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Know Your Forex Lingo

If you are new to Forex trading business you must learn the Forex lingo. You should know these terms like the back of your hand; this is the first lesson that you need to know before making your first trade.

There are terms that you might encounter that you know already; however, there are words that we are sure must be new to you.

1. Major and Minor Currencies

There are eight major currencies that are the most frequently traded in this business. They are the following: EUR, USD, JPY, CHF, GBP, NZD, AUD and CAD.

Other currencies that are not mention above are simply called the minor currencies.

Other traders leave the minor currencies alone since they are interested most with the "Fab Five" and these are: EUR, USD, GBP, CHF and JPY. These currencies are the most liquid of all.

2. Base Currency

We call the first currency in a currency pair as the base currency. The base currency will determine how much it is worth as amounted against the second currency.

Take a look at this example: USD/CHF: rate = 1.6350 - This means that 1 USD is equal to 1.6350 (USD/CHF - 1/1.6350) - In this example the USD or the U.S. Dollar is considered as the "base currency" for quotes. - Quotes shows as a unit of $1 U.S. against the other currency, which in this case is the CHF.

3. Quote Currency

The second currency at the currency pair is called the "quote currency". However, this is also called as the pip currency. As the trader, you will realize your loss and profit in this currency.

4. Pip

A small unit of price in a currency is called the "pip". Almost all the currency pairs have five remarkable digits and almost all pairs have decimal point right after the first digit.

Example: EUR/USD = 1.2538 - From this example one pip is equal to changes done at the smallest detail in the fourth decimal place, which in this case is 0.0001. - Hence, if the quote currency is in U.S. Dollar, then we can say that one pip is equal to 1/100 of a cent.

However, there is always an exception when it comes to the pair of USD/JPY. In here the pip is always equals to $0.01.

5. Bid Price

The "bid price" is the buying price of one currency in the pair currency in the market. The trader can sell the price of the base currency at this amount.

Example: GBP/USD = 1.8812/15 - From this example the bid price is the 1.8812. - In translation, the trader may sell 1 British Pound for 1.8812 U.S. Dollars.

6. Ask Price

This is now the selling price, which is called the "ask price". Sometimes ask price can also be called as the "offer price".

Example: EUR/USD = 1.2812/15 - From this example the ask price is the 1.2815. - As the trader you can buy 1 Euro for the amount of 1.2315 U.S. Dollars.