Forex Terminology

ISO (International Organization for Standardization)

Established in 1947, ISO established a standard for country and Forex currency pair abbreviations. Since foreign currencies are quoted in terms of value of one currency against another, a Forex currency pair consists of an acronym for both currencies, separated by a slash "/".

For example:

GBP = Great British Pound
EUR = Euro
CHF = Confoederatio Helvetica Franc (Swiss Franc)
USD = United States Dollar
CAD = Canadian Dollar
JPY = Japanese Yen
AUD = Australian Dollar
NZD = New Zealand Dollar

Currencies are always traded in pairs, for example EUR/USD, USD/JPY. Every position requires the buying of one currency and selling of another. When someone says they are "buying the EUR/USD", they are buying Euros and selling Dollars.

There are many other Forex currency pairs available to trade, such as the Danish Krone, Mexican Peso, and Russian Ruble. However, these currency pairs are generally traded less, and are not considered major currencies.

Pips

Market increments are measured in PIPs. The word PIP stands for percentage in point and is used to describe the smallest unit of price movement for any currency pair. A PIP is the fourth decimal place except for Japanese Yen crosses, where a pip is the second decimal place.

For example, let's assume a Forex trader buys 1 standard lot of GBP/USD. The current exchange rate is 1.96150. Essentially this trader is buying £100,000 in exchange for $196,150 USD. Again, for examples sake, assume the Forex market rate rose 15 PIPs to 1.96300 and the trader liquidates the position. The same £100,000 is now worth $196,300 USD, the trader realizing a $150 USD profit.

Major Forex Currency Pairs

Some Forex currency pairs are traded more heavily than others. The currency pairs that have the most volume consist of the "majors". It is widely agreed that the following 6 pairs are considered the majors:

EUR/USD
GBP/USD
USD/JPY
USD/CHF
USD/CAD
AUD/USD

Nicknames are sometimes used for currencies. Here is a list of Forex currencies and commonly used nicknames for each:

GBP – Pound, Cable, or Sterling
EUR – Euro
CHF – Swissy, or Franc
USD – Greenback
CAD – Loonie
AUD – Aussie
NZD – Kiwi
JPY - Yen

Base Currency/Quote Currency
Currencies are quoted in pairs such AUD/USD. The base currency is the first currency (AUD) and is measured again the second currency (also called the quote currency). For example if the AUD/USD is quoted at 0.6570 it would be read as 1 Australian Dollar currently buys 0.6570 US Dollars.

Bid/Ask Price
When looking at a quote you are given 2 prices – the bid price and the ask price. The first price quoted is the bid price and is the price at which the market is willing to buy the currency pair - i.e. the price you can sell at to the market. The second price is the ask price and is the price the market is willing to sell the currency at - i.e. the price you buy at from the market.

Bid/Ask Spread
The spread is the difference between the bid and ask price. Spreads in the foreign exchange market range from less than 1 pip to greater than 10 pips depending on the liquidity of the currencies being traded. Due to the high liquidity in the forex market spreads are very tight compared to other markets.

Margin
When placing a foreign exchange trade you are only required to pay a deposit to keep that trade open. This deposit is known as margin. For example to purchase $10,000 worth of AUD USD you are only required to have a deposit or margin of $100 in your account using 100:1 leverage.

Leverage
Leverage is the ratio between the margin required and the amount of capital used. A trade that only requires 1% as a deposit uses leverage of 100:1. Leverage gives you the ability to control large trades with little money. Leverage can both increase your returns and increase your losses.

Swaps/Rollovers
If you hold a spot forex position overnight (past 22:00GMT) you will either be credited or debited a rollover fee which is generally very small. The credit or debit is calculated by the difference in the interest rates that apply to the two currencies in the currency pair that you’re trading. If you buy a currency pair where the base currency attracts a higher interest rate than the quote currency you will receive the difference as a credit to your account. If it is less you will pay the difference as a debit to your account.