Forex Trading for Beginners: Forex Terminology Explained
Jumping into the forex market for the first time can be a daunting experience because you will encounter some terms unique to the industry. These terms are commonly used and important for anyone looking to become a trader. This article will comprehensively explain some of the most common terminology you will encounter as you begin the journey of a forex trader.
Base/quote Currency
Currencies in the forex market are quoted in pairs. The first currency in the pair is called the base currency. Meanwhile, the second currency is the quote currency. Therefore, in the EUR/USD pair, the euro is the base currency, while the US dollar is the quote currency.
The base currency always represents one unit. Meanwhile, the quote currency shows how much you need to buy that one unit.
PIP
The pip, or percentage in point, is the smallest unit of measurement in the forex market. It is measured from the fourth decimal of most currencies like EUR/USD. Meanwhile, for the yen, it is measured from the second decimal.
When currencies move, they do so in pips. Therefore, in forex, traders try to profit from the difference between the entry and closing prices, measured in pips. For instance, if the EUR/USD price moves from 1.0419 to 1.0421, a trader buying will make the difference of 2 pips.
LOT
Lots
A lot is the unit that measures how much you transact per trade. There are different types of lots, depending on how much you transact. A standard lot contains 100,000 units of currency.
Your broker can also offer a mini lot, which contains 10,000 units, a macro, which contains 1,000 units, and a nano, which contains 100 units. The bigger the lot size, the more money you need for your transactions. The lot size will also determine how much you risk per trade.
Ask/bid Price
When you look at the price quoted on your trading charts, you will see two types: the Bid and the Ask price. These terms are from the perspective of the broker. Therefore, the broker will bid a price when a trader is selling.
On the other hand, the broker will ask for a specific price when a trader is buying. Consequently, the Ask price has to be higher than the Bid price so that the broker can make a profit.
Spread
Spread is the difference between the Ask and the Bid prices. This value is how your broker makes money. The spread can be wide or tight depending on the broker and the currency. Major currencies are very liquid. This means that there is always a large number of traders willing to buy and sell. Moreover, volatility is relatively low. Therefore, the spread here is tight. On the other hand, cross and exotic currencies have fewer buyers and sellers, meaning high volatility and wide spreads.
Dominion Options spread
When trading, you should use tight spreads, reducing your trading costs and allowing you to retain most of your profits. Therefore, you should work with brokers offering the tightest spreads. Dominion Options is one such broker. By focusing on client retention, the broker can offer some of the tightest spreads in the industry.
Leverage
Leverage is a product forex brokers offer that allows traders to control more money than they have. Therefore, it is a loan that increases your profit and loss potential. Leverage is a unique feature in forex that has allowed traders with little money to access expensive global markets. Moreover, it is the best tool for increasing your profits while trading.
However, it is a double-edged sword because it also increases your losses. Therefore, it should be used wisely with a profitable strategy.
Dominion Options leverage
Dominion Options offers some of the highest leverage in the industry, allowing traders to grow and control more capital. A leverage of 500:1 means that you can control up to 500 times what you have. However, beginner traders should start with little leverage as they grow.
Margin
The margin is what your broker will put aside when you start using leverage. It is expressed as a percentage and is like a security for using leverage. The bigger the margin required, the lower the leverage. On the other hand, the lower the margin required, the bigger the leverage.
Latency
Latency is the difference in time between placing an order and its execution by the broker. Therefore, it is the execution speed. Low latency translates to fast speeds, while high latency translates to slow speeds. This speed is measured in seconds and milliseconds. The faster the speed, the more accurate your entry or exit. Meanwhile, a slow speed leads to delays and inaccurate entries and exits.
Dominion Options latency
As a beginner, it is important to find a low-latency broker, as this will significantly improve your results and trading conditions. Dominion Options offers its clients an execution speed of 30 milliseconds, some of the industry's fastest speeds.
Technical Analysis
In forex, technical analysis involves the study of charts and historical price data to identify patterns and trends that predict future movements. As you delve deeper into the forex market, you will come across chart patterns, candlestick patterns, and indicators traders use to conduct technical analysis.
Technical Analysis Chart
For the best experience, find a broker with the latest trading platform that gives you all the tools you need for technical analysis. Dominion Options provides its clients with the cTrader platform. This platform is superior to its peers because it has more chart tools and indicators for a comprehensive analysis.
Fundamental Analysis
Fundamental analysis involves monitoring news and economic reports to try and predict future price movements. On a larger scale, traders focus on economic trends in a country to predict its currency's future direction.
For instance, if you are trading the EUR/USD pair, you will focus on news releases from the Eurozone and the US. Some of the major reports that shape the markets include inflation, Gross Domestic Product, Employment, and central bank releases.
News feature
As a fundamental trader, having your news where you trade is important. This way, you can react quickly to any high-impact releases. The Dominion Options cTrader platform has a news feature that keeps you updated with the latest developments.
Join Dominion Options today and start your trading journey. Work with some of the tightest spreads, lowest latency, and high leverage to improve your results.
