Different Terminologies in Currency Trading

Different Terminologies in Currency Trading 1

Currency Trading is a whole new world – even for those who are used in equity trading. This is why anyone who decides to be part of this market should take the time to learn the different tricks, tips and terminologies in order to function well. That being said, following are the most common words that are tossed around within the Forex community.

Currency Pair

This is one of the most important terms that will be used, referring to the two currencies that will be pitted or compared against each other. The most common ones are the Dollar and the Euro or perhaps the Dollar and Yen. Trading is basically done in pairs and not by a single currency, which means that, traders would need to consider both when making a decision.

Base and Quote Currency

Base and Quote Currency refers to the currency pair like the USD/EUR. The base currency is usually constant and used as the measurement with respect to another currency. The base currency is usually the first one stated, in this case the US Dollar. As for the Quote currency, it would be the latter or the EUR.

Leverage

The general rule in Currency Trading is that the lower the leverage, the better would it be for the starting trader. This is basically a type of account provided by the broker, providing individuals with a stated amount of trade opportunities. The trader deposits cash to the broker and the latter would give them the chance to trade using more money than the original deposit. If the trader starts earning with their transactions then the broker would also be benefitting. If they start losing however, the broker would likely cut off the leverage.

Pip

In Currency Trading this stands for “percentage in point” and is one of the most thrown around words in Forex. This refers to the smallest unit of change in a currency pair. This is typically shown in decimal points and can be used to track the movement of currencies. Brokers use them for their spreads, making it easier to analyze data and make correct decision.

Bollinger Bands

This is actually a Forex technique used for analyzing data to arrive at an accurate conclusion. Created by John Bollinger in the 80’s, the concept is used to measure the depth and height of a price. It works by plotting two standard deviations and observing the movement of the bands in relation with the situation of the market. When the bands move away from the moving average, this means that the market is volatile. When they contract, the market is less unstable, providing traders with an idea of when to trade or lay back and wait.

Of course, those aren’t the only terminologies attached to Currency Trading. As individuals become more adept with the market, they will start to encounter words and information that will be new to them. When this happens, individuals are advised to hit the books and find out exactly what these words mean and how it relates to them.

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