Understanding Forex Lingo.

As a novice or newbie trader, you have to learn the lingo of Forex before you ever think first ever trade. Some of the lingo or Forex terms you have learned already. Still, have a look to understand these terms:

Learning the Major and Minor Currencies:

There are eight commonly traded currencies at the Forex Market. USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD. These currencies are called the Majors or major currencies.

The rest of the currencies are commonly called as minor currencies. You do not have to worry about these minor currencies. They are there for professional use only.

Base Currency:

In foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is named the quote currency (counter currency, terms currency). Exchange rates are quoted in per unit of the base currency. Note that FX market convention is the reverse of mathematical convention.

Currently the euro has first precedence for base currency; as a result, all currency pairs involving it should have the euro as the first currency. For example, between the US dollar and the euro the exchange rate will be identified as EUR/USD; the number is the amount of US dollars that can be traded for one euro.

The currency hierarchy for the majors is as follows:

* Euro
* Pound sterling
* Australian dollar
* New Zealand Dollar
* United States dollar
* Canadian Dollar
* Swiss franc
* Japanese Yen

Quote Currency:

In foreign exchange markets, the quote currency is the second currency in a currency pair.

The quote currency is also known as the counter currency.

If looking at the EUR/USD currency pair, the U.S. Dollar is the quote currency, and the Euro is the base currency.

Understanding The Pip

A pip is the smallest price increment in forex trading - pip stands for percentage in point.

Prices are quoted to the fourth decimal point in the forex market - for example EUR/USD might be bid at 1.1914 and offered at 1.1917. In this example we can see that the spread is 3 pips wide. The Japanese Yen (JPY) is an exception - it is quoted only to the second decimal point.

There is an exception for quotations for Japanese Yen against other currencies. For currencies in relation to Japanese Yen a pip is 0.01 or 1 cent. Then if you are trading USD/JPY in $100 000 lots, one pip will be equivalent to $1000.

Knowing the Bid Price

Bid simply means the price that the market is willing to buy for a particular currency pair. At this price, you will be able to sell the base currency. It is shown on the left of the quotation.

To illustrate, the quote for GBP/USD is 1.8812/15. Bid price is set at 1.8812. This simply means that you can sell 1 British Pound for 1.8812 U.S. Dollars.
Identifying the Ask Price

On the other hand, the ask is the selling price that market is willing to take for a particular currency pair. In this case, you will be able to buy the base currency. It is shown on the right of the quotation.

Here we will quote EUR/USD at 1.2812/15. The ask price set is 1.2815. Basically, you will be able to buy 1 Euro for 1.2815 U.S. Dollars. This is also commonly known as the offer price.

Knowing the Bid/Ask Spread

The difference between the bid and ask prices is called the spread. A dealer expression called “the big figure quote” refers to the first few digits of a specific exchange rate. These digits are not included in the dealer quote.

To give you an example, the USD/JPY exchange rate could be at 118.30/118.34. Dealers however will verbally quote this in terms of 30/34.


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