meaning behind the most commonly used Forex terms.
Since forex trading always involves selling one currency in order to buy another, exchange rates are quoted in pairs.
Currency pairs are made up of the base currency and the quote currency. The base currency is the first currency in the pair, and the quote currency is the second currency in the pair.
The exchange rate is the value of 1 unit of base currency, relative to the value of the quote currency.
For example, if the EURUSD exchange rate is 1.13110, it means 1 EUR is worth 1.13110 USD.
Two prices are quoted for each currency pair, the Bid and the Ask:
The bid price is the price at which a trader can sell.
The ask price is the the price at which a trader can buy.
The ask price is always higher than the bid price, and the different between the two is the spread.
The spread is the charge made by the broker to the trader for opening the position.
Spread is measured in pips, which are explained further down the article.
Forex is traded in lots, with 1 (standard) lot being equal to 100,000 units of the base currency being traded.
1 lot EURUSD is equal to 100,000 EUR
1 lot GBPUSD is equal to 100,000 GBP
1 lot USDJPY is equal to 100,000 US
- - Standard lot = 100,000 units
- - Mini lot = 10,000 units
- - Micro lot = 1,000 units
There are three main lots sizes:
Margin is the amount of funds that you need to open a position.
1 lot EURUSD has a margin requirement of 100,000 EUR.
Using leverage allows you to control the full amount of the trade, without having to invest the full value of the trade. Traders can leverage their trades up to 500 times (1:500 leverage), meaning that to control a 1 lot EURUSD position only 200 EUR is required, not 100,000 EUR.
The table below illustrates how leverage affects the investment requirement for a 1 lot EURUSD position:
|Leverage||Margin Requirement||Investment Amount (EUR)|
|1:1 (no leverage)||1:100||1:500|
Use our simple calculator below to see how using leverage allows you to control a much larger position size with less actual investment.
Price movements in forex are measured in pips. Generally speaking, a pip is the 4th decimal place of the quote ie 0.0001. For example, an increase in the EURUSD exchange rate from 1.1360 to 1.1361 is 1 pip. The pip value for 1 standard lot is fixed at 10 units* of the quote currency.
1 lot EURUSD has a pip value of 10 USD
1 lot USDCAD has a pip value of 10 CAD
1 lot GBPCHF has a pip value of 10 CHF
If you were holding a buy position of 1 lot EURUSD and the exchange rate increased from 1.10040 to 1.10090 (5 pips) you would have made a profit of 50 USD (5 pips x 10 USD/pip).
*A pip value of 10 units of quote currency is standard for all currency pairs where the pip is the 4th decimal. For pairs where the pip is the second decimal (0.01) such as JPY, the pip value is 1,000 units for 1 standard lot.
You can use our simple profit calculator below to see how much profit you would make depending on your trade size and the price movement.
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