Trading is a complex and challenging industry, filled with its unique terminology. Before you can begin trading in the forex market in Sydney, you must have a solid understanding of this terminology to help you make better decisions and reduce your overall risk when trading.
Trading terminology is constantly evolving as new terms are created. However, there are a few key terms that you should always be aware of when trading in the forex market. Click here to see the type of currency pairs you can trade in Australia via Saxo markets.
Pip
A pip is the smallest value in the forex market. For most currency pairs, a pip is equal to 0.0001. If the price of a currency pair shifts from 1.2345 to 1.2346, it has risen by one pip. For currency pairs involving the Japanese yen, a pip is equal to 0.001. Pip values can fluctuate depending on the currency pair and how volatile the market is at any given time.
Margin
In the forex market, margin refers to the amount of money you must put up to hold a position in your account. Margin requirements are determined based on leverage and volatility in the market at any given time. For example, if you want to trade 100,000 units of EUR/USD using 50:1 leverage, you need $500 to hold your position. However, if you made the same trade with 200:1 leverage, you would only need $25 to hold your position.
Leverage
Leverage is the money you can borrow from your broker to trade in the forex market. You can use leverage to grow your potential profits, but it can also increase your risk. For example, if you have $10,000 in your account and use 50:1 leverage, you can trade up to $500,000 worth of currency. However, if the market moves against you, you could quickly lose all of your money in your account. It is important to remember that leverage is a double-edged sword and should be used with caution.
Stop-loss order
You can place a stop-loss order with a broker to sell a currency pair if it reaches a specific price. Stop-loss orders are used to limit your losses in a trade. For example, if you buy EUR/USD at 1.2345 and place a stop-loss order at 1.2315, your position will be closed automatically if the price of EUR/USD falls to 1.2315.
Currency pair
A currency pair is the two currencies traded in a forex transaction. For example, if you buy EUR/USD, you buy Euros and sell US dollars. Currency pairs can be either direct or indirect. A direct currency pair is one where the quotation is given in terms of the base currency, while an indirect currency pair is one where the quotation is given in terms of the counter currency.
For example, EUR/USD is a direct currency pair because the quotation is given in terms of Euros (the base currency). However, USD/JPY is an indirect currency pair because the quotation is given in terms of US dollars (the counter or quote currency).
Spread
The spread is the difference between a currency pair’s bid and ask price. The bid price is how much you pay for a currency pair, while the ask price is how much you charge for selling a currency pair. The spread is usually quoted in pips. For example, if EUR/USD has a bid price of 1.2343 and an ask price of 1.2345, the spread would be two pips.
Swap
A swap is a fee charged by your broker for holding a position overnight. Swaps are calculated based on the interest rates of the two currencies involved in the trade and the size and direction of your position.
Also, read Currency Exchange in Australia.
If you hold a long position in EUR/USD, the swap would be credited to your account since you are earning interest on Euros. If you hold a short position in EUR/USD, the swap would be debited from your account since you are paying interest on US dollars.
Indicators
An indicator is a tool that technical traders use to analyse historical price data and predict future movements of a currency pair. Common indicators include moving averages, relative strength index (RSI), Bollinger Bands, and the MACD. Technical analysis can help traders identify trends and make better trading decisions based on those trends.
