Every field has its own verbiage that is used. The same words can mean something different, depending on where it is being used. With that said, there are common terms used in the forex world. If you are well-acquainted with the subject, the following definitions are most likely already familiar to you. This list is not exhaustive as the forex market and traders have and use their own vocabulary. However, if you are new to being a trader, the following terms and definitions will help you navigate the game when you are in it:
- Base and Counter Currencies:
In forex markets, traders are continuously and simultaneously buying and selling currencies. In other words, traders are consistently exchanging one currency for another. For that reason, the prices of currencies are inevitably quoted in pairs. The way the prices are written reflects the unit of the first currency that a person is willing to pay for the other currency. The first currency listed is the base currency, whereas the second currency mentioned is the counter currency. An example of this is USD/EUR. The first one is United State Dollar, which is the base currency, and the second one is Euro, which is the counter currency.
- Long and Short Positions:
Traders are permitted to take long and short positions. Going long means that a trader will buy units of the base currency and sell units of the counter currency. For example, if a trader is going to go long on the USD/EUR pair, then he or she must buy the USD and sell EUR in the marketplace. Alongside long positions, short positions mean that a trader will sell units of the base currency, simultaneously buying units of the counter currency. With that said, if a trader is going to go short on the USD/EUR currency pair, then he or she must sell the United States Dollar concurrently with buying the EUR. As a bonus, it is important to note that there is something called squaring off. Squaring off means that one is going back to a zero position from a short or long position. If a trader intends to square off in a long position, he or she would have to sell; on the other hand, if a trader intends to square off in a short position, he or she would have to buy.
- Bid, Ask, and Spread:
Because currencies are in a pair with forex trading, the price at which one is willing to buy is typically always less than the price at which one is willing to sell. The difference in price is there to help compensate traders for the risk they endure by maintaining a volatile asset for an unpredicted period of time. The bid price is the price at which market makers are willing to buy and ask price is the price market makers are willing to sell. The difference between the two is often referred to as the spread.
- Lots:
In the Forex market, a lot is a standard unit of measurement for currency trades. One lot is equal to 100,000 units of base currency in a forex trade. For example, if you are buying the EUR/USD pair, and you place an order for one lot, you are effectively buying 100,000 euros. The size of a lot in forex can vary depending on the specific brokerage or platform, but most retail forex brokers offer the option to trade in lots that are much smaller than 100,000 units of base currency. You are also able to choose between micro-lots, which are worth 10,000 units of the base currency or nano lots which are worth 1,000 units of the base currency. This allows the traders to trade in smaller increments and to more effectively manage risk.
On our server, TradersGlobalGroup, we have a standard lot of 100,000 units.
- Pip:
The minimum amount of money that a currency quote can move is called a pip. Generally, a pip refers to 1/10000 of the quoted currency. In other words, a currency must deviate by approximately 0.00001 in order for there to be an impact on the quoted prices in the market. This term has become of regular use to traders in that changes in prices and often time profits are conveyed in terms of pips. Because there may be varying definitions of this term, traders who are a little more experienced in the field are able to communicate using the word more accurately.
- Value Dates and Rollovers:
The dates when the parties involved in the trade agree to settle their accounts is the value date. All open positions of all derivative contracts close mechanically on the value date. Because accounts close automatically on the value date, contracts become more volatile closer to the time. There are times when traders decide to rollover their contracts. In simple words, this means that traders determine that they will settle their contracts on the next value date instead of the current one. If this is what they want to do, both parties must agree and pay a fee based on the interest rate differenital of both currencies involved.
