Whenever you start something brand new, there is a lot of learning that needs to take place. And when you want to grow your money with a trading strategy like forex, you need to be extra careful about learning as much as you can about how the market works.
By doing so, you can work on reducing risk as much as possible so you can get good returns. And, to set a solid foundation as you begin making your way towards becoming a forex trader, you will need to learn and understand a variety of new terms that you might not have ever heard before.
Below is a short list to help you get started so you can get an idea of what you’ll need to know before you start trading currency pairs.
Pips
A pip, or price interest point, is what you look at when you need to calculate how much a currency pair’s exchange rate has changed. The pip could show that a currency pair’s exchange rate has increased or decreased in value. Based on the trade that you placed, this would tell you if you made money or lost money on the trade.
You can learn about pips by doing some research online, as there are many helpful articles and videos that dive deep into this important topic. Plus, you can also learn how to calculate pips, as well as how to use a pip calculator to keep things as simple and efficient as possible.
Base Currency, Quote Currency, and Major Currencies
You probably already know that, in the forex market, you work with pairs of currencies. Of course, a pair contains two currencies. But the first currency in that pair is referred to as the base currency, while the other currency in the pair is referred to as the quote currency.
In addition to those terms, you will undoubtedly hear a lot about the major currencies. These are essentially the pairs that forex traders trade the most. Therefore, the major currencies are the most active currencies.
Long Position and Short Position
If you think that the base currency in a pair will increase in value, you would want to buy it, and that is what is known as a long position. On the other hand, if you go into a short position, you are making a decision to sell because you think that the base currency will decrease and you want to reduce the risk of losing money.
Bid, Ask, and Spread
Once you start trading currency pairs in the forex market, you will also come across bid prices and ask prices. Put simply, the bid price is what you will get when you sell a currency pair. On the other hand, when you decide to buy a currency pair, you will end up paying the ask price. The spread is basically the difference between the bid price and the ask price.
Leverage
You can use leverage to help increase the amount of money that you make on your trades in the forex market. Put simply, leverage is an amount of money that you borrow from your online forex broker.
Ratios, such as 1:100, are used to showcase leverage. While this strategy could be useful in boosting your profits, it could also have the opposite effect, increasing your losses, if you make the wrong trades. So, while it might be tempting to use leverage often, it’s wise to proceed with caution and really know what you’re doing first.
These are just a few of the many terms you’ll need to know as a forex trader. Remember to always keep learning and improving!
