10 Foreign Exchange Professional Terms to Learn

2024-06-09 1275

The first thing beginners in foreign exchange trading are exposed to and need to learn is various professional foreign exchange terms. Understanding these foreign exchange professional terms and understanding their meanings is beneficial for further in-depth learning and practical application.

1. Levers

Leveraged trading in foreign exchange trading, also known as virtual trading, is the use of investors' own funds as collateral to amplify foreign exchange trading through financing from banks or brokers. The greater the leverage, the less capital the customer needs to pay. There are various leverage ratios on the market, and different banks or brokers offer different leverage ratios. Common leverage ratios include 1:10. 1:20. 1:50. 1:100. 1:200. 1:300. 1:400. and 1:500. For example, if you open an account with $10000 and deposit $1000. and use 100 times the leverage, you can operate a foreign exchange transaction with $100000. If you buy $1 USD/JPY with a price difference of 0.01. when you buy $100000 USD/JPY, the trader can earn $1000 in income. If you misjudge your direction, it will be deducted from your remaining $9000. which is $1.1. If it is deducted to 0. it will be forced to close the position.

2. Margin

Foreign exchange margin, also known as foreign exchange deposit, refers to traders using a certain proportion or quantity of funds as margin to achieve a certain leverage ratio to amplify foreign exchange transactions. The $1000 deposit mentioned earlier is the foreign exchange guarantee deposit. There is also a common calculation formula for margin, which is margin=number of hands x 100000 base currency x exchange rate ÷ leverage. For example, if you have a US dollar account and open a position at a USD/JPY exchange rate of 128.41. with 1 hand and 100 leverage, your margin should be at least 1 * 100000 (US dollars) * 128.41 ÷ 100=128410 (JPY), which is equivalent to 1000 US dollars.

3. Standard hand/Mini hand/Micro hand

Standard hand is a commonly used conversion unit standard in foreign exchange trading. The standard hand is a currency conversion based on 100000 base currencies. For example, if you trade in US dollars, a standard hand would be 100000 US dollars. In foreign exchange trading operations, each point of the standard batch is changed by 10 units on a point basis. That is, the average point of the standard hand is $10 per point. When you fall 10 points, remember that this is actually a loss of $100.

Mini hands are converted to 10000 base currencies. If you use a US dollar account and a US dollar currency pair when trading, then 1 point is worth 1 US dollar.

Micro Hand is a currency quoted in 1000 base currencies, which is also the minimum number of trading hands that most brokers can use. If you are trading a US dollar currency pair, 1 point will be equal to 10 cents, which is usually more suitable for novice forex traders.

4. Base currency pairs

The basic currency pair mentioned in the standard hand means that the first currency in the currency pair, such as the exchange rate between the US dollar and the Japanese yen, is 128.41. so 1 US dollar can be exchanged for 128.41 Japanese yen. In the foreign exchange trading market, the US dollar is the base currency for quotations.

5. Main and secondary currencies

The eight most frequently traded currencies in the foreign exchange market are referred to as major currencies, which are the US dollar, euro, Japanese yen, pound sterling, franc, Canadian dollar, New Zealand dollar, and Australian dollar. And besides these eight unexpected currencies, they are called secondary currencies.

6. Straight and Crossover

Direct selling refers to currency pairs that only contain US dollars, such as US dollars/Japanese yen, Canadian dollars/US dollars, etc; Cross selling refers to currency pairs that do not contain the US dollar. For example, Japanese yen/euro, Australian dollar/pound sterling, etc.

7. Point difference

The spread refers to the difference in the number of points between the buying price and the selling price, for example, the spread in USD/JPY from the buying price of 128.41 to the selling price of 128.45 is 4 points. When GBP/USD changes from 1.3029 to 1.2709. the difference is 320. and the converted value is 0.0001 US dollars. The corresponding number of points is 1. depending on how many significant digits are after the decimal point. According to different brokers, there is a difference between fixed spread and floating spread. Meanwhile, spread is also one of the sources of profit for brokers.

8. Hedging

Hedging refers to the simultaneous trading of two closely related, opposite directions, and equal quantities by traders in order to reduce trading risk, with profits and losses that can be offset. There are two methods of hedging: direct hedging or correlation hedging. Direct hedging involves holding a long position in Japanese yen/US dollar and then opening a short position of the same amount; Indirect hedging involves finding two highly correlated currency pairs, such as holding a long position in GBP/USD and recommending a short position in EUR/USD. Because the pound and euro are very similar in terms of political and economic aspects, there is a positive correlation between the growth of these two currencies.

9. Position

We often hear two related words: long position and short position. Long position, also known as long buying, refers to buying with optimism about the rise of a currency pair in order to earn profits. The position bought during this period is called a long position; Short positions refer to investors who anticipate a decline in currency pairs and sell them at a high level in advance. The positions sold during this period are called short positions, abbreviated as short positions. As the position has not been written off yet, investors can also profit in a falling market.

10. Stop profit and stop loss

Stop profit and stop loss is an operational command in foreign exchange trading, in which the system automatically operates to stop profit or loss after reaching a fixed deviation point. Whether it's a stop loss or a stop loss, traders need to set their own rules, which greatly tests their experience and humanity. For example, if they are on an upward trend but want to exit the market, they may have a lucky mentality when watching a decline, but miss the best stop loss point.

There are still many professional terms related to foreign exchange. If you encounter something you don't understand, you can check and ask more, which can better help you deepen your understanding of the foreign exchange market.

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