Terminology You Must Know To Trade Or Invest In Forex

So you've seen some advertisements on TV or online and maybe you've read a little bit in investment books about Forex and it seems like something you might be interested in but you also keep coming across all these strange new vocabulary words and aren't quite sure what they mean. Fortunately, Forex terminology is simple and makes sense and once you learn it, you'll not only be able to understand more of the articles you read, but you'll also be able to use it in conversation yourself and feel like a pro. So let's get started on some of the Forex terms that you are most likely to encounter:

Ask - The Ask refers to the price at which you can buy a currency pair.

Bid - The bid refers to the price at which you can sell a currency pair.

Spread - The spread refers to the difference between the bid and the ask price. You will often see a currency price listed so that it looks like this:

EUR/USD: 1.3428/30

or sometimes like this:

EUR/USD 1.3428 / 1.3430

What this means is the bid is 1.3428 and the ask is 1.3430.

It is important to note that the bid will always be lower than the ask. If this wasn't true, then you could buy anything and immediately sell it for more money. Plus, the spread (remember, spread means difference between the bid and ask, which in the previous example was 0.0002) is how the market makers or brokers make their money.

It is said that you must "pay the spread" to trade currencies (or anything else, since in every market the bid is always lower than the ask). It is considered part of the cost of investing.

Pip - Pip is one of the most common terms you will hear. A pip refers to the smallest amount of movement a currency pair can make. So for example, if the EUR/USD goes from 1.3428 to 1.3429, that one pip. You could say "the EUR/USD moved one pip." If it goes from 1.3428 down to 1.3400, you could say "the EUR/USD went down 28 pips."

Leverage - Leverage refers to using borrowed money. Assume you have $10,000 to invest. If you buy $10,000 of something and it doubles, you now have $20,000.

But sometimes your broker will loan you money (which you must pay interest on). If you have $10,000 and your broker loans you another $10,000, you can now buy $20,000 worth of something. If it doubles your account is now worth $40,000. Remember that you must pay back the borrowed money ($10,000) so you get to keep $30,000 of the $40,000 after you pay back the $10,000 loan.

From this example it is clear how using leverage can help you make more money from the same movement. However, it is considered dangerous to use too much leverage (since you can lose money faster if price moves against you), and using leverage should always be avoided by beginners until you are sure what you are doing and why.

These are some of the most common Forex terms and understanding them will help you make sense of what you read when you are reading websites and books to learn about Forex.

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