29th Sep 2008
Understanding Forex Trading Jargon
The term Forex refers to the foreign currency exchange market, the world’s leading financial trading market. As with most financial entities, Forex is full of jargon, or industry speak. Here are some terms that may help you gain a better understating of Forex trading:
Bid – means to buy
Ask – means to sell
Liquidity – is the monetary ease of transaction, i.e. cash
Trading volume – refers to the quantity of unit currency traded
Bid/ask spread – This is important, as it is something that could make the difference between making money and losing money. The spread is the difference between the anticipated buying price and the real selling price
OTC – is an acronym for over the counter
Exchange rate – the exchange rate is the difference between currency values; for example, a Canadian dollar is valued at .83 of a US dollar
Hedge funds – Hedge funds are large mutual fund companies that control enormous amounts of money and are able to influence the value of a currency through speculation
Central bank – this is the national bank of a nation, which generally exerts control over the value of that currency.
Forex trading is in essence the investment in the currency of one country. Large global corporations that do business in many nations find value in keeping their cash reserves in a range of nations, and holding their funds in a mixture of ways. For example, a US company may have a proportion of its working capital in US dollars, but if it does quite a bit of business in Europe may also find it advantageous to keep a percentage of its money in Euros, in European banks. Over the years, many individual investors have discovered that there is profit to be made in speculation in the currency markets.
It is important to understand the terminology when learning to trade on the Foreign Exchanges. As mentioned previously, some of the choices you make are critical, and if you don’t understand the jargon, then you could be at a significant disadvantage to other Forex traders.
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