Forex Concepts

In this section we will review the concepts that have been explained so far, it is possible that as you have been reading the course you have forgotten any of the terms or concepts explained.

Major and Minor Currencies

The currencies most frequently operate are called major currencies that are in USD, EUR, JPY, GBP, CHF, CAD, NZD and AUD. All other foreign currencies are known as minors. We recommend you concentres operate in these currencies, USD, EUR, JPY, GBP and CHF since they are the ones that have more liquidity on the market. The minor currencies are greater words and are operated mainly by people expert.

Pair Format

It is used the following format to express exchange rates.

Base Currency / Quote Currency Bid(Sell)/Ask(Buy)

Base Currency

In the format of the first couple currency indicated on the left is the base currency. That gives us the value of that currency against the second currency in the form of the pair. An example of the USD / CAD in that the quotation is 1.1841, this indicates that 1 US dollars worth 1.1841 Canadian Dollars.

Quote Currency

In the format of the second pair currency indicated on the right is the quote currency. It is also known to the currency quoted as currency pip since any gain or loss that has been expressed in this currency.

Pip

A pip is the smallest unit price for any currency. Usually, all the pairs have 5 numbers, and most of them carry a comma after the first number. One example is the USD / CHF at 1.2472. That is a pip is the smallest change that has at the fourth decimal place, in example, 0.0001.

One exception is the pair USD / JPY where a pip equals 0.01

Crossing Currency

It is one in which neither currency is the dollar. These pairs have already erratic behaviour that the operator has conducted two orders USD. For example, when you begin a long (buy) in the EUR / GBP is equivalent to buy EUR / USD and sell GBP / USD. These pairs usually have a high transaction cost.

Bid(Sell)Price

The Bid (Sell) is the price at which the market is willing to buy a given currency on a pair. At this price the trader may sell the base currency.

For example, in the Par EUR / USD 1.3029/31, The Bid price will be 1.3029 it is meant to be sold by one euro 1.3029 dollars.

Ask(Buy)Price

The Ask (Buy) is the price at which the market is willing to sell a particular currency pair. At this price the trader can buy the base currency.

For example, the pair USD / CHF 1.2470/73, it means that you can buy a dollar for 1.2470 Swiss Francs.

Spread Bid/Ask(Sell/Buy)

The spread is the difference between the prices Bid (Sell) and Ask (Buy). Often brokers skipped placing all the numbers in Bid and Ask showing the full bid price and with the last two numbers the price of Ask. For example, GBP / USD will be 1.9668/1.9571, sometimes gets 1.9668/71. Although often saw only the two latest numbers 68/71.

Margin

When you open an account with a broker, you will have to deposit money that depending on the broker can range from 100 dollars up to $ 100,000.

When you open an operation, a certain percentage of your account will be established as margin required for the new operation based on the pair, the current price and the number of units (or lots) operated. The lot size is referring to the base currency.

Suppose you open an account Mini, with a 200:1 leverage or 0.5% margin. The Mini Accounts operate with mini lots. Now say that a mini lot is $ 10,000. If you were to open a mini lot, do not have to provide 10,000 margin, but they only need 50 US dollars (10,000 US dollars x 0.5% = $ 50)

Leverage

The leverage is the division between the amount of capital used in a transaction and the security deposit required (margin). This gives us the possibility of controlling large sums of money with a small amount. The leverages vary depending on the broker, and may range from 2:1 to 400:1.

Margin and Leverage

When operating currencies in margin this will give us greater buying power. For example if you have a $ 7,000 account 100:1 leverage, you can buy up to 700,000 dollars already have to place only 1% of the buy price as margin. This means that this will have a buying power of $ 700,000.

With greater buying power, the trader can increase profits from investments made, but much more cost-effective. But this can make you get more benefit or get greater losses.

Balance

It will be the capital which may have opened the account in a particular broker.

Equity

It would be the result of subtracting the balance more / less the result of the operations that are open. That would be the value that would account if you close all open positions to be taken at that time.

Usable Margin

It would be the subtraction result enters the Equity and Used Margin. The resulting quantity will be the capital that is not affected by the buys and will enable us to meet the margins that we need to maintain the positions we have opened.

Used Margin

When you open a position, the amount you start with that position is the margin you used.

Required Margin

It would be the amount that the broker provides to open a position.

Margin Call

One thing is dreaded by the traders enter in margin call, as this may cause the closure of a position or more. This usually happens when the broker notifies us that your margin deposit has fallen below the minimum margin required because a position has increased their losses.

We must understand one thing in Forex should establish a strategy of benefit to us but we must be careful with the inherent risks and one of them is this. You must understand how it works and of course the margin to be clear what is the margin that your broker provides.

If you have open positions, we assume that if, and enter margin call, the broker may close one or more position, it will depend on whether your margin falls below a predetermined level. Of course you will have no notice of broker before entering margin call (which is what all traders want us warned before enter in margin call).

You can avoid margin calls to see the account balance and set stop-loss, which will explain later, in each open position.