Forex Terms

What is base currency and quote currency?

Currencies are always quoted in pairs, such as EUR/USD or USD/JPY.

The first currency to the left of the slash ("/") is known as the base currency (in EUR/USD example, the base currency is the Euros), while the second one on the right is called the counter or quote currency (in EUR/USD example, the U.S. dollar).

What is long position?

Long position means buy the base currency and sell the quote currency.

What is short position?

Short position means sell the base currency and buy the quote currency.

What is Bid?

The bid is the price that your broker is willing to buy the base currency in exchange for the quote currency.

What is Ask?

The ask is the price at which your broker will sell the base currency in exchange for the quote currency.

What is Spread?

Spread is the difference between the bid and the ask price.

What is Pips?

Pip is the unit of measurement to indicate value change between two currencies. In short, it is the last decimal place of a 4 decimals quotation

For example, if EUR/USD moves from 1.0000 to 1.0001, that is one pip change.

What is Pipettes?

There are brokers that quote currency pairs beyond the standard "4 and 2" decimal places to "5 and 3" decimal places. In this situation, they are quoting FRACTIONAL PIPS, also called pipettes.

For an instance, if EUR/USD moves from 1.00000 to 1.00001, it moved ONE PIPETTE.

What is lot?

The specific amounts traded in Forex is lots.

There are a few types of lot size. The standard size for a lot is 100,000 units. There is also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively.

What is leverage?

Leverage simply means the % amount of money you are allowed to borrow from the broker when you open a position. The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a trade deposit, also known as "account margin" or "initial margin." Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account. No problem as your broker would set aside $1,000 as down payment, or the "margin," and let you "borrow" the rest. Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.

What is sell limit/buy limit?

A limit entry is an order placed to buy below the market or sell above the market at a certain price.

What is sell stop/buy stop?

A stop-entry order is an order placed to buy above the market or sell below the market at a certain price.

What is stop Loss?

A stop-loss order is a type of order linked to a trade for the purpose of preventing additional losses if price goes against you.

For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss (eww!).