You should make a point of understanding the fundamentals of forex trading before you jump into the live arena. There are several basic terms that you need to familiarise yourself with. Read as much as you can about the market and take a look at some of the methods and strategies used for trading.
The Forex Trading Terms You Should Know
Some of the basic terms you should know about include:
- Currency pair. This is made up of the two currencies you wish to trade.
- Ask price is the price the broker will sell the base currency at.
- Base currency is the currency to the left in your pair, for example AUD/USD would be Australian dollar
- Quote or counter currency is the one to the right in your pair, and that would be the US dollar
- The spread is the variance between the bid and ask prices.
- The bid price is the price your broker will buy the base currency at. This price is always lower than the ask price.
- A pip is a movement of .0001 in the price of a currency. A pip or a point is the smallest movement in a price.
The Lot Sizes
Currencies are normally traded in lots of which $100,000 is a standard one. There are smaller lots of $10,000 which are called mini-lots. Although these may seem like large sums, the small incremental movements in currencies make this necessary.
The Use of Currency Quotes
There are two ways in which you can quote a currency, directly or indirectly. A direct quote is an instance where the foreign currency quotes is the base currency. An indirect quote is where the domestic currency is quoted as the base currency. For example, if you are based in Australia and the Australian dollar is your domestic currency, a direct quote would indicate a variable amount for your domestic currency for a single, fixed amount of the other currency. Thus, a quote received from an Australian institute would read ‘AUD1.10 per USD1.’ This would indicate a direct quote. If an institution is quoting you an indirect quote, it would have a fixed domestic currency and variable foreign currency. In this case the quote would read ‘AUD1=USD.90.
The Use of Cross Currency
A quote that is given without the US dollar forming part of it is called a cross currency quote. The most common of these pairs is Euro/British pound, Euro/Japanese yen and Euro/Swiss franc. Making the decision to trade in cross currency pairs gives the trader a wider choice. Most professionals recommend that beginners should not trade cross currencies until they have sufficient experience in the forex trading market. These currencies are not as popular as the ones that have the US dollar as a component of the pair.
Now that you are aware of the basics regarding quotes etc., it is important that you get to know this financial market inside out. It might be a good idea for you to obtain books or register for an online course to gain better insight into the forex market. This will stand you in good stead for the future.