Frugal Feature: Know Your Trading Terminology: A Forex Trading Tutorial

Today’s frugal feature is brought to you by a contributing sponsor.   If you’ve been saving your pennies and are ready to invest in something new- terminology can be confusing.  From currency pairs to long and short trade positions, this forex trading tutorial introduces commonly used FX trading terms, to assist you to trade like a pro.  

The forex market has its own trading terms that can cause a lot of confusion to a new trader.  Terminology ranging from pip (nope, not an orange seed) to spread (not your regular PB&J spread) are very important to traders, and this forex trading tutorial highlights some of the most commonly used forex trading terminologies.

A forex trading tutorial of commonly used trading terms

What is a currency pair?

FX trading pairs one currency’s value against another and trades that value for profit. The quotation of paired currencies against each other forms the currency pair. The most commonly traded and most liquid currency pair in the world is the EUR/USD pair. The very first listed currency is known as the base currency while the last one,  in this case, the USD, is known as the quote currency.

All currencies are internationally identifiable through a currency ISO code. To trade a currency pair means that you are purchasing a currency and selling another simultaneously. You can, for example, buy a base currency and sell the quote currency and vice versa. There are three classes of currency pairs that are known as;

• The Majors
  These currency pairs are the most traded globally and are highly liquid, allowing you to trade them any time of day. They are usually paired with the USD because the greenback is the reserve currency of choice globally, and it is estimated that 88% of all trades revolve around it. The EUR/USD, GBP/USD, USD/CAD, USD/JPY, NZD/ USD, AUD/USD, AND USD/CHF currency pairs make up the majors.
• The Minors
  Currencies that are not paired against the USD are generally referred to as minor currency pairs. These include the EUR/ JPY, GBP/CHF OR EUR/GBP. These pairs are less liquid than the majors and are more prone to more significant swings in either direction. They offer more regarding spreads though.
• The Exotics
  Exotic pairs are rarely traded and are harder to trend on the significant financial grapevine. They consist of a major currency paired against one from an emerging market economy like that of South Africa, China, India or Brazil. Their spreads are usually higher, but these pairs are not as easy to come by as major or minor currency pairs.

What does it mean to go long or short?

If you have found a suitable currency pair to trade with, going long means that you are buying the base currency of your pair expecting it to strengthen in value against your quote currency. If you have speculation is right, then you could make profits after selling in the long position. 

To get into a short position of a trade is to sell off your base currency speculating that its value will weaken against its counterpart so that you can repurchase it later at a lower cost for profit.

What are spreads and pips?

The spread is the difference between the bid and the asking price. These two prices are simply the buying price (bid) and the selling price (ask) of paired currencies, concerning the pair’s base currency.

This value is usually in decimal values called pips or points. The spread may look insignificant, but with leverage, these changes can cause huge profits or losses. Most brokerage firms pay off their service costs from the spread too.

There are many other essential terms used in forex trading that have not been covered by this forex trading tutorial. Browse more online FX trading blogs for more information on forex trading terms and keep this forex trading tutorial at hand while trading FX.