Fundamental analytics

4 Basic Forex Terms You Should Know

1 - Margin

 

Margin, also known as margin trading, refers to the practice of using funds from a Forex broker to trade. In other words, the broker is loaning you money to trade a larger sum without you necessarily having to deposit that amount in your trading account. This common practice increases considerably potential gains, but also exposes traders to massive losses.

 

2 - Leverage

 

Leverage is the ratio of the capital used for a trade to the required deposit amount (margin). In other words, when you see 200:1, it means a trader should deposit $1 to trade with $200. Leveraging positions is a very common practice among Forex traders, who typically operate with small amounts. Leverage enables them to widen their profits, but also their loses, turning this financial tool into a dangerous two-way sword.

 

3 - Base and Quote Currency

 

Base currency: the first currency displayed in a currency pair. For example, if we are analyzing the EUR/USD - the EUR will be our base currency.

 

In other words, the base currency refers to the unit which is converted into another currency. Following the previous example, 1.0000 EUR equals 1.2000 USD.

 

Quote currency: it is the second currency seen in a currency pair, also known as the pip currency. It expresses the rate to which the base currency is exchanged at a certain time.

 

4 - Pip

 

A pip is the smallest unit of a currency. For example, an EUR/USD pair is usually expressed with five digits. In this case, 0.0001 will be a pip. A different story happens when we look at the Japanese yen. Then the pip equals to 0.01.

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