Basic forex terminology
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A standard lot is equivalent to , units of the base currency. A mini lot has 10, and a micro lot has 1, units. An example is a stop-loss order which is used to minimise losses on a trade.
This protects against further losses on an open position if prices continue in an unfavourable direction for the investor.
This protects against profits being lost in an unanticipated reversal of price direction before the investor can close the position.
Alternatively, find out more about the similarities and differences between forex trading and CFDs. At Destek Markets we provide our registered users with a wide range of educational tools and videos on demand to gain an in-depth knowledge and to build your confidence.
The Forex market comes with its very own set of terms and jargon. Cross rate — The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U. For example, if an exchange rate between the British pound and the Japanese yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the pound or the yen is the standard currency of the U.
However, if the exchange rate between the pound and the U. Exchange Rate — The value of one currency expressed in terms of another. Pip — The smallest increment of price movement a currency can make. Also called point or points. Leverage — Leverage is the ability to gear your account into a position greater than your total account margin.
Increasing your leverage magnifies both gains and losses. To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. Margin — The deposit required to open or maintain a position. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. This allows a trader to leverage his account by up to times or a leverage ratio of Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open.
Spread — The difference between the sell quote and the buy quote or the bid and offer price. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread. You will need to understand how to properly read a currency pair quote before you start trading them. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another.
In other words, in the example above, you have to pay 1. In other words, in the example above, you will receive 1. An easy way to think about it is like this: So, whether you buy or sell a currency pair, it is always based upon the first currency in the pair; the base currency. The basic point of Forex trading is to buy a currency pair if you think its base currency will appreciate increase in value relative to the quote currency. If you think the base currency will depreciate lose value relative to the quote currency you would sell the pair.
Bid Price — The bid is the price at which the market or your broker will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker.
Ask Price — The ask price is the price at which the market or your broker will sell a specific currency pair to you. Thus, at the ask price you can buy the base currency from your broker. Jump To Next Chapter — Part 3: Introduction — What Is Forex Trading? What is Professional Forex Trading?
Another measure of liquidity is the volume of buyers and sellers, with more players creating tighter spreads. Assets that can be easily converted into cash.
A position characterized by purchasing more of an instrument than is sold in hopes that the value will appreciate. A request by a broker or dealer for additional funds or other collateral in order to guarantee performance on a position that has moved against the trader.
A dealer who supplies prices and is prepared to buy or sell at those prices. A market maker runs a trading book. Risk relating to the market in general that cannot be extinguished by hedging or holding a variety of securities. Jargon used in buying and selling. Short-term investment opportunities e. Participants include banks and other financial institutions. Amount of assets that exceed liabilities.
For an individual, this refers to the total value of all possessions such as houses, stocks, bonds and other securities; minus all outstanding debts, such as mortgage and loans. A contingent order in which the execution of one part of the order automatically cancels the other part.
A deal, not yet reversed or settled, in which the investor is subject to exchange rate movements. An instruction from a client to a broker to trade. An order can be placed at a specific price or at the market price. It can be good until filled or until close of business. The smallest incremental move an exchange rate can make.
Depending on context, this is normally one basis point 0. A trading viewpoint expressed by buying or selling. Can also refer to the amount of a currency either owned or owed by an investor. Involves the sale of an instrument to be re-purchased at a specified time and date.
Occurs in the short-term money market. A term used in technical analysis indicating a specific price level above which a currency is unable to cross. Recurring failure for the price to move above that point produces a pattern that can usually be shaped by a straight line. The interest rate variation between the two currencies when the settlement of a deal is rolled forward to a different date. To sell an instrument without actually owning it in hopes that the price will decline so it can be bought back in the future at a profit.
A transaction that occurs immediately. The funds will usually change hands within two days after deal is struck. A term used in technical analysis indicating a specific price level below which a currency is unable to cross.
Recurring failure for the price to move below that point produces a pattern that can be displayed using an approximate straight line. The temporary holding of a security that is then exchanged after a fixed period of time. To calculate the swap, find the interest rate differential between the two currencies.