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Market trading is a complex business, and one of the reasons that many people find it so complicated is because of some of the terms used. There are many different words and phrases used in market trading to refer to specific things, so many in fact that it can sometimes feel like you are learning a foreign language! Coming to grips with these terms is essential if you are to understand the modern trading market.
Forex (otherwise known as FX or the currency market) is the term used to describe the global marketplace where foreign currencies can be exchanged. Money is made by changing currencies for those with more favorable exchange rates, and huge amounts can be won or lost in mere seconds. Traders of the Forex need a quick hand and steady nerve in order to make money.
This is the generic term used when one currency is traded in exchange for another. Most major world currencies are available on the Forex exchange, and people can make money by trading a certain amount of dollars for Euros, or British pounds for Japanese yen.
The term ‘the spread’ is used when referring to the difference between the asking price of a currency and the selling price. Individual brokers decide the spread on the currencies they trade, meaning they can make a profit by offering a better deal for buyers than other brokers.
Continuing our look at UFX Markets’ 8 must know Forex trading terms on Forexcrunch.com, a pip is a unit of measurement of a currency, usually the second decimal point number seen on the exchange rate. Although a pip usually only represents a small amount of money, it can make all the difference when it comes to leverage.
Brokers using margins or even credit when trading are said to have leverage. Leverage can make the difference between multimillion dollar deals and deals worth a few thousand, although caution must be exercised as this can lead to huge losses as well.
Margins represent certain allowances that traders give brokers. For example, a trader with $5,000 can use margins to trade millions of dollars worth of currency. The only problem occurs during a margin call, when anyone trading with margins has to pay them back immediately.
This is a device used to protect investments. With a stop loss, even if you are unlucky and lose some of your investment, you will never lose the entire amount and will be able to claw some money back.
Long Vs. Short
You must decide when trading how long you want to keep hold of your currency for. Long trading means you typically keep hold of the currency for at least a week, while short mean you can trade it quicker, often on the same day you bought it.