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Know your forex terms
Before we delve any deeper into the possibilities that exist in the Forex market, we need to go over some basic Forex market terms.
Pip: A pip (percentage in point) or point, is usually the smallest unit of measurement in the Forex market. Most currency pair quotes are carried out four decimal places—i.e. 1.4500. When you work with Alpari quotes are carried out to the 5th decimal place to provide better pricing. The 5th decimal place represents fractional pips. If the exchange rate of a currency pair moved from 1.45000 to 1.45100, we would say that the price moved up 10 pips. You make money when the pips move your way in a trade.
Note: Any exchange rate that contains the Japanese yen as one of the currencies will only be carried out three decimal places.
Currency Pair: We wouldn’t have a Forex market if we weren’t able to compare the value of one currency against the value of another currency. It is this comparison that drives prices. Forex contracts are always quoted in pairs. The Euro vs. the U.S. dollar (EUR/USD) is the most heavily traded currency pair. The U.S. dollar vs. the Japanese yen (USD/JPY) is another popular pair.
The following is a list of the most common currency pairs, their trading symbols and their nicknames:
Euro vs. U.S. dollar (EUR/USD): “The Euro"
Great Britain Pound vs. U.S. dollar (GBP/USD): “Pound,” “Sterling,” or “The Cable.”
U.S. dollar vs. Swiss franc (USD/CHF): “The Swissie
U.S. dollar vs. Japanese yen (USD/JPY): “The Yen”
U.S. dollar vs. Canadian dollar (USD/CAD): “The CAD,” or “Loonie”
Australian dollar vs. U.S. dollar (AUD/USD): “The Aussie”
New Zealand dollar vs. U.S. dollar (NZD/USD): “The Kiwi”
Understanding forex pricing
A currency pair contains two parts: a base currency and a quote currency. The base currency is the first currency listed in the pairing. For example, the base currency in the EUR/USD pair is the euro because it is listed first.
It is the strength or weakness of the base currency that is illustrated on the chart. For example, as the chart of the EUR/USD moves higher, it means the value of the euro is getting stonger as compared to the U.S. dollar, and vice versa.
The same principle applies to the USD/JPY pair but in that case the USD is the base currency. So as the chart of the USD/JPY moves higher, it means the value of the U.S. dollar in relation to the Japanese yen is getting stronger.
The quote currency is the second currency listed in the pairing. For example, the quote currency in the GBP/USD pair is the U.S. dollar because it is listed second. The quote currency gets its name because it is the currency in which the exchange rate/price is “quoted.”
When you say the exchange rate between the British Pound and the U.S. dollar (GBP/USD) is 1.7533, you are saying it costs 1.7533 US dollars ($) to purchase one Pound.
Currencies are sold in lots
When you want to buy a stock, you buy a “share” of stock, or a share of that company. In the Forex market, you buy a contract, or a lot.
There is no way to buy a share of the U.S. dollar like you would buy a share of a stock. When you trade in the Forex market, you are trading lots or contracts.
Contracts and lots are divided into three categories: full-size contracts, mini contracts and flexible contracts.
Full-Size Contracts control 100,000 units of whatever the base currency in the currency pair is. So for instance, if you were to buy one full-size contract on the EUR/USD, you would control €100,000.
Mini-Contracts control 10,000 units of whatever the base currency in the currency pair is. A mini contract is one-tenth the size of a full-size contract.
Flexible Contracts allow you to choose the exact amount of a currency you would like to control. If you want to control amounts of currency smaller than a full-size or mini contract, you can with a flexible contract.
Being able to choose among full-size, mini and flexible contracts allows you to tailor your trades to best meet your investment style and strategy.
Provided by Learning Markets