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The Forex trading market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The purpose of this article is to give you an introduction to common Forex trading terms and their definitions.
Ask Price: The ask price is the price you can buy at.
Base Currency: The currency to the left of the / in a Forex quote is the base currency. Its value is always 1. In the Forex quote, EUR/USD = 1.3489, EUR is the base currency.
Bid/Ask Spread: The bid/ask spread or simply spread is the "distance" between the bid and ask prices. This spread is usually expressed in pips.
Bid Price: The bid price is the price you can sell at.
Counter Currency: The currency to the right of the / in a Forex quote is the counter currency. In the Forex quote, EUR/USD = 1.3489, USD is the counter currency.
Forex Deal: The purchase or sale of a currency.
Forex Quote: Forex quotes are always expressed in pairs. In the following example, your "pair" of currencies are the U.S. Dollar (USD) and the Euro (EUR). The Forex quote, EUR/USD = 1.3489, means that one Euro is equal to 1.3489 U.S. dollars.
Fundamental Analysis: A fundamental analysis uses economic and political factors, such as housing starts, the unemployment rate, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons for currency movements.
Long Position: A long position is a market position that appreciates in value if the market price increases.
Lot: 1 lot is equal to 100,000 units of the base. Likewise, 2 lots are equal to 200,000 units of the base, 3 lots are equal to 300,000 units of the base, and so on.
Margin: Margin is referred to as the collateral needed to facilitate A Forex deal. Usually, this is a very small portion of the entire deal, say 1% or 1:100. However, margin is a "double-edged sword." Without the proper use of risk management tools (that is, stop-loss and take-profit orders), you can experience substantial losses as well as gains.
Open Position: When your Forex deal is running, you hold an "open position."
Pip: The spread between the bid and ask prices.
Short Position: A short position is a market position that appreciates in value if the market price decreases.
Stop Loss Order: A market order to close a Forex position if or when losses reach a pre-set threshold.
Take Profit Order: A market order to close a Forex position if or when profits reach a pre-set threshold.
Technical Analysis: A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.
As with stocks and mutual funds, there is risk in Forex trading. The risk results from fluctuations in the currency exchange market. Investments with a low level of risk (for example, long-term government bonds) often have a low return. Investments with a higher level of risk (for example, Forex trading) can have a higher return. To achieve your short-term and long-term financial goals, you need to balance security and risk to the comfort level that works best for you.