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Glossary

  • Base Currency
  • Bid/Ask Price
  • Cross Rate
  • ECN Broker
  • Expert Advisors (EAs)
  • Forex Spot Rate
  • Going Short/Going Long
  • Leverage
  • Pip
  • Quote Currency
  • Rollover
  • Scalping
  • Spreads

Base Currency

The base currency or primary currency is the first currency that is quoted in a currency pair. For example with the EUR/USD currency pair, the Euro in this case would be called the base currency.

Bid/Ask Price

The Bid /Ask price is a two way price quote which shows the best price which an asset can be bought or sold at any particular point of time. In Forex trading, the Bid price is the price which a forex broker is willing to BUY from you. In other words, this is the price that you would get when you SELL a currency pair. On the other hand, the Ask price is the price which a forex broker is willing to sell a currency pair for. In short, this is the price that you get when you BUY a currency pair. An example of a Bid/Ask price of the EUR/USD is 1.3392/1.3395.

Cross Rate

The cross rate is the exchange rate of two currencies both of which are not the legal tender of the country which the quote is given in. For example, the AUD/JPY quote in the British Financial Times newspaper will be regarded as a cross rate in this context. Often times, the cross rate is also used to refer to quotes which does not include the USD.

ECN Broker

An ECN broker is a forex broker that is able to provide their clients with direct market access using the electronic communications networks (ECNs) to other market participants. The role of the broker here is just to match trades between the various market participants. Spreads provided by an ECN broker are tighter and because of this they normally charge a fixed commission for every trade.

Expert Advisors (EAs)

Sometimes known as a Trading robot or automated trading systems, EAs are scripts which are used to automate the trading process. The advantage of using EAs is the fact that they take the emotional aspect of trading out of the equation.

Forex Spot Rate

The forex rate which a currency pair can be bought or sold at any current time is known as the Spot Rate. It differs from the “Forward Rate” which seeks to compare the value of currencies at a future date. The spot rate also calls for delivery and settlement of a trade within two business days. However in practice, trades are normally “reset” by the forex broker by closing and reopening the trade prior to its deadline

Going Short/Going Long

Going Short and Long both refer to the market position that a trader is taking. If the trader believes that the price of the currency pair is going to fall, he can take a “short” market position by selling the currency. The strategy if the price does fall, is that the trader can buy the currency back at a lower price and hence make a profit. The reverse is true when the trader decides to holds a “long” market position. Here, he will buy and hold the currency hoping for the price to increase and then sell for a profit.

Leverage

Leverage in forex trading means you can increase the amount that you want to invest by using “borrowed” money from the broker. For example, if your broker provides you with 1:500 leveraging ratio, this mean with $1000, you can make an investment equivalent to $500,000 ($1000 x 500). It is only in the forex trading industry that a trader can increase his investment capital by a factor of several hundred times.

Pip

A pip is the abbreviation for the term “Percentage in Point”. It represents the smallest possible fluctuation that a currency can make. This is depicted by the change in last number in the four decimal place price quote. For example, if the EUR/USD is quoted at 1.2000, a rise of 5 pips means the new quote would be 1.2005.

Quote Currency

As known as the “counter” currency, the quote currency represents the second currency in a currency pair quote. For example, if we look at the EUR/USD quote, the USD here will represent the quote currency. Exchange rates are quoted in the format showing how much quote currency can be bought with one unit of the base currency.

Rollover

In forex trading, rollover refers to moving a spot forex position that is due to be settled to the next settlement date. When a forex position is rolled over, traders will incur a rollover charge. The fee that traders have to pay to rollover a position is due to the differing interest rates between the two currencies in a currency pair. This is why sometimes instead of paying a rollover debit, traders gain from a rollover credit.

Scalping

Scalping is a form of trading whereby a trader buys a currency pair only to hold it for a very short period of time just to earn a small profit for each transaction. Because of the small of profit earned for each trade, to make it worthwhile, scalpers have to trade a large number of trades to earn a decent overall profit.

Spreads

With forex trading, forex brokers normally do not charge traders any commissions for their services. Instead, what they earn from you is a “spread”. The spread is the difference between the Bid (Buying) and Offer (Selling) prices. For example, if a broker offers the EUR/USD with the Bid price at 1.2000 and Offer price at 1.197, this mean the spread is 3 pips.