Here is the basic terminology regarding the Forex market that every capital investor should be aware.
What is Bid / Ask Price
All Forex pairs are quoted with two prices: the bid and the ask price. The bid price is the price at which a Forex broker is willing to buy and thus a Trader can sell a currency at that price. The ask price, is the price at which a Forex broker is willing to sell and thus a Forex Trader may buy at that particular price.
What ist he Forex Spread
The spread which is measured is pips is the difference between the bid and the ask price of a Forex currency pair. Narrow spreads are better for Forex traders. Popular Forex pairs and especially EUR/USD are enjoying lower spreads than other unpopular pairs. A typical spread on EUR/USD for example is 1.2 pip.
What is Pip
A pip is the minimum incremental move of any Forex currency pair. For example, a pip is equal to a EUR/USD movement from 1.3500 to 1.3501.
What is Trading Leverage (Margin)
In a typical financial market, a capital investor in order to execute a trade worth $1,000 he must first deposit $1,000. This is not the case in the Forex market. In the Foreign exchange market, an investor can execute a trade only by depositing a small part of the value of the trade which is called MARGIN. The ratio between the value of the margin required and the value of the trade is called LEVERAGE. A typical trading leverage when trading Forex is 100:1, but some brokers are offering leverage up to 500:1. A trading leverage of 100:1 means that only 1% margin is required in the investor’s account balance in order to open a position of 100%.
What is Forex Lot
A lot is the smallest size in Forex trading. For USD-based currency pairs, the lot size is 100,000. That means that the smallest amount that you can buy or sell is 100,000, regardless the size of the margin. The smaller your lot size, the more flexible you can be when it comes managing your trades. A lot is categorized according to its size as follows:
1) Micro Lots (essential for the beginner capital investor)
A micro lot is the smallest tradable lot of 1,000 units of a currency. If a trading account is funded in USD then a micro lot worth $1,000 of the base currency. Thus when trading a US dollar based pair, 1 pip is equal to 10 cents.
2) Mini Lots (essential for the middle-exprerianced capital investor)
A mini lot is 10,000 units of the trading account funding currency. In a US dollar based account, each pip worth $1.
3) Standard Lots (Pro Capital Investor)
A standard lot worth 100,000 units. In a US trading account a standard lot worth $100,000. The typical pip size in a standard lot account worth $10.
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Capital Investor’s Forex Trading Terminology
