You want to know the lingo of the Forex market not only so you can participate in the market in the most complete and informed ways, but also so you can impress those around you with your extensive knowledge of what is happening in a marketplace that most are not even aware exist. We want to provide you with a condensed list of some of the terms that will most impress people around you as you show them just how much you have learned while journeying through the jungles of the Forex markets. You may use this list as a nice refresher for yourself on some of these terms. There are so many terms out there that it can be nice to have a quick cheat sheet to fall back on.
The base currency is always the first currency listed on any currency pair. It is the currency that one is buying or selling against the value of the other currency listed in the pair. For example, when looking at the USD/CAD pair, the USD is the base currency. A trader that buys the USD/CAD believes that the USD will rise in value against the value of the Canadian Dollar. Likewise, if they sell the currency, they believe that the US Dollar will decline in value against the Canadian Dollar. Another example is the EUR/USD pair. For this pair, the Euro is the base currency that one is making their trading decisions on.
Major And Minor Currencies
The major currencies are those currencies most traded around the world. They have the most liquidity, and this makes it easier to get in or out of a trade in these currencies. They are the most open to the possibility of major gains (or losses) because they tend to move around the most in the trading day. With that much interest in them, it is hard for them not to move heavily. The major currencies are:
All other currencies are considered minor currencies and are not traded nearly as heavily. It is still possible for a savvy trader to potentially make some money on the minor currencies, but most traders know that their best bet is to stick with the major currencies and allow their fortunes to be decided by these more heavily traded vehicles.
A fun word to bring up around people who may not be as knowledgeable about the currency markets as you are is the word “pip”. As you know, a pip is the unit of measure of movement between two currencies. One pip on the EUR/USD pair would be a movement in price from 1.1500 to 1.1501. It seems so insignificant to the outside world, but you know that currency traders literally make their fortunes on the pip movements of currency pairs that they trade.
The even cuter named pipette is the smaller movement of a currency pair. It is defined as one-tenth of one pip of a movement. In the EUR/USD pair, a one pipette movement would be a move from 1.1500 to 1.15001. It is a fractional movement, but it still has some impact on the accounts of Forex traders. It is a fun word to say, and that also intrigues people, but the most important thing to remember is that a pipette is the tiniest unit of movement that is measured in the Forex world.
The difference between what a buyer is willing to pay and what a seller is willing to sell their currency pair for is known as the bid/ask spread. The bid is the amount that the buyer is willing to put up, while the ask is the amount that the seller is willing to accept. There is always some distance between those two numbers, and that distance is known as the bid/ask spread. It is the place where brokers make their money on each trade, and it is definitely something worth keeping an eye on in terms of how much spread you pay to keep your trades live and active.
Cross Currency Pair
A cross currency pair is simply any pair that does not involve the US Dollar. The US Dollar is still considered the world’s reserve currency, and that is why it is present in so many pairs. However, there are pairs such as the GBP/JPY or the AUD/NZD that do not contain the US Dollar at all. These cross-currency pairs make for interesting investment opportunities as they take the US Dollar and the questions that one would ask about the strength of the dollar out of the question.
This is that extra money that a trade receives from their broker to trade in larger lot sizes than they would be able to with their own money. The trader does not get to keep the margin funds of course, but they are permitted to use them to make some trades while they are operating under that broker. The value to the broker of offering all of these extra funds is that they allow the traders to get into position sizes that are respectable and actually make an impact on their bottom line. That is what traders want, and the brokers are happy to step in and provide that to them. It benefits everyone, and that is why margin accounts are so popular among traders of all sizes. Plus, it is really fun to tell people that you are trading 100,000 worth of EUR/USD rather than whatever small amount you could cover with your own funds.
The ratio of the amount of a transaction to the required margin is called leverage. With leverage, traders can control larger positions with a relatively small amount of capital. It varies according to your broker — ranging from 2:1 up to 50:1.