Currency Trading is a whole new world - even for those who are
used in equity trading. This is why anyone who decides to be part of
this market should take the time to learn the different tricks, tips and
terminologies in order to function well. That being said, following are
the most common words that are tossed around within the Forex
community.
Currency Pair
This is one of the
most important terms that will be used, referring to the two currencies
that will be pitted or compared against each other. The most common
ones are the Dollar and the Euro or perhaps the Dollar and Yen. Trading
is basically done in pairs and not by a single currency, which means
that, traders would need to consider both when making a decision.
Base and Quote Currency
Base
and Quote Currency refers to the currency pair like the USD/EUR. The
base currency is usually constant and used as the measurement with
respect to another currency. The base currency is usually the first one
stated, in this case the US Dollar. As for the Quote currency, it would
be the latter or the EUR.
Leverage
The
general rule in Currency Trading is that the lower the leverage, the
better would it be for the starting trader. This is basically a type of
account provided by the broker, providing individuals with a stated
amount of trade opportunities. The trader deposits cash to the broker
and the latter would give them the chance to trade using more money than
the original deposit. If the trader starts earning with their
transactions then the broker would also be benefitting. If they start
losing however, the broker would likely cut off the leverage.
Pip
In
Currency Trading this stands for "percentage in point" and is one of
the most thrown around words in Forex. This refers to the smallest unit
of change in a currency pair. This is typically shown in decimal points
and can be used to track the movement of currencies. Brokers use them
for their spreads, making it easier to analyze data and make correct
decision.
Bollinger Bands
This is actually a
Forex technique used for analyzing data to arrive at an accurate
conclusion. Created by John Bollinger in the 80's, the concept is used
to measure the depth and height of a price. It works by plotting two
standard deviations and observing the movement of the bands in relation
with the situation of the market. When the bands move away from the
moving average, this means that the market is volatile. When they
contract, the market is less unstable, providing traders with an idea of
when to trade or lay back and wait.
Of course, those aren't the
only terminologies attached to Currency Trading. As individuals become
more adept with the market, they will start to encounter words and
information that will be new to them. When this happens, individuals are
advised to hit the books and find out exactly what these words mean and
how it relates to them.
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