Important Forex Trading Terms

• Spread
  In forex trading and currencies trading spread is a term that is used to describe the difference between the price that you can sell your lot of currency called Bid and the price you can buy currency technically called as Ask. The spread on majors is usually 3 pips under normal market conditions.


• Pips
  A pip in forex trading is the smallest unit by which a cross price quote changes. When trading Forex you will often hear that there is a 3-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EUR/USD is quoted at a bid price of 0.9875 and an ask price of 0.9878. The difference is USD 0.0003, which is equal to 3 “pips”.On a contract or position, the value of a pip can easily be calculated. You know that the EUR/USD is quoted with four decimals, so all you have to do is cancel out the four zeros on the amount you trade and you will have the value of one pip. Thus, on a EUR/USD 100,000 contract, one pip is USD 10 and vice versa.

The Seven Most Traded Currencies in FOREX

Currencies throughout the world are normally traded in US dollar amounts technically called as “lots”. Where one lot is equal to $1,000, which controls $100,000 in currency. This contolling of currencies is known as the "margin". With its help you can control $100,000 worth of currency for only 1,000 dollars. This is what is called “High Leverage”.

Currencies are always traded in pairs in the FOREX. The pairs have a unique notation that expresses what currencies are being traded. The symbol for a currency pair will always be in the form ABC/DEF. This example is just an analogy for the reader to understand the terms that are used frequently in forex trading here ABC is the symbol for one countries currency and DEF is the symbol for another countries currency.
Here are some of the common symbols used in the Forex:

• USD - The US Dollar
• EUR - The currency of the European Union "EURO"
• GBP - The British Pound
• JPN - The Japanese Yen
• CHF - The Swiss Franc
• AUD - The Australian Dollar
• CAD - The Canadian Dollar

There are symbols for other currencies as well, but these are the seven most commonly traded currencies in forex market.
As stated before a currency can never be traded by itself. So you can not ever trade a EUR by itself. You always need to compare one currency with another currency to make a trade possible. Some of the common PAIRS are:
EUR/USD - EUR/JPY - USD/JPY - GBP/USD - USD/CAD - AUD/USD - USD/CHF

The listed currency pairs above look like a fraction. The currency synbol written on the left of the fraction is called the base currency whereas the symbol written on the right on the fraction is called the counter currency. When you place an order to buy the EUR/USD, for instance, you are actually buying the EUR and selling the USD. If you were to sell the pair, you would be selling the EUR and buying the USD. So if you buy or sell a currency PAIR, you are buying/selling the base currency. You are always doing the opposite of what you did with to base currency with the counter currency. All you need to trade in forex and to understand the Fundamental Analysis issues is to be aware of the base/counter concept.
So why is it important to know about the base/counter currency? The base/counter currency concept illustrates what is actually taking place in a Forex transaction. Some think that short-selling was restricted in the stock market *(Short-selling is where you sell a stock/currency/option/commodity first and then try to buy it back at a lower price later). But in the FOREX you are always buying one currency (base) and selling another (counter). If you sell the pair you are simply flipping which one you buy and which one you sell. The transaction is essentially the same. This allows you to short-sell with no restrictions.
You want to be able to short-sell with no restrictions so you can make money when the market drops as well as when it rises. The problem with traditional stock market trading is that the market has to go up for you to make money. With FOREX trading you can make money either the market is going up or down.