Tagged in: Foreign Currency Exchange Trading Terminology Explained

Foreign Currency Exchange Trading Terminology Explained

After taking your first step into the foreign currency exchange trading world, it can be quite an overwhelming experience. The onslaught of information will come thick and fast from the very first moment, and a majority of it will be hard to understand and digest. Foreign currency exchange trading requires a certain knowledge to master. While each and every trade should be made with comprehensive research, getting the fundamentals right with foreign currency exchange trading only requires a base level of education. In order to take this “next step” for knowledge, take on board the tips in this article.

Foreign currency exchange trading terminology explained

Currency Pair

 

The term “currency pair” will be a phrase you encounter often in the world of foreign currency exchange trading. You will understand that the process of trading foreign currency is done by trading one currency for another, hence currencies being showcased in pairs. Consider that you currently hold USD in your investment portfolio, but you want to buy GBP, this trade will be a currency pair of USD/GBP. There are numerous formats for currency pairs, with enough available to satisfy all who want to trade foreign currency, no matter what the scale in mind is.

 

Spread

 

If you hear the term spread, it is referring to the difference between the buying and selling price. Most consider this to be where the profit is found in foreign exchange currency trading. Trading currencies require you to watch the spread extremely closely, with the ideal scenario being you holding a higher priced currency for the one you are about to trade for. In this scenario, you will be making money, but if the situation is the other way around, you will see a loss.

Leverage

 

In the world of foreign currency exchange trading, the term leverage refers to both margins and credit, both being used collectively to make trades. If you trade using leverage, as an investor you can make your money stretch further, however, there is an increased risk associated with it. Select online brokers are able to offer leverage ratios as high as 50:1, meaning a single pound can be worth up to £50 in a trade scenario. However, if a trade begins to unravel, you can find yourself in deep trouble fast.

Stop Loss

 

Unlike other elements currently able to be used within the world of foreign exchange currency trading, stop loss is able to offer some form of security. As mentioned previously, if leverage is not used properly, significant risks are involved. However, stop loss is a tool used for risk management. The usefulness of this feature at times can be worth its weight in gold, as it can prevent you finding yourself in financial freefall during hard times of trading. When a stop loss is initiated, it automatically enforces a trade if the value of the currency dips below a pre-set level. It is an essential aspect of foreign exchange currency trading, but must be used wisely, as it can deconstruct an effective trading strategy if implemented poorly.

Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.

Alexander Bowring is a London based writer and a Southampton Solent University Screenwriting graduate. He has worked alongside TV personality and Telegraph feature writer Alison Cork, whilst also having produced content for ITV, This Morning, Canvas8, Who’s Jack, Alison at Home, and Bonallack & Bishop Solicitors. Alexander also has a keen interest in investments.