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Basic Terminology
Major and Minor Currencies
The eight most highly traded currencies – AUD, USD, EUR, GBP, CHF, CAD and JPY are called the major currencies. All others are called minor currencies.
The eight most highly traded currencies – AUD, USD, EUR, GBP, CHF, CAD and JPY are called the major currencies. All others are called minor currencies.
Pips
When trading forex, you cannot measure movement in dollars and cents as if you were trading the GBP/JPY neither GBP or JPY use dollars nor cents. The word PIP stands for percentage in point and is used to describe the smallest unit of price movement for any currency pair. For example if the AUD/USD moves from 0.6570 to 0.6575 then it has appreciated 5 pips.
Base Currency
Currencies are quoted in pairs such AUD / USD. The base currency is the first currency (AUD) and is measured again the second currency (also called the quote currency). For example if the AUD/USD is quoted at 0.6570 it would be read as 1 Australian dollar buys 0.6570 United States Dollar
Bid / Ask Price
When looking at a quote you are given 2 prices – the bid price and the ask price. The first price quoted is the bid price and is the price the market is willing to pay for the currency pair. The second price is the ask price and is the price the market is willing to sell the currency at. When you place a market buy order, you have to buy it from someone selling it which is the ask price. When you are selling you sell at the price someone wishes to buy it from you at which is the bid price.
Bid/Ask Spread
The spread is the difference between the bid and ask price. Spreads in the foreign exchange market range from 1-2 pips to 10 pips depending on the liquidity of the currencies being traded. Due to the high liquidity in the forex market, spreads are very tight comparatively with the stock market.
Margin
When placing a foreign exchange trade you are only required to pay a deposit to keep that trade open. This deposit is known as margin. For example to purchase $10,000 worth of AUD USD you are only required to have a deposit or Margin of $100 in your account. Different brokers have different margin requirements but most only require 1% of the total position taken.
Leverage
Leverage is the ratio between the margin required and the amount of capital used. A trade that only requires 1% as a deposit uses leverage of 100:1. Leverage gives you the ability to control large trades with little money. Leverage can both increase your returns and increase your losses.
Rollover
If you hold a spot forex position overnight (past 22:00GMT) you will either be credited or debited a rollover fee which is generally very small. The credit or debit and the amount is calculated by the difference in the interest rates that apply to the two currencies in the currency pair that you’re trading. If you buy a currency pair where the base currency attracts a higher interest rate than the second currency, then you’ll receive the difference as a credit to your account. If it is less, then you will have to pay the fee.