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FOREX TERMINOLOGY

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FOREX TERMINOLOGY

Post by Jacq Stone on Wed Oct 19, 2011 7:46 pm

Since currencies are always quoted in pairs; for example: EUR/USD = 1.3075. The first currency left to the slash is called base currency while the currency right to the slash is called quote currency and the value shown is the exchange rate. The base currency is the basis for the buy or sells. If trader buy EUR/USD, means he/she are buying the base currency (in this case, the Euro) and at the same time selling the quote currency (in this case, the US dollar) and vice versa. In Forex market, buy is termed as "go long" or "long position" and sell is termed as "go short" or "short position". For this particular example, trader will need to pay 1.3075 US dollar to buy 1 Euro and can receive 1.3075 US dollar when sell 1 Euro (without considering the spreads). A trader is open position whenever he enters a trade and is close position when he exits from his trade.

The "bid" is the price which traders will sell and the "ask" is the price which traders will buy. The bid price will always lower than the ask price and the difference between the prices is known as "spread".

In Forex, there is a term called Swap Rate or Rollover Interest. Rollover interest is a type of interest rate that trader pays or earns depending on the pair of currencies traded. As every Forex trade involves borrowing one currency to buy for another, rollover interest is part of the Forex trading. Interest is paid on the currency that is borrowed and is earned on the currency that trader bought.

Forex is traded in lots. The standard size of a lot is $100,000 and a mini lot size is $10,000. Pip is the dimension of the smallest increment or decrement of currencies. A pip is the last decimal place of a quotation and use to measure trader's profit or loss. For instance, EUR/USD move from 1.3075 to 1.3076, there is a pip increase in the quotation. For quotation involving the Japanese yen, there will has only two decimal points such as 123.45, and 1 pip would be 0.01. In foreign exchange market, the value of a pip is all shown in the unit of US dollar. Sample of calculation for pip value is shown below. Profit or loss is thus calculated by just multiply the pip value with the amount of pips gain or loss.

Example:

USD/CAD at an exchange rate of 1.2345:
(0.0001/1.2345) $ 100,000 = $ 8.10 per pip

If the base currency is not US dollar, the formula is slightly changed.

EUR/USD at an exchange rate of 1.3075:
(0.0001/1.3075) EUR 100,000 = EUR 7.65 1.3075 = $ 10 per pip

Margin is the minimum account size require for a trader to trade. Unlike other markets, Forex allow trader to trade with leverage. Leverage is the ratio that trader can trade using a small account size. If $ 1,000 is deposit and trade in standard lot size, the trader is trading in a leverage of 100:1. At IKOfx, we offer leverage up to 500:1. A trader will experience a margin call if the equity (the value of account) fall below the margin requirements. In the event of margin call, the trading platform will automatically close some or all open positions to prevent trader's account fall to negative balance.
There are some basic types of order that use in Forex market.

1. Market Order
To buy or sell a currency pair at the current price. Execution of this order results in opening of a trade position instantly.
2. Pending Order
Pending order is the client's commitment to the IKOfx to buy or sell a currency pair at a pre-defined price in the future. This type of orders is used for opening of a trade position provided the future quotes reach the pre-defined level. There are four types of pending orders available in the terminal:
* Buy Limit buy provided the future "Ask" price is equal to the pre-defined value. The current price level is higher than the value of the placed order.
* Buy Stop buy provided the future "Ask" price is equal to the pre-defined value. The current price level is lower than the value of the placed order.
* Sell Limit sell provided the future "Bid" price is equal to the pre-defined value. The current price level is lower than the value of the placed order.
* Sell Stop sell provided the future "Bid" price is equal to the pre-defined value. The current price level is higher than the value of the placed order.
3. Stop Loss
This type of order is used for minimizing of losses if the security price has started to move in an unprofitable direction. If the quote price reaches this level, the position will be closed automatically. Such orders are always connected to an open position or a pending order. Terminal checks long positions with Bid price for meeting of this order provisions, and it does with Ask price for short positions. To automate Stop Loss order following the price, one can use Trailing Stop.
4. Take Profit
Take Profit order is intended for gaining the profit when the quote price has reached a certain level. Execution of this order results in closing of the position. It is always connected to an open position or a pending order. Terminal checks long positions with Bid price for meeting of this order provisions, and it does with Ask price for short positions.
5. Trailing Stop
Trailing Stop is always attached to an open position and works in client terminal, not at the server like Stop Loss, for example. To set the trailing stop, the user has to execute the open position context menu command of the same name in the "Terminal" window. Then the user has to select the desirable value of distance between the Stop Loss level and the current price in the list opened. Only one trailing stop can be set for each open position. After the above actions have been performed, at incoming of new quotes, the terminal checks whether the open position is profitable. As soon as profit in points becomes equal to or higher than the specified level,
command to place the Stop Loss order will be given automatically.The order level is set at the specified distance from the current price. Further, if price changes in the more profitable direction, trailing stop will make the Stop Loss level follow the price automatically, but if profitability of the position falls, the order will not be modified anymore. Thus, the profit of the trade position is fixed automatically. After each automatic Stop Loss order modification, a record will be made in the terminal journal.

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Jacq Stone

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