Most of the newbie investors who express interest to trade on the forex market often get discouraged by their inability to quickly grasp the basic terminologies used in forex trading. If you belong to this group, then this post is specifically written for you. Below, you will find a quick and simple guide on forex terminologies that you will find useful in your bid to enter the forex market.
- Base currency. This is the currency of your current trading account and is therefore the currency that you want to spend and “convert” into another currency. If you have an account with an online brokerage that uses US Dollars as its currency, this becomes your base currency.
- Quote currency. This is the current that you want to purchase using the base currency. Say you want to purchase Euros using US dollars from an online brokerage account; the US dollar becomes your base currency while the euro is your quote currency.
- Exchange rate. The exchange rate is the value of one currency with respect to another, often expressed as a ratio of both. Suppose you want to work with the USD/EUR currency pair; the exchange rate would look like this: USD/EUR = 1.3158 which means that you need to spend $1.3158 to buy 1 EUR. Conversely, if your base currency is the EUR going into the dollar, the exchange rate is simply the inverse of the USD/EUR. In this case, it becomes the EUR/USD and the exchange rate is 0.760.
- Long position. This is a description of a transaction where you are buying the base currency and selling the quote currency. With the same USD/EUR example, a long position means you want to buy back US dollars using Euros.
- Short position. The inverse of the long position; here, you want to buy the quote currency and sell the base currency. From the same example, a short position means you want to sell US dollars and buy Euros.
- Bid price. This is the price where your broker is willing to buy the base currency in exchange for the quote currency. The bid price isn’t necessarily equal to the prevailing spot price but can be very close. The bid price is the best price at which you are willing to sell the quote currency back into the market.
- Ask price. This is the reverse of the bid price; it refers to the price at which your broker will sell the base currency in exchange for the quote currency.
- Spread. This refers to the difference in the bid price and the ask price and is often a determinant of your profit out of the transaction.
If you want to succeed in forex trading, master these terminologies so you know how to converse and make transactions with your broker and with other forex traders.