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Tags: finance, currency trading, knowing the forex trade language
 The increase in online access around the world has meant the widespread availability of electronic trading networks which has made trading on the currency exchanges or what we call the forex trade more accessible than ever. If you think you would like to get into the forex trade business then knowing the forex trade language can help you better understand what it is you are going into.
To start off, forex trade transactions occur in the foreign exchange market or FX market. This is where financial entities such as banks, commercial companies, hedge funds, and even central banks buy, sell, and exchange foreign currencies, monies or units of exchange, the main commodity. A typical forex trade transaction would have one party buy a quantity of one unit of exchange in return for paying with a quantity of another unit of exchange.
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In such a transaction nothing physical ever changes hands since the FX market is purely speculative one. When doing an forex trade, monies are always bought, sold, and priced in pairs. In a regular transaction you will always long or have more of one unit of exchange and short or have less of the other unit of exchange.
Say you exchange EUROS for US dollars in the forex market—then you would be long on US dollars and short on EUROS. In these pairings the first one is what’s called the base currency and the second one is the quote currency. Put another way for every one unit of the base currency you would need to pay so much amount of the quote currency.
As an example using the above pairing with a quote of EURUSD=1.50; it just means that to get 1 EURO you would need to pay 1.50 US dollars. In any pairing the quotations usually consists of the bid and ask price and is usually made by a market maker. A market maker is usually a firm that quotes both a buy and sell price in a certain commodity with the hopes of making a profit on the bid/ask spread.
The bid price is the price at which a market maker is willing to pay in order to buy the first currency of the pairing, while the ask price is the price at which a market maker is willing to sell the first currency of the pair. The spread, therefore, is the difference between the higher ask price and the lower bid price.
So going back to our earlier example if the pairing is now quoted at EURUSD=1.5805/1.5807 then the spread is EUR 0.0002 (1.5807 – 1.5805) or 2 pips. If you’re asking what a pip is that’s a good question. A pip is basically a percentage in point and is the 4th decimal place in a forex trade transaction.
Most countries use direct quotes wherein their home money is used as the quote currency. Some countries, however, use indirect quotes wherein their home money is the base currency. In layman’s terms currency trading is based upon and affects the exchange rates between countries. Many factors can affect the exchange rate which can also affect the forex trade.
Economic factors consist of a country’s budget surpluses or deficits, their balance of trade, and their productivity and GDP growths. There’s the political factor which depends on the stability of a country’s government and their relationship internally, regionally, and internationally. Then there are the usual market psychology such as flight as well as the so called “buy rumor, sell fact” syndrome where there is a tendency for the price of a country’s currency to reflect the impact of a particular action before it actually occurs and when it does occur, have it react in exactly the opposite direction.
The forex trade does require a slightly different way of thinking and despite the risks it does have potential. Knowing the language helps.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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