Forex Glossary – Basic Terms

Forex GlossaryTaking advantage of the Forex market to earn that extra penny does not necessarily require one to be a daily trader. Practically, by traveling abroad and converting your currency to the local currency, you have participated in the Forex market. Though not in the official setting but it still counts as Forex trading. Today, Forex market is the king of all capital markets known to man. The forex glossary and terms used in this article are however quite basic and simple to understand. Below are some of the main concepts & terms involved in Forex trading markets.

  • Major & Minor currencies

It is important to note the stocks used in the market. This basically refers to the variety of currencies used in the trading. There are a lot of currencies used in the trade but only 8 are actually recognized worldwide. The 8 are those of the 8 majors. Majors in Forex trading are basically the major economies involved in the trade and take up a larger share of the currency market. They include:

  • Japan
  • The United States
  • The United Kingdom
  • Canada
  • Australia
  • Switzerland
  • New Zealand
  • Euro zone

The Euro zone in this case comprises of leading economies in Europe these being Spain, Italy, Germany and France. The minor currencies are simply all the other currencies.

  • Yield & Returns

The ‘Yield and Return’ concept is another basic Forex aspect. The returns are driven by the yields. Spot market trading involves buying then selling two currencies that are underlying. The currencies are valued basing on each other and are normally quoted in terms of pairs; this where a pip comes in.

  • Pip

A pip is the acronym for Percentage in Point. It describes the exchange rate of a particular pair of currencies. With that in mind, it becomes clearer that the value one gets from buying one currency in the pair is used to buy the other currency of the pair. A lot of interests are involved in the transaction since each currency has its own attached interest. Therefore, you tend to earn the interest after buying the currency and pay it after selling the currency.

  • Base currency

This is the currency that gets quoted in the pair. For example, since a USD is worth 84 Kshs; then it is the base currency in USD/Kshs 84.

  • Quote currency

Also referred to as the pip currency, it is the other currency in the pair.

  • Pipette

This is basically a tenth of the actual pip value.

  • Leverage

Another basic term that one needs to understand is the whole aspect of leverage. The returns in Forex trading need to be leveraged. The leverage for a good market can go to heights of 100:1. Such leverage implies that one has the capability of controlling $10,000 with a capital of only $100. However, it is not always all smiles when it comes to leverages. Depending on how well one uses the leverage, they can either gain big or loss big. It is normally advisable for beginners to use more conservative leverages. It is a good thing to go big but Rome was not built in a day! It takes baby steps to reach great heights. Therefore, make sure to start with a reasonable leverage such as 10:1 and slowly progress upwards.

John Walker
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