The Basics of Foreign Exchange Trading
Here are some basic definitions regarding Forex Trading:
- What is a Trading Platform
A trading platform consists of software and hardware and provides the ability to trade using a personal computer. Trading platforms may be manual and/or automated.
Lot in Forex is the smallest volume of a transaction.
A pip is short for ‘percentage in point’ and is the minimum change in a currency price. The pip is a numeric value that is equal to 0.0001.
The quotation is the price of a particular currency, expressed in the units of another currency.
Leverage in Forex means the ratio of capital leverage used by traders when trading currencies. In Forex market capital leverage is usually 1:100 but it can be set up to 1:500 even more.
When trading the Foreign Exchange market, a margin is required to open any position (long/short). A margin is minimum collateral that is needed to trade.
- What is Liquidation of a Position
Liquidation means closing a trading position as there is no margin-left.
Hedging is the strategic procedure that helps traders to reduce their portfolio risk using multiple financial instruments like derivatives.
Scalping trading in Forex is the strategy of selling currencies and gaining profits by tiny changes in the currencies' price level. Some Forex brokers allow scalping others don’t.
A Forex trader “short” the market when he opens a selling position.
Slippage is the execution of an order for a price different than expected. Slippage may occur based on a fast market or a low-speed broker. The main reason for slippage is market volatility that often occurs during news releases.
A spot transaction is carried out at once but the payment is made within two days.
Spread is the difference between the buying and the selling price of a currency. The trading spread is a very important variant when trading on Forex and it is measured by pips.
It is a very important order when trading. A stop-loss order is a predefined price level where a trader is determined to close his positions and thus limits his trading losses.
The thin market is called a market with low market activity/liquidity.
A liquid currency may be bought/sold without any limitations.
Long positions are buying positions on a currency rate. In the Forex market, the primary currency when bought is long and the other is short.
ECN means Electronic Communication Network and refers to the Electronic Network of Banks. This network is designed to match automatically bid and ask orders and to execute transactions without any intervention. Via the use of the ECN network participants in different geographic locations can easily trade with each other without the need of a middleman.
- What is VPS (Virtual Private Server)
VPS is a virtual environment of trading Forex without unexpected interruptions.
- What is an Overnight Swap Fee (Rollover Rate)
The Swap Fee or Rollover Rate is the cost of holding a currency pair overnight. The swap rate may be positive or negative for a trade position according to the interest rate differential between the currency pair traded.
The clearing is the trade settlement procedure.
Collateral is the trader deposit held as insurance.
- What is Trading Commission
Commissions are charged by brokers for their services. Forex brokers are not charging commissions as they profit from the offering spread.
Confirmation of a trend in the technical analysis means that a particular forecast is confirmed and usually it signals a profitable trade.
It is the rate of buying / selling one Forex currency for another currency.
- What are the Forex Majors
The major currencies include 7 key currencies: the US dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), Australian dollar (AUD), Canadian dollar (CAD), and the Swiss franc (CHF).
The Basics of Forex Trading