Forex Trading Basics: Definition Of Jargons You’d Probably Come Across
The learning curve for Forex Trading can be rather steep especially for those who have no prior experience to trading in any financial market. Although there are only thirty currency pairs used in the foreign exchange market, there are so many related concepts to learn, and number of strategies to master. Being familiar with commonly used jargons is therefore necessary before you even start speculating on the foreign exchange market.
Currency Pair Quotes
Currencies are always quoted in pairs in Forex trading. For instance, if you compare the value of the US Dollar against the Japanese Yen, you would see it written as USD/JPY. The first currency in the pair (USD) is called the quote currency while the second one (JPY) is called the base currency. If the quote is written as USD/JPY = 100.00, it is read as 1 US Dollar is worth one hundred Japanese Yen.
Short and Long Positions
These terms are used when placing a trade order. “Going short” means placing a sell order on a currency pair. Traders do this when a currency’s price is predicted to go down. Later on when the currency’s price falls as predicted, he can buy it back for a price that is much lower than when he sold it, thus making profit. “Going long” on the other hand means placing a buy order. Investors take make this trade order when indicators show that the currency’s price will increase. By buying it at a much lower price, and later reselling it when its value is higher, the trader earns a profit.
Economic Indicator Analysis Versus Market Activity Statistics
No other market that facilitates the trading of securities shows the same degree of volatility as the currency market. The reason for this volatility stems from the fact that the exchange rates existing between currencies are influenced by a host of variables. Among market determinants, the existing economic climate is considered pre-eminent. With that in mind, those who want to participate in Forex trades may need to take economic variables, like a country’s Gross Domestic Product and unemployment ratings, into account. This method is called fundamental analysis.
Forex Investors may also take market activity and price shifts into account to make sound trading decisions. This technique is referred to as technical analysis and many investors give preference to this method.
Leverage
To put it simply, using leverage in Forex trading allows you to control large positions for a relatively small cash outlay. Although buying on a margin can significantly increase returns, it is not without risk. If the investment moves against what the investor predicted, his losses can possibly be much larger than the amount he used for leverage.
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