New To Forex? Words You Need To Know

Ever felt out of place in a room of seasoned investors? It’s not uncommon for forex newbies to feel like they know next to nothing when the veterans start throwing around the big words. But more often than not, big words are really just that—fancy terms for things you probably already understand. To help you better understand trader lingo, here’s a guide to some of the industry’s biggest buzz words.

Major/minor currency. Major currencies are simply the most frequently traded ones in the market. There are eight: the US dollar, euro, Japanese yen, British pound, Swiss franc, Canadian dollar, New Zealand dollar, and Australian dollar. Everything else is a minor currency.

Base/quote currency. The base currency unit against which another unit is measured; the second unit is the quote currency. The quote currency is also called the pip currency. The USD is the most commonly used base currency; for example, if the USD/CAD rate is said to be 1.015, one US dollar is equal to 1.015 Canadian dollars.

Pip. The smallest unit in a currency, which in most cases is the fourth decimal place or one-hundredth of one cent. This is the smallest level at which a change is observed. The Japanese yen is an exception; it is only counted up to the second decimal place. Brokers sometimes quote pipettes, or one-tenth of a pip, to add precision.

Bid/ask/offer price. The bid price is the price that a market is willing to pay for a given currency pair, and therefore at which the base currency can be sold. The ask price of offer price is the price a market is willing to sell a pair. The bid and ask prices appear on the left and right side of the quotation respectively. The difference between the two is called the bid/ask spread, and is measured in pips.

Round-turn trade. A move consisting of a buy trade and an offsetting sell trade, or vice versa, of the same value in a single currency pair. In a round-turn trade, the transaction cost is also the bid/ask spread.

Cross currency. Any pair of currencies that does not include the US dollar. Because the USD is the peg for most trades, trading these pairs essentially involves initiating two USD trades. This usually translates to higher transaction costs.

Margin. A minimum security deposit required when one opens a forex broker account, varying from a hundred to several thousands of dollars. Part of this deposit is set aside for every trade, depending on the currency pair traded, their prices, and the amount traded.

Leverage. The ratio between the margin (required deposit) and the capital spent in a transaction. The larger your leverage, the more money you can control with a smaller capital.