As we have discussed in previous articles, you have to have some knowledge about the basics of Forex. In this article, we will try, sum up, the major ideas, using extracts from previous articles. Let’s get into the details.
Currencies of Forex
The currencies of Forex are divided into two groups, the major currencies and the minor currencies. There are 8 major currencies of Forex, whilst the other currencies are represented as minor currencies. Usually, professional traders prefer to trade major currency pairs as the price movements are much more stable.
Base and Quote Currency
The Base and Quote currency idea in Forex is an important one. The Base currency is the first currency of a pair. For example, in the currency pair GBP/USD, The British Pound is the Base currency.
The Quote currency is the second currency of the pair. In the above example, the Quote currency is the USD. It also represents the value of the Base currency. Normally in the US market, the US Dollar is always taken as the Base currency.
Pip
Pip is the movement of decimals in your currency pair. If your currency pair JPY/CHF moves from 1.5108 to 1.5109 then the pip movement is 1. It is very important for making money in Forex. If the pip movement is negative, you will lose money. If the pip movement is positive, you will make money. Depending on your lot size, this small pip can largely contribute to your profit.
Pipette
The pipette is the smaller fraction of pip. If the pip digit decimal is placed in 3 or 5 places, it is called a pipette. Unless you use a scalping trading method in the CFD trading industry, the concept of the pipette is not that useful.
Bid and Ask
The bid is the price at which you are buying the currency pair. The ask is the offer price, that seller gives you when selling the currency pair to you. The difference between the bid and ask price is significantly higher in cross currency pairs compared to the major assets. Consider this fact while taking the trades in the real market.
Spread
The difference between ask and spread is known as the bid. If you intend to use a scalping strategy, try to trade the asset that has a tight spread. By doing so, you can cut down your trading costs to a great extent and secure some decent profit without facing too much hassle.
Transaction cost
This is the cost that gives you the idea if you make money or not. The formula for calculating the transaction cost is simple. Simply subtract the bid price from your asking price. That is, subtract the price you have used you buy the money from the amount that you received by selling the money.
Cross Currency
Most of the currency pair of the Forex market has USD in their pair. Some of the pairs do not have US dollars. These pairs are known as cross-currency. Examples of cross currency include GBP/JPY, EUR/GBP.
Margin
The margin is the advantage that you get when you are trading in Forex. For example, if you are to trade $10,000, you do not have to pay the full amount. If the margin of the account is .5% for a certain trade, you have to pay only $50 for the trade. Note that the margin required to keep a trade open varies. Check your broker’s website to get the exact details.
Leverage
Leverage is cash that is being put in your account so that you can trade in Forex. It is the deposit money like a bank, where you have to deposit it in an account and therefore need to open an account with them for banking.
These are the most well-known basic ideas of Forex trading. If you are familiar and well acquainted with the basics Forex, you can be successful at making some profit.
