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Basic Terminology



Spread

It is the difference between the sell quote and buy quote, it basically represents the brokerage service cost. The bid price is always lower than the ask price and thus the difference between ask and bid price gives spread.

Exchange rate

It refers to the value of one currency expressed in terms of other for eg. If EUR/USD is 1.32 then it means that 1 euro is worth US$1.32

PIP

Also called point or points it represents the smallest increment of price moment that a currency can make. Most of the currencies trade within a range of 100-150 pips. It is different for different currencies for example for Euro, US Dollar, British pound or Swiss franc one pip is .0001 whereas for Japanese Yen one pip would be 0.01.

Bid and Ask price

Bid price refers to the price at which the market will buy a particular currency from you. It generally represents a price at which a trader can sell a base currency to the broker. Ask price represent just the opposite that is the price at which you can buy the base currency from your broker.


Leverage


  • The forex markets offer large leverages and it allows the trader to gear the account into a position greater than the total account margin for instance if a trader has $2000 of margin in his or her account and he or she opens a $200000 position with $2000, a leverage of 100 times has been used.
  • The leverages are generally mentioned in ratios such as 10:1,15:1 and so on.

Margin


  • It refers to the deposit that needs to be maintained to open or maintain a position. Basically, there are two types of margins that are used and free margin, the used margin is the amount which is used to maintain an open position and the free margin refers to the amount which can be used to open new positions.
  • In order to maintain an open position, the minimum amount needs to be maintained.

Margin Call


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