8 Forex Terms Every Trader Should Know
- April 3, 2022
- Posted by: Nancy
- Category: Education
There are many important terms used in the Forex world. We have compiled for you the most important forex terms you need to know:
Going Long/Going Short
When you are going long on a currency pair, the first part of the pair is bought while the second is sold. If you sell the first pair and buy the second, it means you are going short. For example, going long in EURUSD means that you buy EUR and sell USD.
One of the most important factors that distinguishes the Forex market from others and makes the Forex market very attractive in itself is the leverage system. Traders with low investments also have the chance to earn a large amount of profit thanks to leverage and, of course, accurate analysis. To exemplify, let’s say that you open an account with an amount of $20,000 and your Forex broker offers you 1:10 leverage. This means that with a $20,000 deposit, you can trade 20,000 x 10 (the leverage ratio) = $ 200,000. Your profit will be calculated in line with this amount.
Spread is the difference between the purchase price and the selling price of a currency pair. The spread difference varies among different pairs. Generally, EURUSD is the first one among the pairs with the least spread. The difference is deducted from your account as soon as your position is opened. For this reason, each position actually starts with a loss.
The pip is the smallest unit a pair can move. Each point increase in prices is a pip. For example, when the EURUSD reaches 1.3664 from 1.3660, it increases 4 pips.
Margin is the minimum amount your broker asks you to deposit into your account to start trading in the markets. There are no restrictions on using margin. If you want, you can open a position by using all.
Lot is the trading unit in Forex markets. For currency pairs, we usually define 1 lot as 100,000 units and 1 lot for gold as 100 ounces.
A swap is a transaction in which the two parties exchange cash flows that depend on an asset or liability. For example, a firm with a ten-year fixed-rate debt and a firm with a floating-rate debt can change each other’s obligations. The aim of swap transactions is to minimize the risk arising from changes in interest rates and foreign exchange.
It is the price of one currency in terms of another currency. For example, one euro may cost you $1.2016 if you buy EURUSD.
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