This article is about the jargon used in the forex live trading market.
To trade in the forex live market, you need to understand the jargon that is regularly.
Terminology Used in Forex Live
Exchange Rate or Forex Rate
These terms are used as indicators of the value of one currency to another. For example USD/AUD=1.0601. This means that for each US dollar you will receive AUD1.0601.
Margin is the value you require to open or maintain a position. The margin you have is normally either free or used. Free margin is the value you have available for the purchase of new positions. Used margin is the amount required to maintain your open positions. For example, if you had a $500 margin balance in your trading account and your broker has stated a 1% margin value, you would be able to buy or sell a position worth $500000 if you used a leverage ratio of 100:1.
When you account balance goes below the minimum level needed to maintain your open positions, your forex broker will issue a margin call. This means that you either have to add extra funding or you have to close the position. Most forex brokers will automatically close your open position if you go below the required margin level. Your terms and conditions will state the margin level required to maintain an open position.
A pip can be described as the smallest currency movement. This is also sometimes called a point. A pip movement for the USD/AUD=.0001.
The spread in a forex quote is the variance between the price it will cost to buy and the price you will receive when you sell a pair. These are called the bid and ask prices. For example, if your broker quoted you 1.1800/05 for the EUR/USD dollar. The spread can be calculated as the difference between 1.1800 and 1.1805 which is equivalent to five pips. For you to enter a breakeven point when you enter this trade, the position will have to move by the spread amount that was quoted.
When you make use of leverage ratios, you are increasing the value of your trade to an amount in excess of what you have in your trading account. For example, you wish to open a standard valued at $100,000, but you only have $1,000 in your account. To do this you would have to make use of a leverage ratio of 100:1. Although this appears to be an ideal situation as it does not require funding to open such a huge trade, you have to bear in mind the dangers of leverage. With this level of leverage you can make a huge profit, but if your trade fails, you will lose all the available funds in your account.
A cross rate is the forex rate that is quoted for two currencies where neither currency is the originating country’s domestic currency. The term is also at times used for those pairs which exclude the US dollar irrespective of the origination country of the quote.
An example of this is if a quote for the JPY and AUD was quoted in a publication in the US, it would be seen as a cross rate as neither of these currencies is the domestic currency for the US. If the quote included the US dollar, it would not be considered a cross rate.