The Forex & Currency Jargon

In order to understand Forex Trading or even begin to get involved in the Forex Market, there are certain terms that it would be helpful to know. The more of the language you understand the more the articles, books, websites and videos that are available to Forex beginners will make sense to you.

Pip:

A pip or a percentage in point is the smallest amount a currency price can move. Price differences are reported in Pips. A Pip is equal to the fourth digit after the decimal point in almost every currency. That means it is 1/100th of 1%. Currency most often moves between 100 and 150 Pips per day. The Japanese Yen, is the one major exception because it is reported only to the second digit after the decimal point. That means that when the JPY moves one pip, it moved 1% whereas a different currency moving a pip is a much smaller amount. That means that even though it might seem like 1/100th of 1% is a negligible amount, when it is traded in lots of 10,000 even one Pip up or down can mean a lot of money to the trader.

Spread:

The spread is the difference between the buying price and the selling price. When you see a price quote of for EUR/USD = 1.3200/03 it means there is a 3 PIP spread. The difference between the buying price of 1.3200 and the selling price of 1.3203 is 3 pips or points.

Margin:

Margin is the amount of money you need in order to open a position or a trade. In order to enter into a trade, you have to have money in your brokerage account. The margin is usually a very small percentage of the actual price of the trade. Every trader will have some used margin and some free or open margin. The used margin is what you are using to hold the positions you already have and the free margin is what you can still use to enter new trades. If your balance falls below the minimum you need to open a position, you will receive what is known as a margin call, asking you to put more money into your account.

Leverage:

Leverage is the ability to enter trades with only a small percentage of the actual cost. Since all currency is purchased on paper or in theory and not actually held in the hand of the trader, Forex Traders can use theoretical money to purchase that currency as well. This means that a brokerage will only require you to put 1/100 or of the amount that you will be trading with into your account in order to trade. This sounds very appealing, but it can also work to your detriment because if you risk money you cannot back up with actual funds, you can run into very serious problems. Leverage allows you to trade money you do not actually have.

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