Forex Terminology Explained

As a specialized financial market, the Forex market has its own terminologies that are unique to this market.

Common everyday words like “long” or “short” take on a whole new meaning when used in the Forex market.

For the layman, these words might mean the length of an object while for a Forex trader; these are used to denote the market position that a trader is holding to going to hold.

Listed below are some of the more common terminologies that are specific to the Forex market:

“Pip”

The smallest unit of fluctuation that a currency can have is called the “pip”. Generally, Forex are traded in terms of fractions and the majority of these currencies are expressed in terms of four decimal points. For example, the USD/CHF rate is expressed like 1.6550 and likewise the EUR/USD as well.

The exception to this rule is the USD/JPY currency pair which is expressed up to 2 decimal points only. The “pip” therefore refers to the smallest change of the quote. For example, one pip for most currencies refer to a change of 0.0001 while for the Japanese yen, one pip refer to a change of 0.01.

“Spread”

In the Forex market, there is no commission applicable when a trader executes a trade. However, instead of commission charges, Forex trader have to pay the market maker what is term as the “Spread”.

This is the margin of difference between the “Ask” and the “Bid” price. Furthermore, unlike commissions, “spread” are only incurred on one side of the transaction, i.e. when you are purchasing the currency pair. In short, the “spread” is actually a round turn cost.

“Rollover Charges”

In Forex, when we are discussing about “roll over”, we are actually talking about holding the purchase of a currency pair overnight. When this occurs, there is a “roll over” fee receivable or payable depending on whether you are profiting or losing on your trade for that currency pair.

In essence, this is interest that you earned or pay as a buyer or seller respectively. The “roll over“ fee is derived from the difference between the prevailing interest rates of the two currencies of the currency pair.

Cross Quote/Cross Currency

Most of the currencies that are traded in Forex are against the US dollar as one of the currency in the currency pair. Nevertheless, there are situations when neither of the currencies that are traded in the currency pair is the US dollar. When this is the case, the currency pair is regarded as a cross currency pair.

As such any quotations for any of these cross currencies are known as cross quotes. A good example is the EUR/JPY. The quote is derived by measuring the Euro against the US dollar and subsequently the Japanese Yen against the US dollar.

Margin

In Forex, the word “margin” is used to denote the deposit that is placed with the brokerage when you make a trade. It represents a form of collateral that is used to offset the losses that you might incur while trading. It is also sometimes known as the “minimum security”.

However, you are normally required to place this minimum deposit when you open your trading account with the brokerage and not when you just start to trade. This margin amount also varies from broker to broker.

Margin Call

In the event that you are incurring losses while trading and the initial margin deposit is inadequate to cover this loss, you might be subjected to what is called a “margin call”. This is a situation where your broker will inform you that you are required to top up the margin deposit failing which they will close your market position in order to offset the shortfall.

Leverage

In Forex, leverage mean utilizing the margin facility to enable a Forex trader hold a larger market position than their actual capital would allow. For example, with a margin of 100 to 1, this mean you are able to trade up to a hundred thousand worth of currencies with just a deposit of $1,000.

By leveraging, you will have more opportunities to reap bigger profits. Nevertheless, the downside is that, your losses will also be multiplied when you utilize this leveraging factor.

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