Beginner or not, anyone can lose track of all the complex terminologies circulating the foreign exchange, or simply, forex market. Just like in every industry, it’s common for professionals in a specific field to converse with their colleagues if they were to use the same language, ergo, the jargon.
The forex industry is littered with confusing language and jargon that may often sound alien to outsiders but can be understood by those practicing in the field. So, if you find yourself wanting to dabble in the forex market as an amateur trader, or even if you just want a quick refresher, you’ve come to the right place.
Knowing the unique language used while trading can make your entire experience more memorable, especially because you won’t be struggling to keep up. This can also improve rather than hinder your potential profitability because you’ll know the ins and outs of forex like the back of your hand.
That’s why before you dive headfirst into the forex market, you must take the time to familiarize yourself with the concepts and jargon. This way, you won’t have to keep second-guessing your decisions because you already know that you’re on the right track. Here are six terms to get you started:
Currency pairs are the backbone of the forex market because every trade happens in pairs. The exchange rate is the result when one currency is bought while another is sold. Learning how to read currency pairs is among the very first skills that you should have before entering the forex market.
There are three categories of currency pairs: majors, crosses, and exotics. The majors will always include the U.S. dollar (USD) and another currency from a major economy, such as the euro (EUR) or Japanese Yen (JPY). This is because the USD has a unique position on the global reserve currency, which means that all countries can trade with it regardless of their currency.
The crosses are trades with any two major currencies that don’t involve the USD. For instance, the EUR and British pound (GBP) or Canadian dollar (CAD) and JPY are both popular crosses. The exotics, on the other hand, are pairings with the USD and a currency from a country with an emerging and a rather volatile economy, like the USD and Thailand baht (THB).
Percentage in Point (PIP)
The percentage in point, or more commonly known as PIP, is the smallest movement that an exchange rate can make. It refers to the 4th and final decimal point in a price quote for a currency pair, which is used to measure overall value, market profits, or potential losses. One PIP is equal to 0.0001.
When you’re trading with leverage, it means that you’re borrowing money from within your trading account. This allows you to open a position with a high contract size without having to invest a lot of money in the process. Through leverage, you can increase your trading power and manage a higher position on the market.
Going Long or Short
Going long means that you’re buying the base currency (the first in the pair) and selling the quote currency (the second in the pair) because you’re expecting the market value to rise. On the other hand, going short means that you’re selling the base currency and buying the quote currency because you’re expecting the market value to fall.
Bid and Ask Price
Knowing the bid and ask price of currency pairs will help you plan your trading more accurately. The bidding price refers to the amount that a trader is willing to sell a currency pair. The asking price, on the other hand, is the amount that a trader will purchase a currency pair. The difference between these two currencies is known as the spread.
Appreciation and Depreciation
As you should already know, the forex market is highly volatile and the exchange rates change constantly. This is because of currency appreciation, which is the increase in the value of an exchange rate, and depreciation or devaluation, which is the decrease in the value of the exchange rate.
Of course, there are more forex market jargon that you will encounter and learn as you go further, but nailing the basics from the start will allow you to have an easier trading journey. By understanding the basic concepts of foreign exchange and how the market values move, you’ll be more equipped to navigate the murky waters on your own.
So, keep your eyes peeled for any terms that look alien to you and find out what they mean. There will always be room for more learning when you’re trading in the forex market, especially because you’ll have the first-hand experience with how the current economical and societal events in the world affect the exchange rates for different currencies.