Forex traders speak a language of their own. In order to be an active trader, you need to understand what some basic terms mean.
The “ask price “ is the price a seller would like to receive for their currency. The “bid price” is the price a buyer is willing to pay for a currency. The difference between the amount the buyer is offering and what the seller expects is known as the “bid/ask spread;”
The movement in the currency market is usually in small amounts. That’s why movement is measured in “basis points”. A basis point is one hundredth of a percentage point (0.01%) and it is used because it helps traders track these small changes. This gives them an early warning about changes that may be leading to a reversal in price.
Because traders measure small increments in movement, oftentimes you will hear them refer to a “pip”. Pip is an acronym for Price Interest Point. It is the smallest increment a currency can make. Pips are the currency market equivalent of ticks in the stock market.
Keep in mind that currency is always traded in pairs. One currency in the pair is bought and the other is sold. This is called a “quote”. The first currency in the pair is referred to as the “base currency” and the second currency in the pair is known as the “counter currency” or sometimes, the “quote currency”. The base currency is always represented as one monetary unit. The number following the pair tells you how many units of the counter currency are equivalent to one unit of the base currency. When the counter currency is quoted as compared to the US dollar, it is known as a “direct rate”. If it is compared to a currency other than the US dollar, it is known as a cross rate.
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