Making sense of Forex trading terminology

Are you looking to make some sense out of all these Forex terms used in the Forex market?

Cross rate: the exchange rate between two currencies neither of which are the currencies of the country in which the quotation originates. The term is sometimes used for foreign currency quotations which do not involve the USD. An example is a quotation that you get in the United States involving the British pound and the Swiss franc because neither is the currency of the United States. On the other hand, if you receive a quotation in the United States involving the Swiss franc and the U.S. dollar, strictly speaking, this is not a cross rate because the U.S. dollar is the domestic currency of the United States.  Forex Terminology

Leverage: the process of using it to multiply your trading capital and therefore your ability to establish positions in the market. Leverage is used to multiply your profits ( and multiply your losses!). The financing is normally provided by your broker. If you have a trading capital of $500.00 in your margin account and your broker allows you to leverage up to 100: 1, you can establish positions totaling $50,000.00. If he allows you to leverage up to 200: 1, you can now take a market exposure of up to $100,000.00. You can easily calculate your leverage by dividing the total value of your positions by the amount in your margin account.

Margin: the amount or deposit you are required to keep with your broker to open positions and to maintain them. Margin may either be “ used” ( the amount used to maintain your existing positions) or “ free” ( the amount available for you to open new positions). If the margin amount falls short below the amount required to maintain your existing position, the broker will issue a “ margin call” which means that you have to rectify the situation either by depositing extra margin or by closing out positions. The general practice among brokers is to close your position without reference in the event of a margin shortfall.

Bid and ask prices: the bid price is the price at which the market (through your broker) will buy a particular currency pair and this is the price at which you can sell the base currency. The ask price is the price at which the market ( through your broker) will sell a particular currency pair and this is the price at which you can buy the base currency.

Buying and selling: the basic objective of all trading in financial markets is to make a profit by buying low and selling high or by selling high and then buying low. The Forex market is slightly different from other markets in that when you sell a currency pair, you are actually selling the first currency in the pair ( the base currency) and buying the second currency in the pair ( the quote currency). Because the Forex market is neutral with no inherent bias, you can make money in both rising and falling markets. When you go long, it means that you are buying in the expectation of rising prices at which you can sell for a profit. For instance, if you go long on EUR/USD, you are buying Euros and selling U.S. dollars and you will make a profit if the Euro strengthens against the U.S. dollar. Similarly when you go short in the same currency pair, you are selling Euros and buying U.S. dollars in the hope of falling prices. You will make a profit if the Euro weakens against the U.S. dollar.

Types of orders: when you make a trade, buy or sell, in the Forex market, it is known as an order. There are some basic types of orders but these can vary from broker to broker and some brokers can offer special orders.

A market order is executed immediately at the best available price.

The limit entry order is placed when you want to buy below the current price in the market or sell above it.

A stop entry order is used to buy above the current market price or to sell below it.

A stop loss order is used to avoid further losses if the price breaches a level specified by you. This is an important way to manage your risk and the order will remain in force until your position is closed or you change the order.

A trailing stop loss is also used to manage risk like a standard stop loss but with the difference that it moves upwards as the market rises. This locks in the profit that you have already made and is best used in a market showing a strong upward trend.

A Good till Cancelled order remains in force and will not expire until this it is manually canceled. You should be careful about using these because if you forget to cancel, you may find that the order is executed at a time when you are in an unprofitable position.

A Good for the Day order remains in force until the end of the trading day which is normally 5:00 PM New York time. The exact time of expiring depends on your broker and you should always check to make sure.

A One Cancels the Other order involves two different orders which could be two orders of any kind such as entry orders and one is canceled the moment the other one has been executed. For example, if you were trading a particular currency pair, and you are expecting a market move but do not know in which direction, you would like the option of buying or selling depending on the direction in which the move takes place. You can use this kind of order to provide you with that option by placing buy and sell orders at different price levels.

A One Triggers the Other order is the opposite of the above in that when an order is executed, the execution of another order is triggered instead of being canceled.