Forex trading terminologies for novice traders
This type of forex market includes selling and buying of real currency. For instance, you can buy a fixed amount of sterling Pounds and exchange it for Euros, and when the value of the Pound rises, you can re-exchange your Euro for a Pound and get more money than you spent on the purchase.
The contract for Difference (CFD) is an agreement that use to symbolize the movement of the prices of financial instruments. In terms of Forex, it means that instead of selling and buying vast amounts of currency, without owing any asset, you can take advantage of price movement. In addition to Forex, CFDs are also available in bonds, commodities, indices, stocks, and cryptocurrencies. In all cases, you are allowed to trade the price movement of these instruments without buying them.
When Forex traders speak about “profit and losses,” usually they use the term PIP. It stands for “Percentage In Point.” The smallest movement reflected in the exchange rate of a currency pair is PIP. In the Forex movement, PIP is a measure of the exchange rate movement. It is the 4th decimal on the price of a currency pair. One PIP is equal to 0.0001.
Spread is the difference between the asking price and bid price in pips. The spread replaces transaction fees and represents the brokerage service cost. There are two kinds of spreads; Fixed Spreads and Variable Spreads. Fixed spreads are not affected by market changes and maintain the same number of pips between bid prices and ask price. Variable spreads change (increase or decrease), according to the market liquidity.
Margin is the amount that remains in the trading account at the time of opening a trade. However, since the average “Retail Forex Trader” lacks the margin needed to trade enough to make a good profit, many forex brokers offer their clients leverage access.
For the beginner of the Forex trader concept of “leverage” is essential. It is the capital provided by a Forex broker to increase the volume of trades that its clients can make.