June 21, 2024

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Basic Terms Used in Forex Trade

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These are common terminologies that define forex trade. The explanations have been simplified to make as much sense as possible to the non specialist forex investor as well as lay men.

Foreign Exchange Trade

This is a large market where the business of exchanging currencies at a profit is carried out. There is no meeting place and it is therefore not a market in the conventional sense. Most of the deals are negotiated through a network consisting of individual investors, brokerage firms as well as forex trade companies.

“Interbank”

This refers to a network consisting of investment banks, insurance and re-insurance companies and big corporations. This network serves to manage the risks that arise as a result of fluctuating exchange rates.

Spot Market

This is the market where one can buy and sell currencies of different countries at the prevailing exchange rate.

Exchange Rate

The exchange rate of one currency is measured in terms of that of another country. This brings to the focus the issue of currency pairs. Currency pairs result from the pairing of currencies for the purpose of determining the exchange rate and by extension, facilitating the calculation of profits to be realized by forex traders. When one currency has been sold, it goes without saying that another one has been bought.

Market Maker

This is a pricing specialist who traces the progress of a single currency pair. It indicates the readiness of the market to accept the prevailing buying and selling prices. He takes the opposite view such that it becomes had for a subjective to be taken. The market maker, however, has the authority of off-setting the imbalances that exist in the trade as well as manage them. This ensures stability in the whole of the forex trade. The commission that the market maker earns arises from the difference between the offer value and the bid value. A market maker provides a place for bankers to place their bids. Since these bids are often conflicting in most cases, each party to the transaction feels compelled to push for the most reasonable deal.

Dealing Desk

This is the platform for dealing with issues to do with pricing of shares as well as facilitating a smooth exchange of both currency pairs and information relating to forex exchange. Sometimes a broker may choose to forego the need for the dealing desk. The role of these people is left in the hands of the liquidity providers who are sourced from outside the forex market.

Sell Quote and the Buy Quote

Sell quote is the price at which currency is sold. It is the price which is displayed as the bid and it is shown on the left of the transaction board. The buy quote is shown on the right. This is the buying price of the currency.

Margin

This is the deposit that one needs in order to operate and maintain a position or an account in the forex trade. A fee margin means the entire amount which is available for any willing investor to launch new positions.

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