FOREX TERMINOLOGY
In this industry there are a number of abbreviations and key terminologies that you need to know in order to understand everything that is going on. We have set out everything you need to know in this chapter.
What is a pip?(percentage in points)
A pip is the smallest price change that any given exchange rate can make.
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Most currency pairs are priced to four decimal places, the smallest change is the last decimal point- for most pairs this is equivalent to 1/100 of 1%. For example if a price is at 1.4100 on a pair and it moves to 1.4101 then we are looking at a change of one pip.
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Some brokers offer a fraction of a pip to provide an extra digit of precision when quoting prices. As traders, we look for pips, because pips = ££££. So if someone refers to making so many pips on a trade, you now know what that means.
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The amount of money you put on per pip, determines the amount of money you can make or lose on a trade. Remember we chase pips not money.
What is meant by spread?
Every market has a spread and so does the forex market. A spread is simply defined as the price difference between where a trader may purchase or sell an underlying asset.
The price on the left is showing 1.1917(3) and on the right 1.1918(6), the difference of 1.3 pips. This means as soon as you enter the trade you start minus 1.3 pips and whether you win or lose a trade your broker will take this as their commission.
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The more a currency pair is traded and the higher volume of people trading it, the lower the spread. You can get pairs with a spread of 10 plus pips, this is rare and these are the very expensive pairs.
What is meant by margin?
The margin is the amount of money required to open a new position. This is an amount of money set aside from your free equity and whether you win or lose your trade you will keep your margin.
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Margin and leverage go hand in hand in trading, the higher the leverage on your account, the lower your margin will be when placing a trade.
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It’s just as important to know that having a higher leverage on your account leads to a higher chance of being margin called. When this happens you will need to deposit more money in order to stay in the trade.
What is meant by leverage?
Not only investors but also big companies use leverage. They will use leverage to significantly increase returns on their investment. They do this by using options, futures or margin accounts.
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Forex traders will leverage profit from fluctuations of exchange rates on any given pair. Leverage is a loan provided to the trader/investor by their broker.
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The leverage on your account can maximise your profit by making it possible to access higher amounts of funds which can be great if you’re winning but can also maximise your losses, so you need to be very careful when using a high leverage. To work out the leverage being used on a certain trading account you must divide the total value of your open positions by the total margin balance being displayed on your account.
Example of how leverage would change the amount of money you can trade with
The Majors and their nicknames
Currency pairs can be split into two groups known as the Majors and the Minors. The Majors consist of the major currency pairs in the table below. These are the most commonly traded pairs and therefore cheaper to trade.
The other group is the Minors, which are all the more exotic pairs like CAD/JPY, NZD/JPY, GBP/CAD and so on, these are more expensive to trade.
Active Market Hours
As one major forex market closes, another one opens.
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Using UK GMT time, trading hours start with the New York session between 01:00pm – 10:00pm; at 10:00pm Sydney comes online. Tokyo opens at 00:00am and closes at 9:00am; and to complete the loop, London opens at 8:00am and closes at 05:00pm. This enables traders and banks worldwide to trade online 24 hours a day, Sunday evening to Friday evening.
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There are people trading at all hours of the day but having done some research we’ve have found that the highest volume of traders are trading the London session. This is where you will find some really good movement. If you swing (long term trade), you won’t need to worry so much about what session you’re trading in because you will be holding your positions throughout all sessions.
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London session – open between 7 am – 4 pm ; EUR, GBP, USD are the most active currencies
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US session – open between 12 pm – 8 pm; USD, EUR, GBP, AUD, JPY are the most active currencies
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Asian session – open between 11pm on to 8 am
GMT TIME