Standard lot, mini lot, and micro lots. These are the three kinds of accounts available to new investors, and they’ve made it easier than ever to break into the ForEx market. For example, a micro account could be started with as little as fifty dollars.
But even though its simple and cost effective to get involved, its important to know the market and vocabulary so that you make the best investment decisions possible. If you’ve already traded stocks in the past, you’ll be a head of the curve when it comes to learning.
Some terms you should be familiar with to get started include PIP, base currency, cross currency pair, currency pair, and quote currency. Tradex1.com PIP is the minimum price change that a particular exchange rate can make. It is usually a fourth decimal point, because most currency value is calculated to the fourth decimal.
Base currency is the initial currency quoted in a pair of currencies in the ForEx market. It is usually either the domestic currency or accounting currency.
A cross currency pair are two currencies that are being traded that do not include the American dollar. In this scenario, one type of currency is exchanged for another without being exchanged into US dollars prior.
A currency pair is the quote and pricing of currencies in the ForEx market. The value is determined by comparing it to another currency. The first currency is called the base currency, defined above, and the other is the quote currency. The currency pair then defines how much quote currency is needed to buy one unit of the base currency.
Quote currency, as mentioned earlier, is the second currency in a currency pair. There are direct quotes, where the quote currency is foreign. There are also indirect quotes, where the quote currency is domestic. Quote currencies may also be referred to as secondary currency or counter currency.
Now that you’re armed with a little bit of vocabulary knowledge, it will be easier to understand the differences between trading stocks and trading currencies. When it comes to trading currencies, you are always comparing two, so research is always done in pairs. It is also assumed the pair includes the United States dollar. For example, if a researcher writes the Yen is trading at 2.3222, it is inferred that this is against the US dollar.
When you buy or sell a currency pair, the purchase or sale is on the base currency. For instance, traders who are excited about the Yen could sell Yen/USD. In this scenario, the trader is selling Yen and buying American dollars simultaneously. This is what is meant by all ForEx trades being done in pairs.
Also, let’s review an example of PIP, another term we discussed above. Let’s say that GBP/USD rises from 1.5000 to 1.5005. This means that the GBP/USD has risen five PIPs. Each time that last decimal increases, each increment it increases is a PIP. This is where the lot sizes we discuss in the first paragraph come into play. Depending on if the lot size is standard, mini, or micro, the monetary value of a PIP could be enormous – even though its just one decimal point.
It is easy for new traders to get involved with the ForEx market because you are always comparing just two things, where as if you trade stocks there are hundreds and thousands to choose from. On the other hand, the ForEx offers challenges because it has it’s own vocabulary. Therefore, those looking to get involved in the ForEx market should be sure to do the necessary learning before getting started.