FOREX Trading Basics and Terminology Used
FOREX is basically short form of foreign exchange and is a form of exchange for the global decentralized trading of all international currencies. In simple terms FOREX is the exchange of one type of currency into another. Foreign exchange is the largest market in the world and has been one of the most important parts in the world economy.
We would like to share few terminology used to do FOREX trading basics which will provide you the basic idea about Forex trading.
Base Currency – It is the currency which you have and would like to convert.
Quote Currency – The currency you want to convert your base currency into.
Exchange Rate – It is the rate at which your base currency will get converted into. For example if you wish to convert rupee in Pounds then your base currency is rupee and your quote currency is pounds and if for 100 rupees you get 1.1 pound then the exchange rate is 100 divided by 1.1 which equals 90.9 and generally written as INR/GBP = 90.9
This also means that if you convert 1 pound into INR then you will get 90.9 Rs and now pound is you base currency and INR is your Quote currency
Bid Price – Best Price at which you are willing to sell the quote currency in the market.
Ask Price – It is also known as offer price and is the best price at which you are willing to buy quote currency in the market.
Long Position – A long position means that you would like to buy base currency and sell the quote currency.
Short Position – A short position means that you would like to sell base currency and buy the quote currency.
Spread – Difference between the Bid and ask price
PIP – PIP stands for “Percentage in points” and is the smallest increment of trade in FOREX. Minimum value of PIP is upto four decimal places which is .0001 and it is termed as 1 PIP. So basically 1 PIP is equal to .0001
Example to understand above terms
Suppose you have 100 GBP and you believe that Indian economy is going to boost further which will make Indian economy strong then obviously rupee would be the choice of investors. Now the exchange rate of INR to GBP is 90.9 and you predict that as INR is becoming stronger so the exchange rate would be 89 around then you would prefer to take a long position i.e. buy INR and sell GBP now and would get around 9090 Rs. After a Month when the exchange rate goes to 89 then you can sell INR to convert it back into GBP and you will get 102.13 GBP. So the total profit you made is of 2.13 GBP which is around 2.13 percent!!!
Warning- In FOREX trading 90% of people loss money and it is an unregulated Market trading.