Understanding Forex: 3 key terms to know

Forex is a portmanteau of the two words “foreign” and “exchange,” and implies the purchase or sale of one particular currency for another. Although Forex trading might at first glance seem like a form of gambling, the tools, strategies, and skills involved with Forex trading do not rely on chance and sheer luck to the degree they do in gambling activity. 

Learning the terminology and basics of Forex trading is like learning any new language. Some of the most important terms in Forex trading include currency pairs, pip, and margin. These are some basic Forex terms that you should know when you are looking to venture in trading. Having a working knowledge of basic Forex terminology is a great way to build a solid foundation for trading. 

Pips and their value

In the English language, a pip is another word for a small, hard seed in a fruit. In terms of currency exchange, it has another definition entirely. To answer the question, what is a pip in forex, it is the smallest unit of measurement to denote the change in value of two designated currencies. Pips are price increments that have a value dependent on the particular currency you are trading. 

For example, if you are trading between Euros and United States dollars, the pip extends out to four decimals, or .0001. In other words, it is one-hundredth of one percent. However, the value is different for other currencies such as if you are dealing with United States dollars and Japanese yen, where a pip will be worth .01. Pip calculators are valuable tools to help do the math for specific currency pairs. 

Currency pairs - major, minor, and exotic

To start off the list, currency pairs are just like the name suggests – they are the two currencies that comprise the exchange rate like GBP/USD, which is the currency pair for British pound sterling and United States dollars. 

Another major currency pair is EUR/USD, which is the currency pair for Euros as the official currency of the European Union’s nineteen member states and United States dollars. Major currency pairs are one of the three types of currency pairs in Forex trading, along with minor and exotic. 

Margins - what they are

In Forex trading, the margin is the amount of currency that is required for a trader to commence a transaction. As a general rule of thumb, a margin above 100% is considered to be acceptable, but it is better and safer to shoot for a margin that is 200% at the minimum.