Forex Basics The following is an introduction to some basic terms, definitions and concepts used in forex trading. You can read it in chronological order, or click on one of the terms arranged in alphabetical order below to navigate directly to that explanation. Basics Automatic Execution Base Currency Bid Buy Quote Counter Currency Counterparty Currency Pair Currency Pair Terminology Dealing Desk Drawdown ECN Exchange Rate FCM Foreign Exchange Foreign Exchange Market ISO Currency Codes Leverage Lot Manual Execution Market Maker Margin Micro Account Mini Account NDD Offer Pip Pip Value Resistance Rollover Sell Quote Slippage Spot Market Spread Standard Account Support Terms Currency Basic Order Types GTC Order Limit-Entry Order Limit Order Market Order OCO Order Stop-Entry Order Stop-Loss Order Basic Trade Types Long Position Short Position Basic Trading Styles Automated Trading Carry Trading Day Trading Discretionary Trading Fundamental Trading News Trading Position Trading Range Trading Scalping Swing Trading Technical Trading Trend Trading Example Trade Click Here Introduction Foreign Exchange The simultaneous transaction of one currency for another. Foreign Exchange Market An informal network of trading relationships between the world's major banks and other market participants, sometimes referred to as the 'interbank market'. The foreign exchange market has no central clearing house or exchange and is considered an over-the-counter (OTC) market. Spot Market The market for buying and selling currencies at the current market rate. Rollover A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely. How to calculate rollover interest Rollovers in Forex 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. Currency Pair The two currencies that make up an exchange rate. When one is bought, the other is sold, and vice versa. Base Currency The first currency in the pair. Also the currency your account is denominated in. Counter Currency The second currency in the pair. Also known as the terms currency. ISO Currency Codes USD = US Dollar EUR = Euro JPY = Japanese Yen GBP = British Pound CHF = Swiss Franc CAD = Canadian Dollar AUD = Australian Dollar NZD = New Zealand Dollar For a full list, see ISO Currency Codes Currency Pair Terminology EUR/USD = "Euro" USD/JPY = "Dollar Yen" GBP/USD = "Cable" or "Sterling" USD/CHF = "Swissy" USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie") AUD/USD = "Aussie Dollar" NZD/USD = "Kiwi" FCM Futures Commission Merchant. An individual or organisation licensed by the U.S. Commodities Futures Trading Commission (CFTC) to deal in futures products and accept monies from clients to trade them. Market Maker A market maker provides liquidity for a particular currency pair by standing ready to buy or sell that currency by displaying a bid and offer price. Market makers earn their commission from the spread between the bid and offer price. Forex ECN Broker ECN is an acronym for Electronic Communications Network. A Forex ECN does not operate a dealing desk, but instead provides a marketplace where multiple market makers, banks and traders can enter competing bids and offers into the platform either inside or outside the spread, allowing traders to trade on those prices. Orders are matched to the best available bid/offer price for a small fee or commission. Dealing Desk A dealing desk provides prices and executes trades. NDD An acronym for 'No Dealing Desk'. A no dealing desk broker uses a matching engine to match up orders between its liquidity providers and their traders. Counterparty One of the participants in a transaction. Sell Quote / Bid Price The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200. Buy Quote / Offer Price The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203. Pip The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY. Pip Value The value of a pip. Pip value can be fixed or variable depending on the currency pair and base currency of your account. e.g. The pip value for EURUSD is always US$10 for standard lots and US$1 for mini-lots. A simple way of calculating pip value is as follows: Divide 1 pip by the exchange rate and multiply it by the lot size to get the base currency pip value. To convert it to your account currency, multiply it by the applicable exchange rate. For example; EURUSD = 0.0001 / 1.30000 = €0.0000769 * 100,000 = €7.69 * EUR/USD 1.30000 = US$10.00 pip value (fixed) USDJPY = 0.01 / 120.00 = US$0.0000833 * 100,000 = US$8.33 pip value (variable) Pip Value Calculator Lot The standard unit size of a transaction. Typically, one "standard" lot is equal to 100,000 units of the base currency, or 10,000 units if it's a "mini" lot, and even 1,000 units if it's a "micro" lot. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit! Spread The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread. Standard Account Trading with standard lot sizes, generally 100,000 units of the base currency. Mini Account Trading with mini lot sizes, generally 10,000 units of the base currency. Micro Account Trading with micro lot sizes, generally 1,000 units of the base currency. Margin The deposit required to open or maintain a position. A 1% margin requirement allows you to control a $100,000 position with a $1,000 margin deposit. Leverage The extent to which you are using borrowed funds to gear your account. Increasing your leverage magnifies both gains and losses. To calculate leverage used, divide total open positions by account equity to get the leverage ratio. e.g. If a trader has $1,000 in his account and opens a $100,000 position, he is leveraging his account by 100 times, i.e. 100:1 leverage. If he opens a $200,000 position with $1,000 in his account, he is leveraging his account by 200 times, i.e. 200:1 leverage. Understanding leverage Part I Understanding leverage Part II Manual Execution An order which is executed by dealer intervention. Automatic Execution The order is executed by the broker without dealer intervention or involvement. Slippage The difference between the order price and the executed price. Drawdown The extent to which equity is lost in a trading account from a trade or series of trades, measured from peak to subsequent trough, most commonly in percentage terms. Support Support is a technical price level where buyers outweigh sellers, causing prices to bounce off a temporary price floor. Resistance Resistance is a technical price level where sellers outweigh buyers, causing prices to bounce off a temporary price ceiling.