To trade Forex signals successfully, learn about:
- Currency Pairs
- Types of Orders
- P.S.M.L (Pip; Spread; Margin; Leverage)
It is very important to get to know Forex Terminology in order to trade knowledgeably. The terminology is important to be able to read currency price quotes.
Remember: in Forex, each currency is compared to another currency.
Base Currency – The main instrument of a pair. The first currency to appear in a currency quote (on the left). USD, EUR, GBP, AUD, and CHF are the most popular bases.
Quote (Counter) – The pair’s secondary instrument (on the right). One would ask, “How many Quote units do I need to sell in order to buy a single Base unit?”
Remember: When we execute a Buy order, we buy Base by selling Counters (in the example above, we buy 1 GBP by selling 1.4135 USD). When we execute a Sell order we sell Base in order to buy Counters.
Forex quotes always consist of two different prices: the Bid price and the Ask price. Brokers receive different Bid and Ask offers from the interbank market and they pass the best offers to you, which are the quotes you see on the trading platform.
Bid price – Best price at which we can sell the Base Currency in order to buy Quotes.
Ask price – Best price offered by the broker in order to buy Bases in return for a Quote.
Exchange rate – The ratio of one instrument’s value to another.
- When buying currency, you operate an Ask Price action (you relate to the pair’s right-hand side) and when selling currency you are doing a Bid Price action (you relate to the pair’s left-hand side).
- Buying a pair means that we sell Quote units in order to buy Bases. We do so if we believe that the value of the Base will go up. We sell a pair if we believe that the value of the Quote will rise. All Forex trading is done with currency pairs.
Example of a Forex Quote:
The data is constantly running live. Prices are only relevant for the time they appear. Prices are presented live, moving up and down all the time. In our example, the Base is the euro (left). If we sell it in order to buy the quote currency (right, in our example, dollar), we will sell EUR 1 in exchange for USD 1.1035 (Bid order). If we wish to buy euros in exchange for selling dollars, the value of 1 euro will be 1.1035 dollars (Ask order).
The 2 pip difference between base and quote prices is called the Spread.
The non-stop changes in prices create the profit opportunities for traders.
Another example of a Forex quote:
Like every currency pair, this pair contains 2 currencies, euro and dollar. This pair expresses the “dollars per euro” condition. Buy 1.1035 means that one euro buys 1.1035 dollars. Sell 1.1035 means that by selling 1.1035 dollars we can buy 1 euro.
Lot – Deposit unit. Lots are the currency units we trade with. A lot measures the size of a transaction.
You can trade with more than one open lot if you wish (to reduce risks or raise the potential).
There are a number of different lot sizes:
- Micro lot size consists of 1,000 units of currency (for example – 1,000 US dollars), where each pip is worth $0.1 (assuming we deposit US dollars).
- Mini lot size is 10,000 units of currency, where each pip is worth $1.
- Standard lot size is 100,000 units of currency, where each pip is worth $10.
Lot Type table:
Pip value – assuming USD
1,000 units of currency
10,000 units of currency
100,000 units of currency
Long position – Go Long or buying a long position is done when you expect the currency rate to go up (in the example above, buying euros by selling dollars, expecting the euro to go up). “Going long” means to buy (expect the market to rise).
Short position – Go Short or Carry on selling is done when you expect a decrease in value (compared to the counter). In the example above, buying dollars by selling euros, hoping the dollar will go up soon. “Going short” means selling (you expect the market to go down).
You purchase 10,000 Euros at an EUR/USD exchange rate of 1.1035
(BUY position on EUR/USD)
3 Days later, you exchange your 10,000 Euros back into us dollars at the rate of 1.1480
(SELL position on EUR/USD)
You exit the trade with a $445 profit
(EUR/USD increased 445 pips in 3 days! In our example, 1 pip is worth 1 us dollar)
* 10,000 Euros x 1.1035 = $10,350
** 10,000 Euros x 1.1480 = $14,800
CAD (Canadian dollar)/USD – When we believe that the American market is getting weaker, we buy Canadian dollars (placing a buy order).
EUR/JPY – If we think that the Japanese government is going to strengthen the yen to shrink exports, we will sell euros (placing a sell order).