of 150 EURO for 11 dollars. Then ask price is 11 dollars. So an outside investor sees that if he wants to buy a stock of 100 EURO, he has to pay 10 dollars and if he wants to sell 150 EURO, he can sell it for 11 dollars.

Forex Lot

This term is very important when you open Forex trading account. The term "lot" indicates by volume in metatrader4. You should have a good knowledge of lot sizes before open Forex trade otherwise you will lose by applying in various sizes of lots. The lots are the tool to separate invested amount into small amounts to ensure easy trading.

Example: Trading amount is 100 dollars but it is not traded at once. Small amount of it will be used to trade by using lot sizes.

The lot sizes indicates that the amount of currency fairs that you can buy or sell. There are 4 types of Forex lots in Forex market.

Standard Lot

This lot is limited to 100,000 units. You can invest 100,000 dollars in this lot and pip value is 10 dollars per pip. The big investors who own more than 25,000 dollars invest in this lot.

Mini Lot

This lot is limited to 10,000 dollars with 1 dollar pip value. You need to have at least 5000 dollars to trade in this lot.

Micro Lot

This is the smallest lot that anyone can invest in. The maximum investment is 1,000 dollars with pip of 10 cents.

Nano Lot

These lots are too small and it might be 10 or 100 units. The risk is very low in these lots. Forex brokers do not prefer these lots but most of  new comers and strangers like to invest in these lots.

Leverage

The ratio in between funds of Forex traders and credits of Forex brokers is known as leverage. It is kind of a burrowed capital to gain a higher return.

Market orders

If you want to enter into Forex market, you have to put a market order. When you invest you do not think much about spread and only thing is to enter Forex market.

There are four different types of market orders and those are, 

Limit order

You can place an order for a specific price and duration. You can decide what will be the price for a particular currency pair and duration of Forex trade account. When the market price is lower, you can place order which is called limit buy order and when Forex market price is higher, you can place order which is called limit sell order.

Stop Order

If you want to limit order at a certain point of bid or ask value, you have to use stop order. You can predetermine stop value when you place market order.

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