Common Terminologies Used in Forex Markets

Common Terminologies Used in Forex Markets

Common terms used in Forex 

There are terms specific to financial markets. Forex includes terms that it shares with other financial markets. But they mean different things in the forex market. Also, there are a number of words that are distinguished by forex alone. In this article, we will introduce you to the characteristics of forex. These terms will be widely used in other articles in this article.

Base and Counter Currencies

In the financial markets, you can sell stocks and bonds. This means that any of them can be converted into money. In the forex market an individual buys and sells at the same time and we will explain how trading is done. 

This means that there is an exchange between one currency and another. So currency rates are always quoted in pairs. The price refers to the unit of the first currency that one is willing to pay for the second. The price is always determined based on the first currency and is called the base currency. 

Counter currency is the other currency. For example, in America, there are two currencies-the dollars and the euro, but the main one is the dollar, and the euro is called the counter currency.

Long and Short Positions

Similar to the bond and stock markets, traders can hold long and short positions in the currency markets. However, in this market, the definition of long and short positions is developing. Again, this is the result of currency trading in pairs. As a result, novice investors are unclear about what happens when they go long and what entails short.

Buying in the forex market involves buying units of the base currency and selling units of the relevant Currency. It is called to go longer when one already has a long position and continues to buy! 

You should buy dollars and sell Euros in the market if you want to go long on the USD/EUR pair, for example. 

Similar to this, going short on the Forex market entails selling units of the base currency while purchasing units of the competing currency. Going shorter means extending the short position.

So, if you wanted to short the USD/EUR pair, you would have to sell the USD and buy the EUR at the same time. 

Squaring off is the process of returning from a long or short position to a zero position. In order to square off, a long position must sell, whilst a short position must buy.

Bid, Ask, and Spread

Market makers control the forex markets. They constantly offer a two-way market for all currencies. They offer to purchase and sell quotes as a result. They will always be willing to purchase anything for less than they will sell it for. By owning a volatile asset for an ambiguous amount of time, they are incurring a risk, and the difference is intended to cover that risk.

The price they are willing to buy at is referred to as the bid price, and the price they are willing to sell at is referred to as the asking price. The term "spread" or the "bid-ask spread" may be used to describe the difference between the two. 

Lots 

 When trading forex market supplies, this phrase is widely used. Futures contracts in the forex market always have a fixed volume. For example, contracts in US dollars can be offered in multiples of 5,000 USD. As a result, each contract in the amount of  5,000 USD will be indicated as a lot. Therefore, you will need to have 5 contracts if you want to buy 25,000 USD in the future. There are many lot sizes accessible for different currencies. Market makers provide currencies with higher liquidity and more freedom.

Pip

The smallest movement the currency quote can make is by this amount. The standard pip stands for one-thousandth of the given currency. This indicates that for a currency to have an impact on the stated rates in the Forex markets, the change must be at least 0.00001 percent. Pips are now commonly used by Forex traders. Pips are used to communicate price changes as well as gains. However, it takes some expertise to interpret what is being said because the pip could relate to a variety of financial sums.

Value Dates and Rollovers

The day that the parties to the deal agree to settle their accounts is known as the value date. This indicates that on the value date, all open positions in derivative contracts are immediately closed. As a result, contracts grow more erratic as the valuation date approaches. Additionally, traders frequently choose to roll over their contracts. Thus, rather than settling their contracts on the current value date, they opt to do so on the next value date. Both sides must consent in order for this to happen, and costs depending on the disparities in the interest rates of the two currencies must also be paid. Many other words are regularly used in the forex industry. Those terms, however, might allude to marketing tactics, therefore they are outside the purview of this fundamental article. In conclusion, one must become accustomed to the jargon employed in forex trading.