Understand Forex Jargons

The basic idea of trading the markets is to buy low and sell high or sell high and buy low. I know that probably sounds a little weird to you because you are probably thinking “how can I sell something that I don’t own?” Well, in the Forex market when you sell a currency pair you are actually buying the quote currency (the second currency in the pair) and selling the base currency (the first currency in the pair).


In the case of a non-Forex example though, selling short seems a little confusing, like if you were to sell a stock or commodity. The basic idea here is that your broker lends you the stock or commodity to sell and then you must buy it back later to close the transaction. Essentially, since there is no physical delivery it is possible to sell a security with your broker since you will ‘give’ it back to them at a later date, hopefully at a lower price.
Forex Jargon / TerminologyPIPS (Price Intercept Point)
A pip is the smallest unit by which a currency pair price quote changes. When trading Forex you will often hear that there is a 3-pip spread when you trade the majors. This spread is revealed when you compare the bid and the ask price, for example EURUSD is quoted at a bid price of 1.4502 and ask price of 1.4505. The difference is USD 0.0003, which is equal to 3 “pips”.
For most currency pairs, the 4th decimal place is equal to 1 pip, for example 0.0004 – 0.0003 = 1 pip. If there is a 5th decimal place as many brokers show, it is just showing 10ths of 1 pip.
The JPY pairs will show the 1 pip in the second decimal place, for example 110.03 – 110.02 = 1 pip. Some brokers show the 3rd decimal place on the JPY pairs which shows 10ths of 1 pip.
Exchange Rate
The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
Bid Price
The bid is the price at which the market (or your broker) will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker.
Ask Price
The ask price is the price at which the market (or your broker) will sell a specific currency pair to you. Thus, at the ask price you can buy the base currency from your broker.
Dealing Spread (Bad/Ask Spread)
The spread is the difference between the price that you can sell currency at (Bid) and the price you can buy currency at (ask). The spread on majors is usually 2 to 3 pips under normal market conditions. The dealer (broker) makes his money in the width of the spread, thus there are no commissions with most Forex brokers.
Profit potential in rising and falling markets
Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency.
When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the US dollar gets stronger against the euro and vice versa. So, if you think the EURUSD will decline (that is, that the euro will weaken versus the dollar), you would sell EUR now and then later you buy EURO back at a lower price. In case that the EURUSD indeed declines, then you can take your profit. The opposite trading scenario would occur if the EURUSD appreciates.
Going Long – We Want Market to rise
Going Long means to buy the currency pair and then later sell it back to the market.
Example “Buy 10,000 EURUSD”.
Going Short – We Want market to fall
Going Short means to sell the currency pair and then buy it back later.
Example “Sell 10,000 EURUSD”
Margin and Leverage


Trading on margin means that you can buy and sell assets that represent more value than the capital in your account. Forex trading is usually conducted with relatively small margin deposits. This is useful since it permits investors to exploit currency exchange rate fluctuations which tend to be very small.A margin of 1.0% means you can trade up to USD 1,000,000 even though you only have USD 10,000 in your account. A margin of 1% corresponds to a 100:1 leverage (or “gearing”). (Because USD 10,000 is 1% of USD 1,000,000.)Using leverage enables you to make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to maximise your leveraging as the risks can be very high.Successful forex traders apply strict capital management and position size modelling, relative to their account size and personal risk profile.Forex typically offers 100 to 1 leverage on capital. (USA traders can currently only get 50 to 1 leverage due to new regulations there)Small deposit to control a larger amountMagnify gains and lossesDesigned to exploit movements in high priced, low volatility markets1,000 USD deposit will control 100,000 USD worth of currency.Forex Pairs Nick Names
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 6 Majors / major currency pairs are:
Symbol Name Nick NameEURUSD Euro Dollar “Euro”GBPUSD British Pound “Cable” “Pound” “Sterling” “The Beast”USDJPY Japanese Yen “Carry trade” “Yen” “Jap”USDCHF Swiss Franc “Swiss / Swissie” “ Chief”AUDUSD Australian Dollar “Aussie”USDCAD Canadian Dollar “CAD” or “ Loony”When one currency is traded against any currency other than the USD, the market rate for this currency pair is called a “Cross Rate”.Examples include EURGBP, EURJPY, EURCHF, GBPJPY and AUDJPY.Demo Trading / Paper trading
You can open a demo account for free with most Forex brokers. This account has the full capabilities of a “real” account.I recommend opening a free demo account with Axitrader as they are well-regulated here in Australia and are very reputable with good customer service. I use them and so do many of my other members, you can get their platform here:http://www.learntotradethemarket.com/meta-trader-demo-account-sign-up-new-york-close-chartsUnderstanding Forex Currency Pair QuotesBefore you can get started trading the Forex market, you need to know how to make sense out of a currency pair quote (duh)…
The exchange rate of two currencies is quoted in terms of pair, such as the EURUSD or the USDJPY…how much of one currency you can get for another. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another. If you were to buy the EURUSD and the euro strengthened against the dollar, you would then be in a profitable trade. Here’s an example of a Forex quote for the euro vs. the U.S. dollar:


The first currency in the pair is called the base currency, and the second currency of the pair is called the counter or quote currency.
If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example above, you have to pay 1.32105 U.S. dollars to buy 1 euro.
Key differences between long and short-term trading:Short Term Day Traders – Enter and exit a trade within 24 to 48 hours. The hold time is very short.
Longer Term Position Traders – Enter a trade today and stay in the position overnight, 1 week or longer. (You and I)
Here are the differences we see between the two types of trading and what you need to be aware of as you make decisions…
Short-term trading adopts quite a short-term price view of the currency being traded, varying from a few seconds to a few days.
Short-term forex traders immediately face a disadvantage because they trade more, and have to overcome the spread more often.
To make a 1,000-pip profit when trading the EUR/USD, a long-term forex trader can make one trade that moves 1,002 pips (assuming the spread on the EUR/USD is 2 pips). He has to make 2 pips to overcome the spread.
To make a 1,000-pip profit when trading that same EUR/USD pair, a short-term forex trader who makes 50 trades must make 1,100 pips (again, assuming the spread on the EUR/USD is 2 pips), because he has to overcome the spread for each trade.
Long-term trading adopts a longer term price view of the currency being traded, varying from a few days to a few weeks, maybe even months.
Long-term trading can be less time consuming since you don’t have to watch the live market all the time. Many new traders are working a full-time job, raising a family and having a life while they learn this market. Checking in on your trades and making adjustments every once in a while, rather than constantly watching the live market throughout the duration of the trade, requires a lot less time and can be easily scheduled around your daily routine.
Short-term trading requires a lot more attention to the market on a continuous basis. A much talked about aspect of trading is the toll it can take on you emotionally. The longer you are in front of your trading screen watching the market zigzag back and forth between your limit and stop, the more tempting it can be to interfere with your strategy. That emotional toll increases the stress of trading and can make the whole experience unpleasant.
Forex Trading SessionsForex trades 24/6 (Sunday to Friday)World Trade Commences trade in Wellington New Zealand at 8am (Sunday Evening in New York). World Trading Closes on Friday Evening in New York.Trading really becomes active during European and US trading, Asian trading is generally much quieter.On the daily price charts we monitor, the day begins just after the New York trading sessions closes at 5pm NY time. (8 am New Zealand time)part 1 section 2 fx session times

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