Essential Forex Terms To Be Aware Of

6 Forex terms that you should get familiar with

Forex trading and online trading is all the buzz these days. From celebrity endorsements to sport sponsorships, it’s become almost impossible to escape the lure that trading provides. And let’s face it, there’s a strong degree of class and sophistication that comes with something like forex trading. Trading in forex has opened to the door to anyone with the means to speculate on all types of currency pairs.  Yes, the gains can be great but so can the losses; and it’s not cut out for anyone either.  It takes a level of commitment, dedication, and learning to get good at it and even then the risks remain. So, if you are looking to enter this exciting and at times volatile world, then you’ll need to get clued up on some key terms and phrases. Luckily the internet is awash with sites with daily Forex news and updates.  With all this in mind, let us now examine 6 forex terms that you should get familiar with.

1. Pip

In Forex trading, a PIP, also known as a Percentage In Point, is a numeric value that essentially tallies up profit and loss. A single pip equates 0.0001. and also serves as a measuring unit for exchange rate fluidity.  Very often forex traders will refer to profits and losses as pips, hence, if you’re in a trading forum, don’t be surprised to hear fellow traders say things like  “I made 60 pips on my last trade.”

2. Spread

A spread can be defined as the pip difference between the bidding price and the asking price for an underlying asset.  As this is fundamentally the asking price for the cost of a trade, it is of vital importance that traders know what spreads are.  In order to ascertain the spread it is required that you minus the Bid (selling price) from the Ask (buying price). To further illustrate, let’s assume the EUR/USD is priced at 0.93860/0.93870 (Sell/Buy). This translates into Buy minus Sell which then equates 10 pips (the spread).

3. Leverage

Leverage is essentially a loan and it’s what’s required by the trader to gain access to higher amounts of trading capital. It’s also referred to as a margin, but more on that later. Leverage stands to affect both profits and losses and can fuel either one of the two, hence traders should practice caution and vigilance when making use of leverage. 

4. Margins

In forex trading, you need a margin in order to execute a trade. A margin can also be seen the as the minimum amount required to trade. The margin in essence lets you take out a loan, meaning that for a small amount of money you can get access to a larger sum. In order to calculate the margin for a trade, you’ll need to make us of an account leverage ratio.

5. Bullish/Bearish

The market sentiment can refer to a particular market or the stock market on the whole.  If the market sentiment is deemed Bullish, this implies that the price on the rise. If the market sentiment is bearish, it means that the price is in decline. Another way to discern between the two is that Bulls have horns and throw things up in the air if provoked – prices are then rising.  Bears on the other hand when provoked stand on their hind legs and rip things down – prices in decline. 

6. Slippage

Slippage has to do with market volatility. You must remember, that when trading in forex, you are entering a market that’s prone to sway for a number of reasons – it could be global or political. As a result, sometimes when you execute a trade you may notice a slight difference between the price you’re expecting and the actual end-product value. When this occurs, it’s referred to as slippage and it’s actually quite common because of volatility.  When slippage occurs, it can pan out good or bad.