The Forex market comes with its own unique set of terms or jargon. So, it is very important to understand some of the basic forex trading terminology before learning how to trade in the forex market.
Cross rate – It means the currency exchange rate between two currencies, which both of the currency are not the official currencies of the country in which the exchange rate quote is given. This also refer to currency quotes which do not involve the U.S. dollar, no matter which country the quote is provided in.
Exchange Rate – It means the value of one currency expressed in terms of another. For example, if USD/EUR is 1.2200, 1 USD is worth EUR$1.2200.
Pip – It means the smallest increment of price movement a currency make, which it is also called point or points. For example: If the currency pair USD/EUR moves from 1.2550 to 1.2552, that’s a 2 pip movement; or a move from 1.2550 to 1.2560 is a 10 pip movement
Leverage – Leverage is the ability to gear your account into a position greater than your total account margin. For example, if a trader has $100 of margin in his account and he opens a $10,000 position, he leverages his account by 100 times, or 100:1. If he opens a $20,000 position with $100 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage will ultimately magnifies the gains and losses.
Margin – Margin is the minimum amount of money or funds, usually in percentage, that you will need if you want to open a position and keep your positions open.
If you trade on a 1% margin, for instance, for every USD 1000 that you trade, you need to put down a deposit of USD 10. Therefore, in order to buy 1 standard lot (i.e. 100,000 of USD/EUR), you need to maintain only 1% of the traded amount in your account which equal to USD 1,000. By buying USD100,000 using only USD1,000, margin trading basically involves a loan from the forex broker to the trader.
Spread – The difference between the sell quote and the buy quote or the bid and offer price. In example, if EUR/USD quotes read 1.3000/05, the spread is the difference between 1.3000 and 1.3205, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Bid Price – The bid is the price at which the market or your broker will buy a specific currency pair from you. Therefore, at the bid price, a trader can sell the base currency to their broker.
Ask Price – The ask price is the price at which the market or your broker will sell a specific currency pair to you. Therefore, at the ask price you can buy the base currency from your broker.