Understanding Internet Trading
The Forex, or foreign currency exchange market, came to life in the 1970s when international trade went from fixed exchange rates to floating exchange rates. Currency trading is the part of the Forex markets that allows investors to buy and sell currencies from a wide variety of countries at mutually agreed prices. The Forex market has grown to be the largest form of investment in the world and Internet trading has become a key part of that market.
To understand any form of commodity trading, it is wise to take some time reviewing the terms involved. This is true for Forex trading. A number of terms are included below. Take some time to review them and understand their meanings.
Ask – Also known as "the offer". This the rate at which you can buy the base currency. When you talk with your commodity broker or perform Internet trading, the price will be in terms of the currency you are looking to sell.
Balance – This is the total financial result of all completed transactions and deposits or withdrawals on the trading account.
Bid – This is the rate at which you can sell the base currency, either through Internet trading or with a brokerage firm.
Base Currency – This is the first currency in a pair. In Forex currency trading for beginners, this is currency that you would be buying in a transaction.
Currency Rate – The value of one currency expressed in terms of another. This rate is controlled by supply and demand on the market or restrictions by a government or by a central bank.
Equity – When trading commodities, this calculation is your balance, plus floating profit, minus floating loss.
Floating Profit / Floating Loss – Both in a brokerage firm and in Internet trading, this is current profit or loss on open positions calculated at the current prices.
Free Margin – This is the amount in your trading account which may be used to open a position. It is commodities trading term that is calculated as equity less necessary margin.
Forex – This the acronym for the foreign exchange market of currency. Forex trade, whether through a broker or via Internet trading has become the largest method of trading worldwide.
Leverage – The term used to describe margin requirements. This is the ratio between the collateral and the value of the contract. In Forex trading, 1:100 leverage means that you can control $100,000 with only $1,000.
Long Position - This is a buy position whereby you profit from an increase in price. In respect of currency pairs: buying the base currency against the quote currency.
Lot Size – For both brokerage firms and in Internet trading, this term describes an abstract idea of the amount of a base currency. This amount can vary at each futures exchange.
Margin – This is the collateral required in a brokerage or Internet trading account to open and maintain a position.
PIP – The price interest point of a Forex trade or the minimum possible price change. Both brokerage firms and Internet trading use this term to define movements in price.
Quote currency – This is the second currency in a trading pair. In commodity trading, this tells you how much of a currency is needed to buy the base currency
Short Position – In Internet trading as well as brokerage trading, this is a sell position whereby you profit from a decrease in price. For currency pairs, this is selling the base currency against the quote currency. In futures trading, this position has risk if the price rises instead of falling.
Spread – In Internet trading and brokerage houses, this is the difference between the bid and the ask price.
Transaction size – This is a numerical value of lot size multiplied by number of lots.
In order to understand the investment strategy that is Forex Internet trading, it is important to first understand the terms involved. By learning the terminology, an investor can feel and sound ready to enter the world of Forex as a successful trader.