Basic Terminology

Currency pair trade

Forex trading is based on the ratio between two currencies. These two currencies are called a pairand their ratio is the exchange rate. For example, when trading in a Euro- US Dollar pair, the accepted term is EUR/USD. The left currency (EUR/USD) is called base currency and the right one (EUR/USD) is called counter currency.

Forex trading is done according to the base currency's direction. If we asses that Euro is about to get stronger in comparison to the US Dollar (i.e., its rate will increase), then we will buy Euro. But if we estimate that the Euro is about to weaken in comparison to the US Dollar (i.e., its rate will drop), we will sell Euro.

Major accepted pairs in the Forex market

EUR/USD - Euro vs. US Dollar
USD/CHF - US Dollar vs. Swiss Franc
GBP/USD -British Pound vs. US Dollar
USD/JPY - US Dollar vs. Japanese Yen

Price quote

A price quote is received from our Forex broker, giving us information about the relevant pair, ask price and bid price.
For Example, the term EUR/USD 1.4906/1.4909 means buying for the higher price, and selling for the lower price. (i.e. buying 1 Euro for 1.4909 USD and selling 1 Euro for 1.4906 USD).

Leverage

Leverage is used in both Forex and commodities trading. It allows us to make business transactions much larger than our account can afford. Different Forex brokers allow different leverage levels in their account. Maximum leverage is usually up to 400 times the original sum in our account.

For example, a leverage of 100 allows us to enter a $100,000 transaction with only a $1000 in our account. A sum of $10,000 with the same leverage will allow us to enter a $1,000,000 transaction. In that case, a small 1% change in the currency's rate can yield a profit of $10,000.

note!: Increasing leverage increases risk.

Pips

A pip is the smallest unit in Forex, i.e., the last digit in the pair. Usually it is the fourth digit after the period. For example, if a price of EUR/USD changes from1.4903 to 1.4905, the difference is 2 pips.

The value of a single pip changes according to the pair and is set by the extent of the transaction. For example, in a $10,000 transaction of a EUR/USD pair, a rate change of one pip equals to $1. In a $100,000 transaction every pip is worth 10$.

Spread

The difference between the ask rate and the bid rate is called a spread. The spread is highly important since it is basically the commission we pay the Forex broker for each and every trade (spreads change from broker to broker). For example, in $10,000 transaction, a 3 pip spread between ask rate and bid rate means a $3 commission.
As part of EverestForex's benefits for dealers, you can enjoy lower spreads and commission discount with leading Forex brokers.

Standard lot

The size of a transaction is measured in lots. A lot refers to a transaction of 100,000 of the base currency. For example, selling a 0.1 lot in a EUR/USD pair refers to a €10,000 transaction.

Stop Loss (SL)*

A Stop-Loss order is a limit order to an open transaction for preventing further losses in case a price goes against you. When the price reaches the pre determined rate set in the SL order, the transaction automatically closes. A responsible trader must set a SL order before each and every transaction. That will give the trader control over the risk involved in the transaction.
note! Increasing leverage increases risk

Take Profit (TP)*

A Take Profit order is an order that closes your trade once it reaches a certain level of profit. When the price reaches the pre determined rate, set in the TP order, the transaction automatically closes and the profit is transferred to the dealer's account.
*Placing Contingent Orders may not limit your losses to the intended amounts