Here are some important concepts/terminologies of Forex.
a) Spot rate
A
spot transaction is a straightforward (or outright) exchange of one
currency for another. The spot rate is the current market price or
'cash' rate. Spot transactions do not require immediate settlement, or
payment 'on the spot'. By convention, the settlement date, or value
date, is the second business day after the deal date on which the
transaction is made by the two parties.
b) Bid & ask
In the foreign exchange market
(and essentially in all markets) there is a buying and selling price.
It is important to perceive these prices as a reflection of market
condition.
A market maker is expected to quote simultaneously for his
customers both a price at which he is willing to buy (the bid) and a
price at which he is willing to sell (the ask) standard amounts of any
currency for which he is making a market.
Generally speaking the
difference between the bid and ask rates reflect the level of liquidity
in a certain instrument. On a normal trading day, the major currency
pairs EURUSD, USDJPY, USDCHF and GBPUSD are traded by a multitude of
market participant every few seconds. High liquidity means that there is
always a seller for your buy and a buyer for your sell at actual
prices.
c) Base currency and counter currency
Every foreign exchange transaction
involves two currencies. It is important to keep straight which is the
base currency and which is the counter currency. The counter currency is
the numerator and the base currency is the denominator. When the
counter currency increases, the base currency strengthens and becomes
more expensive. When the counter currency decreases, the base currency
weakens and becomes cheaper. In telephone trading communications, the
base currency is always stated first. For example, a quotation for
USDJPY means the US dollar is the base and the yen is the counter
currency. In the case of GBPUSD (usually called 'cable') the British
pound is the base and the US dollar is the counter currency.
d) Quotes in terms of base currency
Traders
always think in terms of how much it costs to buy or sell the base
currency. When a quote of 1.1750 / 53 is given that means that a trader
can buy EUR against USD at 1.1753. If he is buying EURUSD for 1'000'000
at that rate he would have USD 1,175,300 in exchange for his million
Euro. Of course traders are not actually interested in exchanging large
amounts of different currency, their main focus is to buy at a low rate
and sell at higher one.
e) Basis points or 'pips'
For
most currencies, bid and offer quotes are carried down to the fourth
decimal place. That represents one-hundredth of one percent, or
1/10,000th of the counter currency unit, usually called a 'pip'.
However, for a few currency units that are relatively small in absolute
value, such as the Japanese yen, quotes may be carried down to two
decimal places and a 'pip' is 1/100th of the terms currency unit. In
foreign exchange, a 'pip' is the smallest amount by which a price may
fluctuate in that market.
f) Euro cross & cross rates
Euro
cross rates are currency pairs that involve the Euro currency versus
another currency. Examples of Euro crosses are EURJPY, EURCHF and
GBPEUR. Currency pairs that involve neither the Euro nor the US dollar
are called cross rates. Examples of cross rates are GBPJPY and CHFJPY.
Of course hundreds of cross rates exist involving exotic currency pairs
but they are often plagued by low liquidity. Ever since the Euro the
number of liquid cross rates have decreased and have been replaced (to a
certain extent) by Euro crosses.