Before starting your real forex trading account you must know the different terms used in this business. The most important terms in forex trading are:
- Currency pair: In forex trading investor buys and sells currencies. The investor will buy a currency and sell it in another currency to make profit. This is called currency pair.
- Base currency and quote currency: In forex trading value of one currency is determined by comparing it with another currency. The first currency which is compared with another currency is called base currency and another currency used for comparing is called quote currency.
- Bid and ask price: Bid price is the price for which investor wants buy the currency. Ask price refers to amount for which he wants to sell his currency.
- Cross currency: A pair of currency in which neither of currency is U.S. dollar.
- Support level: When prices are moving downwards the lowest price at which movement changes and starts moving upwards id called as support level.
- Resistance level: When a currency pair reaches highest price level and then starts moving downwards are called resistance level.
- Lots: It is a size of forex transaction.
- Leverage or margin: The ratio of the value of transaction to the required deposit.
- Lot: The size of forex transaction is called as lot, in forex trading.
- Open position: Active deal that has not been closed.
- Pips or points: It refers to the smallest unit in which currency can be traded.
- Tick: The minimum change in price is known as tick.
- Technical analysis: This analysis consists of analysis of historical data to predict future moves in market.
- One cancels the other: When two orders are placed simultaneously with instruction to cancel second order when first order is executed.
With this basic knowledge of terms you can now move towards next step.
The next step is to know about different types of forex trading. These are as follows:
- Spot trading: It is type of forex trading in which purchase or exchange of currency happens immediately. No contract is required or no interest is applied on spot trading.
- Forward trading: Forward trading happens when two companies or banks decide on certain day for trade in future. The trade has set price, which is fixed and doesn’t change over the period of time till decided date of trade.
- Option trading: In this type of trading you have option i.e. if there is deal that is going to occur in future, and if exchange rate fluctuate either side has option to bail out of deal or change contract according to rates.
- Swap trading: This is another type of forward trading in which, there is no contract involved and you can immediately trade currency, and then decide date in future to take the amount back.
- Future trading: This is also a type of forward trading in which there is agreement for deal between two companies or banks on future date, but instead of being flat contract also includes interest also.
You can choose your trading policies from above according to need. You should also keep in mind the factors that affect forex trading which are described in next section.
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