Terms Used In Forex

Trading Platform: This is the place or station where all trades are conducted.  Trading is executed electronically through computer program that links all the participants.  The Meta4trader is an example of a trading platform software.

Lot Size: This is the unit of trading in currency with the smallest being 0.01.

Position: This is the action you take in respect of buying and selling.  It is either long (buy) or short (sell) e.g. if you bought Euro, you will be “long” Euro and if you sold, you will be “short” Euro.

Base Currency: This is the currency at the left side in a price quote e.g. in EUR/USD, the EUR is the base currency.

Counter/Quote Currency: This is the currency at the right side of a quote e.g. in EUR/USD, USD is the counter or quote currency.

Currency Quote: This the numerical figure in which a currency is valued in relation to another e.g. EUR/USD 1.28056/1.28060

Ask: Price at which a broker/dealer is willing to sell, same as “offer”.  For example, if EUR/USD is quoted at 1.28056/1.28060, the 1.28060 is the “ask” or “offer” price.

Bid: Price at which a broker/dealer is willing to buy.  For example, if EUR/USD is quoted at 1.28056/1.28060, the 1.28056 is the “bid” price.

Pip: This is an acronym for “Price Index Point” which is the smallest price increment in a currency or the last decimal number e.g. if EUR/USD move from 1.28051 to 1.28058, it is 7 pips.

Spread: This is the difference between the buying and selling prices of a quote e.g. if a currency is quoted as 1.5134/1.5138, subtract the buying from the selling (1.5138-1.5134=0.0004) and the spread is 4.  Note that the buying price is always by the left while the selling is at the right.

Margin: This is the amount of money required in a client’s account in order to open a position or to maintain an already opened position.

Margin Call: A requirement by the broker to deposit more funds to maintain an open position.

Leverage: This is a ratio system given to a trader by the trading platform to increase his/her buying power.  This leverage ratio is of different values as follows: 400:1, 350:1, 300:1, 200:1, 100:1, 50:1 etc.  These ratios mean that for every dollar you have, the market maker allows you to trade as if you had the figure before it e.g. the ratio 400:1 means that for every $1 you have, you will be allowed to trade as if you have $400.

Cost of Carry (also “interest” or “premium”): This is the cost of holding an open position.  It may be negative or positive.

Market Order: An order to buy or sell at the current price.

Limit Order (Take Profit): This is an order issued to close a trade at a specific price to take profit.  This order is used to protect profit especially when the trader is not ready to sit and watch the charts.

Stop Loss Order: This is an order issued to close a trade at a pre-determined price to minimize or prevent loss.

Note that both orders are used in managing risk i.e. the risk of losing what you have already made and losing more than you can bear.

Liquidity: A function of volume and activity in a market.  A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.

Technical Analysis: This is analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.

Fundamental Analysis: Macro or strategic assessments of where a currency should be trading based on any criteria but the price action.  The criteria often include the economic condition of the country that the currency represents, monetary policy, political environment, natural occurences etc.

Trend: This is an overall direction in which the market is moving.  It could be uptrend, downtrend or consolidation.

Uptrend: This is a market situation that is signaled by upward waving price.

Downtrend: A market situation that is signaled by downward waving price.

Consolidation: This is a situation in which the market is indecisive of where to go and thus become stable moving in almost an horizontal line.

Bullish: The market is bullish if the most significant activity is buying thus leading to an uptrend.

Bearish: The market is said to be bearish if the prevalent activity is selling, this is signaled by a downtrend.

Currency Futures: Futures contracts traded on an exchange, most typically the Chicago Merchantile Exchange (CME).  Always quoted in terms of currency value with respect to the US dollar.  Parameters of the futures contract are standardized by the exchange.

Spot Foreign Exchange: This refers to currencies traded between two counterparties, often major banks.  Spot Foreign Exchange is generally traded on margin.  It is generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers.

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Forex Trading - Introduction

Forex is the short form for Foreign Exchange.  Forex Trading is therefore trading (people simultaneously buy one currency and sell another) in the currency of different countries of the world.

The current Forex system was established in the 1970s when free currency exchange rates were introduced, during this period, the US dollar overtook the British Pound as the benchmark currency.  The process of trading currencies in modern times evolved in six main stages thus:

·         Signing of the Bretton Woods Accord;

·         Constitution of the International Monetary Fund (IMF);

·         Emergence of the free-floating foreign exchange markets;

·         Creation of currency reserves;

·         Constitution of the European Monetary Union and the European Monetary Cooperation Fun; and

·         Introduction of the EURO as a currency.

The Breton Woods Accord was signed in July 1944 by the United States, Great Britain and France which agreed to make the currency market stable, particularly due to government controls on currency values.  In line with the accord, the major trading currencies were pegged to the US dollars in the sense that they were allowed to fluctuate only 1% on either side of that rate.  When a currency exceeded this range, marked by intervention points, the central bank in charge had to buy it or sell it, and thus bring it back into range.  In turn, the US dollar was pegged to gold at $35 per ounce.  Thus, the US dollar became the world’s reserve currency.

The purpose of IMF is to consult with one another to maintain a stable system of buying and selling the currencies so that payments in foreign money can take place between countries smoothly and timely.  The main functions of the IMF are to:

·         Promote international cooperation by providing the means for members to consult and collaborate on international monetary issues;

·         Facilitate the growth of international trade and thus contribute to high levels of employment and real income among member nations;

·         Promote stability of exchange rates and orderly exchange agreements, and discourage competitive currency depreciation;

·         Foster a multilateral system of international payments, and to seek the elimination of exchange restrictions that hinder the growth of world trade; and

·         Make financial resources available to members, on a temporary basis and with adequate safeguards, to permit them to correct payments imbalances without resorting to measures destructive to national and international prosperity.

The IMF officially mandated the free-floating of currencies since 1978.   This made the currency to be traded by anybody and its value the function of the current supply and demand forces in the market, and no specific intervention points to be observed.  Currency reserve was introduced as a tool for individuals and corporate bodies to protect investments in times of economic or political instability for international transactions.  After the Second World War, the US dollar was made the reserve currency but currently the EURO and Japanese yen are also reserve currencies.  The portfolio of reserve currencies may change depending on specific international conditions.

Just like in conventional trading, online currency trading is buying a currency now and selling it when it appreciates as you expected.  For example, the US$ sells for N100 and due to an occurrence you feel the dollar is going to strenghten against the Naira and you buy, if the US$ appreciates as you speculated and now sells for N110 then you would have made a profit of N10 on every US$ you bought if you sell it back for N.

What currencies are traded?

There are many currencies traded but the most commonly traded are referred to as the “Majors”; more than 80% of daily transactions on Forex trading involve the seven Majorswhich are the US dollar (USD), EURO (EUR), Great Britain pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Austrialian dollar (AUD) and Canadian dollar (CAD).

Who can trade Forex?

Forex trading is opened to corporations, small businesses, commercial banks, investment funds and private individuals.  It is the largest financial market in the world averaging a daily turnover of over $1 trillion.

What do you need to trade forex?

·         Personal computer

·         Internet connection

·         Domiciliary account

·         Trading account

·         Training

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