Understanding a new concept’s terminologies is a big step in understanding and mastering the new concept itself. Some terms are similar in form to other terms, but are used differently and may mean differently. Knowing a term’s meaning and how to use it makes one more knowledgeable about other concepts connected to it.
Foreign exchange trading, just like any other concepts, has different, new terms or jargons that are used to simplify the underlying concepts used in it.
Currency Pair
In forex, you buy a currency with a certain amount of another currency. The value is the exchange rate or how much of one currency is required to buy a unit of another. In each exchange, there are two currencies involved but there is only one price. Currency pairs indicate which currencies are being exchanged. The major currency pairs used in forex trading are: the euro and dollar, the dollar and Japanese yen, the dollar and Swiss Franc, and the British pound and dollar. There are some more different currencies used but these are the ones mainly used by most traders.
Spread Cost
Spread cost or the bid-ask spread is what you call the difference between how much the dealer bought the currency and the price given to the currency when he or she sells it – or simply the difference between the bid price and the ask price. The difference is usually how he or she profits. Retail forex traders and big-time forex traders like banks basically make their profit with buying and selling currencies through the spread cost.
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Since the forex market is constantly changing and there is still no centralized price for each currency trade, one must be vigilant in choosing dealers with the lowest ask price. The bid-ask spread is a negotiation and traders can choose not to accept the spread cost presented by a particular dealer. Anyway, the spread cost does differ from dealer to dealer and a trader can find the best deal when he or she has the patience to look for it.
Foreign exchange trading is basically a simple concept, but the complications happen when you don’t understand the terminologies associated with it. Mastering the terms is just the first step in being an adequate and successful trader in this market.
Reference: Technical Points noted from XE.com and MTrading.eg – a Forex broker from Egypt.
