Basic Forex Definitions

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Exchange Rate

Exchange rate is determined by the worth of funds compared to that of another. An exchange rate will usually be represented by ISO funds codes written as funds pairs. Take a glance at this example:

EUR/USD one.3400

EUR and USD are the funds codes, where EUR stands for Euro and USD stands for US Dollar. Together they are the funds pair. The first funds in the pair is called the base funds, but this term can also refer to the funds your account is traded in. The second funds is called the counter funds. The exchange rate in the example is one.3400. This means that one Euro is worth one.34 US Dollars.
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There's lots of ISO funds codes, but here are a number of the most often traded:

  AUD - Australian Dollar
  CAD - Canadian Dollar
  CHF - Swiss Franc
  EUR - Euro
  GBP - British Pound
  JPY - Japanese Yen
  NZD - New Zealand Dollar
  USD - US Dollar

Definite funds pairs are also more often traded than others. Lots of Foreign exchange brokers and traders use the following slang for these pairs:

  AUD/USD - "Aussie Dollar"
  EUR/USD - "Euro"
  GBP/USD - "Cable" or "Sterling"
  NZD/USD - "Kiwi"
  USD/CAD - "Dollar Canada"
  USD/CHF - "Swissy"
  USD/JPY - "Dollar Yen"

A pip is the most common increment of currencies. It is the smallest value change in the exchange rate of a funds pair and is usually present in the last decimal point. Positive or negative pip is the way you calculate your profit or loss. For example, if your EUR/USD one.3400 becomes EUR/USD one.3401, then the exchange rate has increased pip.

Pip Value

The worth of the pip can be fixed or variable depending on the base funds of your account or the funds pair you are trading. The EUR/USD pip value is always going to be $10 for standard lots and $1 for mini lots. In order to calculate the pip value of the funds you are trading, divide pip by the exchange rate and then multiply it by the lot size. Converting pip value to your funds value is simple as well; multiply the pip value by your exchange rate.

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Lot

Spread

The standard size per transaction is often called the lot. Usually, lot size is 100,000 units of base funds. A mini lot is only ten,000 units, and some Foreign exchange brokers will even let you trade in micro lots from one,000 units all the way down to unit. Having a mini or micro account requires less investment than a standard account.

The difference between the sell quote and the buy quote is called the spread. Take a glance at this example:

EUR/USD one.3401/01

Leverage

The difference in our spread is pip. For Foreign exchange traders to break even, they must move their position in the direction of the trade. They must move equal to the amount of the spread.

The deposit necessary to open or maintain a higher position is called the margin. In the above example, you have a 1% margin.

Borrowing funds to gear your account is what is known as leveraging. By increasing leverage, traders can either gain or lose more funds. In order to calculate leverage ratio, divide your total open positions by your account equity. In the event you have $1,000 in your account and open up a $100,000 position, you are leveraging by 100 times, or 100:1.


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