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Forex Vocabulary - Part 1

Just some of the things that may be daunting about forex is the fact that there are so many terminologies being used among brokers as well as investors. If you are new to forex, here is a guide to the most commonly used terms in the industry. The list is certainly not complete, but it's enough to get you started.

Ask Price or Offer Price - It is the price that traders can buy different currencies. The Ask Price is typically shown on the right side of a quote.

Base Currency - The first half of a currency pair, e.g., EUR in EUR/USD. A forex quote shows the value of the base currency in the second or quote currency.

Bid Price - It is the price that a forex investor can sell a currency. The bid price is on the left side of a currency quote, e.g., EUR in EUR/USD.

Bid/Ask Spread - It is the difference between the bid price and ask price in a currency quotation. A Bid/Ask Spread actually represents the fee of the broker, and thus it varies from one broker to another.

Broker - He is the intermediary between the buyer of a currency and the seller. A broker earns his money by setting the Bid/Ask Spread in any forex transaction.

Cross Currency - It is a currency pair without the US dollar, e.g., GBP/EUR.

Currency Pair - It is the two currencies within a forex transaction, e.g., USD/EUR.

Foreign Exchange or Forex - It is the simultaneous buying one currency and selling of another currency.

Fundamental Analysis - An analysis on how condition in a country's economy and politics affects currency prices in the forex market.

Leverage or Margin It is the ratio between how much you can trade and your actual or required deposit. The common margin for forex is 100:1. It only means that you can trade 100 times the value of your deposit.

Limit Order - This is where you stop and say "buy" or "sell."

Lot - This refers to the size of a transaction in forex. A standard lot is worth about $100,000.

Major Currency - The major currencies in forex trading are the British Pound (GBP), Euro (EUR), Swiss Franc (CHF), German Mark (DEM), and the Japanese Yen (JPY).

Minor Currency - The minor currencies in forex trading are the Canadian Dollar (CDN), Australian Dollar (AUD), and New Zealand Dollar (NZD).

One Cancels the Other (OCO) - In an actual forex scenario, two orders are placed at the same time, but in order to execute the first order, the second order must be cancelled.