Important Forex Trading Terminology

Spread
The word spread means literally the difference between the price that you can sell currency at (known as the Bid) and the price that you are able to buy the currency at ( known as the Ask price). On major currencies such as USD, EUR, JPY,CAD and GBP the spread is usually a lot tighter than on other currency pairs. When assessing which currency trading company to use it is important to know the spreads available.

Pips
When pricing a currency or exchange rate it is important to understand the way the prices are written so that you do not over reach your budget. Normally exchange rates are expressed to four decimal places (0.0000). A 'pip' is the smallest unit by which a cross currency price quote changes. A pip is usually the last decimal place. For example the EUR/USD bid price may be 0.9875 and the ask price may be 0.9878 - thus the spread is 3 pips or 0.0003. If you bought at 0.9875 and the price went to 0.9865 then there was a 10 pip movement.

Base Currency and Variable Currency
When trading foreign currencies you will always have to trade two currencies. For example, you will buy US dollars and sell GBP. Or buy CAD and sell Japanese yen and so on. There are hundreds of currency combinations to choose from, but many investors stick to the major currencies. When trading currencies you are speculating that one currency will strengthen (or weaken) against the other. You will normally indicate which your 'base' currency is - i.e. currency that you are working from and when a trade is settled you can elect to be paid in your base currency. For Example if you your base was GBP and you bought 10,000 GBP of EURO at 1.4750 you would have bought 14,750 Euro. If you sold the Euro at 1.460 then you would receive 10,102.74 GBP back in your base currency

Stop-loss discipline
One of the reasons that people trade currencies is the potential profit opportunity. The rewards can be very lucrative even on a daily basis. However the flipside is also very stark and losses can mount up. Therefore it is important to understand that you can put in place strategies to minimise your losses. The main tool for this is a 'stop - loss' order. When you place your trade you can put in place a stop - loss that is triggered when the market falls to a certain level, thus cutting your losses at a certain amount. However these are not always guaranteed. Many traders prefer to monitor their positions but a stop - loss is useful when the market moves rapidly or overnight or over the weekend.

Factors affecting Exchange Rates
New traders often wonder why Exchange rates move and what makes them move. Below is a very simple explanation of some of the factors that move exchange rates. Some factors are regular economic news and others are things that come out of the blue.

Gross Domestic Product
The Gross Domestic Product (GDP) is a broad brush measure of an economy and gives an idea of relative economic strength. Usually reported quarterly, it measures how many goods are made in the economy.

A high GDP figure means the economy is doing well and therefore interest rates may go up to curb inflation. This usually means that a currency will strengthen.

Trade Balance
A Countries trade balance measures the difference between exports and imports. The trade balance is very important because it has a direct effect on the inflows/outflows of currency by importers/exporters. A strong currency makes exports cheap and imports expensive

Consumer Price Index
The Consumer Price Index (CPI) is a measure of inflation in prices. If inflation is rising then this is often followed by increased interest rates to slow down consumer spending. This makes investment in the country more appealing and usually means the currency will strengthen. However a longer term inflation problem will eventually undermine confidence in that currency and weaken it.

Employment Indicators
The number of people employed/unemployed and the number of new jobs created are big indicators of economic activity. The more new jobs that are created the better the economy is doing and thus these results can affect the relative strength of a currency. More people working = more inflation = higher interest rates.

Goods Orders
Goods Orders are expressed in many ways and measure the amount of new orders placed with domestic suppliers. Rising Durable Goods Orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates that are often supportive to a currency at least in the short term.

Retail Sales
Retail Sales as the title suggest measure the amount of sales on the high street and reflect consumer spending. Rising sales means a strong economy which means an inflation risk which means interest rate rises which in the short term means a strong currency.

Mortgage Lending
Mortgage Lending is an indicator of how many people are buying houses and how many new homes are being sold. Rising figures means the economy is doing well and that current interest rates are not impeding house buying. Therefore rates can go up and the currency is strong.