“I made 30 pips on that last trade”. Ever wondered what that meant? If you did so, it is because you do not know the basic terms used in Forex and, which of course is because you are a beginner. In the financial world, there are a number of technical words that are used to denote one thing or another. It is difficult to grasp all of it at a go. However, in order to succeed and survive in the world of online Forex trading, you need to know a few key terms. Here we will see the most important ones which you cannot avoid at any cost.
As you are well aware of now, Forex trading is the process through which a trader gains profit or loss by buying and selling currencies. These currencies appear as pairs; the EUR/USD being an example of a prominent currency pair.
Base Currency and Quote Currency
In the currency pair, CAD/USD, the Canadian dollar would be the base currency and the U.S. dollar would be the quote currency. In simple words, the base currency (also called the transaction currency) is the first currency that appears in the currency pair quotation. The second currency appearing the currency pair quotation is the quote currency (also called counter currency).
MT4 (Meta Trader 4)
It is the platform on which a trader analyzes the markets, the fluctuations in the rates of the currency pairs, etc. and trades Forex.
This is what your trading platform would look like:
Unlike the normal line graphs that you have seen this is the candlestick chart. This type of chart reveals more information than a line graph and has been in use for about 300 years. Each part of the candlestick has a specific meaning (refer to the illustration below).
Pip (percentage in point)
The movement of the exchange rate for a currency is measured in terms of pips. The smallest change for the currencies is 1 pip which is equivalent to 0.0001 for the currency pair EUR/USD. It is this movement of the exchange rate which determines the result: i.e., if the trade carried out by a trader ended in a profit or a loss. Therefore, pip is also the numeric value that ultimately measures profit or loss.
Consider the following example wherein the trader traded using the currency pair: AUDUSD. He will get a profit if the value of the Australian dollar increases. As in, if he bought the Australian dollars for $1.1835, per dollar and exited the trade at AUDUSD 1.1901, he would definitely have had a profit. To be exact, he would have made 66 pips on the trade (1.1901 – 1.1835).
Bid and Ask price
In online Forex trading, a bid price is a price at which the market is ready to buy that certain currency pair. It always appears to the left of the currency quote. In the example, if the currency pair EUR/USD is 1.2342/47, then 1.2342 is the bid price. It means that you can sell the EUR for 1.2342 USD.
Ask price in online Forex trading is the price at which the market is ready to sell that certain currency pair. It always appears to the right of the currency quote. Taking the same example as above, 47 is the ask price. It means that you can buy one EUR for 1.2347 USD.
A spread is the pip difference between the bid and ask price of a currency pair.
Consider the example:
If the AUD/USD is currently at 0.93860/65
Then the spread would be 0.93865 – 0.93860 which is 0.00005 or 0.5 pips
For now, Let us stop with this. In the coming articles, we shall cover up the rest of the terms that are used if the Forex.