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Forex Trading - What Do These Forex Terms Mean?

If you get involved with Forex, you are going to come across a certain terminology that is particular to the exchange itself. It is, of course, mandatory that you know what the following terms mean:

Currency Pair - All trades on Forex are expressed in terms of pairs, since you would be "exchanging," or selling one currency while buying another. So in effect, the currencies are "paired' with each other for purposes of that particular trade.

Exchange Rate - This is somewhat self-explanatory, in that it is the value of a currency relative to another. In other words, one Euro is worth so much in U.S. Dollars, or British Pounds, or Japanese Yen.

PIP - This is the absolutely smallest increment of movement in the value of a currency.

Cross Rate - This is an exchange rate between currencies, where neither currency is that of the country where the rate quote is given. So if you're in the United States and there is an exchange rate quoted relating the Yen to the Euro, that would be a "cross rate."

Margin - This is the money you have to have on hand in order to create a position for yourself, or to maintain that position. If your position is open, then the margin is "used." If you are going to use it to open a new position, then it has to be "free." If you don't have enough funds to maintain an open position, you will be subject to a "margin call" which will demand that you supply funds to make up the difference. Failure to do so will effectively close your position.

Bid Price - This is what the market, or a broker, will pay you for a currency pair. You can sell the base currency to the broker at the bid price.

Ask Price - This is what the market, or a broker, will sell you a pair at.

Spread - This is the difference between the "bid" and "ask" price on a currency pair.

Have you got all that?