Terms You Need To Know Before Participating In Forex Trading
Forex Trading can be truly overwhelming to the uninitiated. Although there are only thirty currency pairs used in the foreign exchange market, there are so many related concepts to learn, and number of strategies to master. Being familiar with commonly used jargons is therefore necessary before you even start speculating on the foreign exchange market.
Currency Pair Quotes
Currencies are always quoted in pairs in Forex trading. For instance, if you compare the value of the US Dollar against the Japanese Yen, you would see it written as USD/JPY. The 1st item on this quotation is called a quote, the 2nd currency is termed as the base. If the quote is written as USD/JPY = 100.00, it is read as 1 US Dollar is worth one hundred Japanese Yen.
Going Short, Going Long
These jargons are heard when making a trade. “Going short” means placing a sell order on a currency pair. Short positions are taken when the price for a particular currency is expected to fall in value. “Going long” on the other hand means placing a buy order. Investors take make this trade order when indicators show that the currency’s price will increase. By buying it at a much lower price, and later reselling it when its value is higher, the trader earns a profit.
Fundamental analysis vs. Technical Analysis
Among financial markets, foreign exchange is the most volatile. The reason for this volatility stems from the fact that the exchange rates existing between currencies are influenced by a host of variables. Among market determinants, the existing economic climate is considered pre-eminent. Having said such, speculating on the Forex market requires evaluating important economic factors. The strategy of studying these economic indicators, which include a country’s GDP and employment reports, is called fundamental analysis.
Forex traders can also base their decisions solely by following price movements that are displayed on updated graphical charts. This technique is referred to as technical analysis and many investors give preference to this method.
Leverage
To put it simply, using leverage in Forex trading allows you to control large positions for a relatively small cash outlay. Although buying on a margin can significantly increase returns, it is not without risk. If the investment moves against what the investor predicted, his losses can possibly be much larger than the amount he used for leverage.
