Basic Forex Terminologies

1. Spreads — Those who invest or trade in the futures, option and stocks usually has a broker who will become the agent for the transactions. Brokers take orders from the investors or traders for each exchange and will do it following the full instructions of the investors or traders.

Brokers get a pay as a commission when the clients purchase and sell any financial instrument. The forex markets do not give commission which sets it apart from those markets with its have its basis on exchanges. Forex markets depend on principals alone. The foreign exchange markets have dealers instead of brokers. This is one characteristic of the Foreign exchange market that any investor must comprehend. The dealers take on the risk of the market by being the opposing group to the trade of the investor. The dealers are not paid commissions. They gain money from the bids and ask spreads.

An investor in the forex market cannot make the effort of buying on the sell or bids by offering a price the same as the offer for the markets based on exchange. However as soon as the price covers the spread’s cost no commission or other fees will be incurred. This means every centavo gained is a profit that goes to the investor alone. However the reality that these traders should constantly overcome the spreads of bids and ask concludes that scalping is really difficult in Forex markets.

2. Pip — Pip is an abbreviation which means percentage in point. In Foreign exchange market a pip is the tiniest increment of a trade. In the Forex market the rates should be quoted up to its fourth decimal point. With the important currencies, the Japanese yes is the exception to this rule since this currency was never valued again after World War II.

3. Selling and buying in the FX market — We really sell and buy nothing in the currency market. The forex market particularly the retails forex market is a market for speculators. There is no tangible currency exchange that happens. Each trade transaction enters the computers then they will be added up with the present price in the market. The accounts with dollars are also calculated on the value of the dollar and any loss or gain of profits is also recorded in terms of dollars.

4. Carry — This is the most famous currency trade in the forex market. It is often carried out by small retail forex speculators and by the traders with big hedge funds. The basis of the carry lies on the truth that the currency of each nation carries an interest rate with it. For a short period the central bank of each country sets their interest rates.