Knowing the terminologies used in the Forex Trading market lets you understand each of them. The FX market uses its own terminologies apart from other financial markets. There can be words that look the same but have different meanings for the FX market and other financial markets. This time, we will emphasize the terms being used in the FX market.
Counter and Base Currencies
Securities can be sold in the bond and stock market. With this, their security can be converted into money. But it is different in the FX market, as one is already doing the buying and selling. In the FX market, buying and selling are done simultaneously. The trading in the FX market works when someone exchanges one currency for another. Because of this, the prices of each currency are being quoted in pairs. The price of the currency signifies the unit price of the first currency and that you are willing to also pay for the second currency. And since the price of the pair is always based on the first currency, it is then called the base currency. The other half of the pair is called counter currency.
Short and Long Positions
Similar to the stock market, the FX market also offers its traders long and short positions. But the meaning of these positions differs from one market to another. This is all because, in the FX market, currencies are traded in pairs.
In the FX market, if you want to go long, it means that you want to buy the base currency while you want to sell the counter currency. As for a short position, you will be buying the base currency while simultaneously selling the counter currency.
Bid, Spread, and Ask
Market makers run the FX market. They give out buy and sell quotes and a two-way market available for all currencies. Bid or Bid price is the price at which they are willing to purchase. Meanwhile, the asking price is the price at which they’re willing to buy. As for the spread, it is the difference between the asking price and bid price.
Lots
It is a term commonly used in the FX market whenever a derivative is being traded. Fixed sizes are available for future contracts. The market makers are the ones that provide flexibility to different currencies which then provides higher liquidity.
Pip
It refers to the minimum amount that the currency can move. Usually, the pip is at 1/10000 of the currency that’s quoted. Pips have been commonly used in FX and now considered as Forex lingo. Since this word could also refer to another thing related to money, some new traders might get confused and hard to understand.
Value Dates and Rollovers
Rollover is when a trader decides on settling their contracts for the next value date other than the value date of the current trade. Value date, meanwhile, is the specific date in which the parties try to agree on settling their accounts. All the open positions in FX trading are closed on the specific value date.
