The forex market has a global reach and that has led to the development of terms that apply to specific commodity and stock markets. Even traders in certain parts of the world have come up with terms that apply specifically to the forex markets they trade. If you are serious about forex trading and intend to partake in it for the long term, it is paramount that you learn some of the major terms that are commonly used. The forex terminology can be wide and confusing to the beginners but once you get a handle on it, everything becomes much easier.
In this article, I will be talking about some of the terminology that any serious trader should be conversant with when dealing with forex brokers with zar accounts.
Currency pair, CFD, and Commodity currencies
Currency pair as the name suggests refers to two pairs that are used in a forex trade. These two currencies are made of a base currency and the counter currency. The base currency is the currency that is quoted in terms of the counter currency. A good example is EUR/USD, which means that the Euro is quoted against the US Dollar.
CFD stands for Contract for Difference and is often disallowed in the US, but allowed in certain overseas markets. It allows people to trade in futures without actually owning the product.
Commodity currencies refer to currencies for countries whose economies heavily depend on commodity exports. Good examples of countries with commodity currencies include Australia, Canada, New Zealand, and Russia just to mention a few.
Derivative, Position, and Long/Short positions
In forex trading, the term derivative is used to refer to financial tools that derive their value from other assets such as commodities and currencies. What makes derivatives very popular in the world of forex trading is the fact that they have the ability to combine multiple currencies so that their shares can be traded based on the value.
The position of a currency pair refers to the net amount of the pair and it provides exposure to movements in the exchange rate of the pair. As a trader, you will have to take positions so as to speculate on the movements of the pair’s exchange rate.
When you place a trade, the position can be classified as long or short. If the exchange rate of the currency pair you take is expected to rise, then the position is referred to as a long position. If the exchange rate is expected to fall, then the position is referred to as short position.
Pip, exchange rate, and risk/reward ratio
Pip is an acronym that refers to point in percentage and it represents the tiniest change in the exchange rate of a currency pair. In most cases, the size of a pip is 0.0001.
The size of a trading position that can be controlled using a certain amount of money deposited in a trading account is what is referred to as leverage. Online brokers have different requirements for maximum leverage ratios.
Lastly, exchange rate refers to the amount of counter currency that one needs in order to buy a single unit of a base currency.