If you are going to at least become a player in the world of Forex trading you also need to know the language. No, we’re not talking about a whole new dialect that you will have to study late at night in order to communicate with anyone else you meet trading. We’re talking about the terms, the words and phrases that set you apart from everyone else because you will be the guy with the right lingo. Here are a few terms you should know:
1 – Base Currency
This has nothing to do with your house, in case you like to call it Home Base. The base currency is the currency that is on the left of any currency pair. For example, if the currency pair is USD/EUR then what would you think the base currency is? If you picked the one on the left (USD) you’d be correct.
2 – Quote Currency
In case you’re confused, this has nothing to do with sound bites and quotes for the evening news. Well, outside of Forex news that is. Okay, see if you can piece this together. If the left-hand currency listed in a currency pair is the base currency, what do you think is the quote currency out of that pair? Take your time. Think about it. If you picked the right-hand side of the currency pair you would be right.
3 – Ask Price
Sounds like a question, doesn’t it? But if you don’t ask for it, is it actually a question or a statement? Hmmm. In a currency pair the ask price is what you can purchase the base currency for. If the base currency is trading at 1.0001, that is the price you pay for it.
4 – Bid Price
This is has nothing to do with an auction but you may get confused a little bit about it just because of the word bid. However, in Forex trading the bid price of a currency pair is what you can sell the base currency for. Did you follow all of that? The base currency of a currency pair is on the left side of the currency pair listing. The ask price is what you can purchase that base currency for and the bid price is what you can sell that base currency for.
5 – Bid/Ask Spread
Fasten your seatbelt as it’s now going to get a little bit tricky. The transaction cost for opening a Forex position is the bid/ask price. In other words, your broker buys a currency from you at a cheaper price than he sells it to someone else. The profit he makes in that transaction is the bid/ask price.
Think You’re Ready?
You could practice dropping some of these terms into your coffee shop conversation but be careful who you do it with. They may actually call you on it so you better be prepared! Nobody wants to be the ‘newbie’ that just got outed for just talking the talk and not walking the walk. Good luck out there!